selected pre adjustment account balances and adjusting informati 250894

Selected pre-adjustment account balances and adjusting information of Sunset Cosmetics Inc. for the year ended December 31, 2011, are as follows:

Retained Earnings, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $440,670

Sales Salaries and Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000

Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,090

Legal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,225

Insurance and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500

Travel Expense—Sales Representatives . . . . . . . . . . . . . . . . . . . . . . . . . 4,560

Depreciation Expense—Sales/Delivery Equipment . . . . . . . . . . . . . . . . 6,100

Depreciation Expense—Office Equipment . . . . . . . . . . . . . . . . . . . . . . . 4,800

Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700

Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400

Telephone and Postage Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475

Supplies Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,180

Miscellaneous Selling Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000

Dividend Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,150

Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,520

Allowance for Bad Debts (Cr. balance) . . . . . . . . . . . . . . . . . . . . . . . . . . 370

Officers’ Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,600

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,200

Sales Returns and Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,200

Sales Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880

Gain on Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,500

Inventory, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,700

Inventory, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,550

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,000

Freight-In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,525

Accounts Receivable, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . 261,000

Gain from Discontinued Operations (before income taxes) . . . . . . . . . . . 40,000

Extraordinary Loss (before income taxes) . . . . . . . . . . . . . . . . . . . . . . . . 72,600

Shares of common stock outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,000

Adjusting information:

(a) Cost of inventory in the possession of consignees as of December 31,

2011, was not included in the ending inventory balance. . . . . . . . . . . . . $33,600

(b) After preparing an analysis of aged accounts receivable, a decision

was made to increase the allowance for bad debts to a percentage

of the ending accounts receivable balance. . . . . . . . . . . . . . . . . . . . . . . . . . 3%

(c) Purchase returns and allowances were unrecorded. They are

computed as a percentage of purchases (not including freight-in). . . . . . . 6%

(d) Sales commissions for the last day of the year had not been accrued.

Total sales for the day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,600

Average sales commissions as a percent of sales . . . . . . . . . . . . . . . . . . . . 3%

(e) No accrual had been made for a freight bill received on

January 3, 2012, for goods received on December 29, 2011. . . . . . . . . . . . $800

(f) An advertising campaign was initiated November 1, 2011.

This amount was recorded as prepaid advertising and should be

amortized over a 6-month period. No amortization was recorded. . . . . . . $1,818

(g) Freight charges paid on sold merchandise and not passed on to the

buyer were netted against sales. Freight charge on sales during 2011 . . . $4,200

(h) Interest earned but not accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $690

(i) Depreciation expense on a new forklift purchased March 1, 2011,

had not been recognized. (Assume that all equipment will have

no salvage value and the straight-line method is used. Depreciation

is calculated to the nearest month.)

Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,800

Estimated life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

(j) A ?oreal?? account is debited upon the receipt of supplies.

Supplies on hand at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,600

(k) Income tax rate (on all items) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35%

Instructions:

Prepare a corrected multiple-step income statement and a retained earnings statement for the year ended December 31, 2011. Assume all amounts are material.

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