Assignment: The purpose of this assignment is to review the accounting cycle--the procedures that businesses normally use to record transactions during the year and prepare financial statements at the end of the year. The accounting cycle is discussed in Chapter 3 of your textbook. Studying Chapter 3 and working the assigned homework problems will help you understand and complete this problem.
You will act as the accountant for Garza Auto Parts, Incorporated. The post-closing trial balance for Garza Auto Parts for December 31, 20x4 is given below:
Garza Auto Parts
Post-Closing Trial Balance
December 31, 20x4
Debit Credit
Cash $11,520
Accounts Receivable 3,820
Allowance for Bad Debts - 0 -
Inventory 9,500
Supplies 250
Prepaid Rent - 0 -
Prepaid Insurance 640
Store Equipment 23,600
Accumulated Depreciation $14,160
Accounts Payable 4,660
Short-term Notes Payable 16,000
Interest Payable (on the $16,000 note) 400
Salaries Payable 580
Unearned Revenue - 0 -
Common Stock($4 par) 1,000
Additional Paid in Capital 4,000
Retained Earnings ______ 8,530
$49,330 $49,330Instructions:
1. During 20x5, the following transactions occurred. Prepare any necessary journal entries.
You will also post all journal entries to appropriate T-accounts. The post-closing trial balance on the previous page lists the permanent (balance sheet) accounts which Garza Auto Parts uses; you should set up T-accounts for the temporary accounts (e.g., revenues, expenses) and new accounts as needed.
DO NOT PREPARE MONTHLY ADJUSTING AND CLOSING ENTRIES; wait until year-end to prepare these entries, unless otherwise directed in the transaction description. Garza Auto Parts does not use reversing entries. January 1 Sold store equipment for $9,000. The equipment originally cost $10,000 and had a book value of $7,000. (Given this information, you should be able to derive the accumulated depreciation on the equipment and determine the gain or loss on the sale.)
January 1 The company sold 1000 shares of common stock to the market. The par value was
$4 and market value of the stock was $10 per share.
January 5 Entered into a rental agreement with Cuellar, Inc. Garza paid $2,700 for an 18-
month lease of storage space. Garza debited a nominal (temporary) account at the
time of the transaction.
January 9 Purchased inventory on account for $26,500. Garza Auto Parts uses a periodic
system of inventory control. See Illustration 8-4 in your text for a discussion of
the periodic inventory system.
January 15 Paid salaries owed to employees at the end of 20x4.
January 21 Sold goods on account for $20,000. Made cash sales of $15,000.
February 19 Received payment of $16,000 from customers for previous sales made on
account.
February 25 Paid $9,000 to vendors for previous purchases of inventory made on account.
March 8 Sold goods for $14,000 on account. Made cash sales of $11,000.
March 16 Credited customer accounts for $2,300 of merchandise returned.
March 31 Paid the remaining amounts owed to vendors for all goods and services purchased
on account. Hint: this amount should be $22,160.
April 1 Paid the $16,000 note and all interest accrued to date. The company had
borrowed the $16,000 on October 1, 20x4. Interest accrued on the note at rate of
10% annually.April 1 Purchased additional store equipment for $12,000 (paid cash).
May 1 Borrowed $15,000 from the bank by issuing a 2 year note. Interest accrues on the
note at a rate of 10% annually. Interest is to be paid when the note is due.
May 16 Purchased inventory on account for $28,000.
June 13 Sold $16,000 worth of goods on account and made cash sales of $14,000.
June 30 Incurred and paid salaries and utilities expenses of $9,000 and $2,000,
respectively.
July 8 Received payment of $23,000 from customers for previous sales made on
account.
August 31 The prior insurance policy on Garza's operating assets expired on this date;
prepare a journal entry to record this event. Garza replaced this policy with a 12-
month policy by paying $12,000. Garza debited a permanent (real) account to
record the new policy.
September 17 Purchased supplies on account for $4,500. Garza debited a permanent account to
record the transaction.
September 30 Paid all amounts owed to vendors for inventory and supplies purchased on
account.
October 8 Received $6,000 in advance for products to be shipped to customers by January
20, 20x6. Garza recognized this cash receipt by crediting a temporary account.
November 15 Sold $19,000 worth of goods to customers on account. Made cash sales of
$13,000.
November 24 The company declared and distributed cash dividends totaling $14,000 to its
shareholders. To record this transaction, they debited the Dividend account.
December 12 Received payment of $17,000 for previous sales made on account.
December 31 Incurred and paid salaries and utilities expenses of $8,000 and $1,250,
respectively.
2. Based on (1) the previous transactions and (2) the following information, prepare and
post all necessary adjusting entries at year-end.
* A physical count revealed supplies on hand of $1,900 on December 31, 20x5.* Depreciation on the store equipment is 10% per year (the equipment has an estimated life of 10
years). Salvage value on the equipment is zero. Record partial year depreciation on equipment
purchased during the year.
* All $6,000 worth of goods paid for in advance on October 8th were delivered to customers on
January 20, 20x6, as promised.
* Salaries and utilities owed at year-end (but not paid or recorded) were $5,000 and $1,200,
respectively.
* Garza estimates bad debts from an aging of accounts receivable. Garza believes that $3,591 of
accounts receivable outstanding will ultimately be uncollectible.
* A physical count revealed an ending inventory of $6,000. Prepare the year-end entry to record
Cost of Goods Sold under the periodic inventory system (see Illustration 8-4 for an example).
* Garza accrues income tax at a rate of 40 percent of the “Income before Income Taxes” reported
on its income statement. Taxes are due by March 15 of the following fiscal year. Hint: you will
need to record a single journal entry that reflects the following: (a) the cost of the income taxes,
which is reported on the income statement, and (b) the obligation to pay those taxes during the
next year.
*Hint: There are three additional adjusting entries necessary at 12/31 due to the passage of time.
RECORD THE ADJUSTING ENTRIES ON A SEPARATE, APPROPRIATELY
LABELED PAGE. ADJUSTING ENTRIES MUST BE MADE IN JOURNAL ENTRY
FORMAT, OTHERWISE THEY WILL NOT BE GRADED.
3. Prepare and post the closing entries as of December 31, 20x5. RECORD THE CLOSING
ENTRIES ON A SEPARATE, APPROPRIATELY LABELED PAGE. CLOSING
ENTRIES MUST BE MADE IN JOURNAL ENTRY FORMAT, OTHERWISE THEY
WILL NOT BE GRADED.
4. Prepare an income statement in a multiple-step format
for 20x5. See Illustration 4-2 in the textbook. Do not separate the operating expenses into
selling expenses and administrative expenses. Include earnings per share on the face of the
income statement (Garza has no preferred stock).
5. Prepare an statement of retained earnings for 20x5. See Illustration 3-40 the textbook.
6. Prepare a balance sheet for 20x5. See Illustration 5-16 in the textbook.
REQUIRED: Turn in the following items in class on the due date. Keep a copy of your
assignment for your records.
a. General journal entries
b. T-Accountsc. Adjusting entries
d. Financial Statements
e. Closing entrie