The Queen of the Snows started a business, Winter Carnival Co., a company that s

Question

The Queen of the Snows started a business, Winter Carnival Co., a company that specializes in merchandise for ice-fishing, snow-sliding, treasure-hunting and other winter activities. In 2017, the company had the following beginning balances (in dollar).

Beginning Balances:

Accounts Receivable: 30,000

Allowance for Doubtful Accounts: 3,000

Cash: 50,000

Inventory: 220,000

Prepaid Advertisement: 36,000

Salary Payable: 3,000

Accounts Payable: 70,000

Accumulated Depreciation: 10,000

Common Stock: 100,000

Machine: 50,000

Retained Earnings: 200,000

During 2017, the following transactions occurred.

Winter Carnival borrowed $500,000 on February 1, 2017 from a local bank, on a 2% note for 5 years. Winter Carnival would pay interest semi-annually on each August 1 and February 1.

Winter Carnival delivered merchandise and earned sales revenue, totaled $300,000, of which $250,000 was on credit. Cost, to Winter Carnival Co., of the merchandise sold, totaled $150,000.

In addition, Winter Carnival signed a sales contract with a customer, Mini-Soda Company to deliver a total of $60,000 merchandise in January 2018. Winter Carnival collected $18,000 cash in advance from this customer on October 17, 2017.

Winter Carnival acquired additional merchandise, totaled $100,000, of which $90,000 was on account.

Winter Carnival paid $80,000 on its accounts payable to its suppliers.

Winter Carnival collected a total of $230,000 on its accounts receivable from its various customers.

Winter Carnival paid its employees $90,000 cash for their salary. At the end of year 2017, the company still owed $2,500 salary payable to its employees.

Winter Carnival incurred insurance expenses of $6,000, all paid in cash in 2017.

The following information was also available during 2017 for Winter Carnival Co.

9.

Its ‘prepaid advertisement’ had 18 months remaining at the beginning of the year 2017.

The existing machine had an estimated life of 10 years with no residual value and had been depreciated using the straight-line method.

Its bad debt expense was estimated to be 10% of its outstanding A/R on 12/31/2017.

The income tax rate was 21% for Winter Carnival and the company would pay its income tax in the first quarter of 2018.

Required:

Based on above transactions, prepare journal entries and adjusting entries in 2017 for Winter Carnival.

Set up T-accounts and post your journal entries and adjusting entries to T-accounts. (A kind reminder: Don’t forget the beginning balances.)

Prepare a pre-closing trial balance, as of December 31, 2017.

Prepare an income statement, in a good format, for the year ended December 31, 2017 for Winter Carnival.

Prepare a statement of retained earnings, in a good format, for the same period for Winter Carnival.

Prepare a balance sheet, in a good format, as of December 31, 2017 for Winter Carnival.

Prepare closing entries and a post-closing trial balance, as of December 31, 2017.

Explanation / Answer

Journal entries in the books of Winter Carnival Co. for the year 2017 S.No. Date Particulars Debit Credit 1 01/01/2017 Accounts Receivable 30000 Cash 50000 Inventory 220000 Prepaid Advertisement 36000 Machine 50000 Allowance for doubtful accounts 3000 Salary Payable 3000 Accounts Payable 70000 Accumulated Depreciation 10000 Common Stock 100000 Retained Earnings 200000 Entry for recording all the opening balances in Books for the current year 2 01/02/2017 Cash 500000 2% Loan 500000 Entry for recording the borrowing 3 End of the year Cash 50000 Accounts Receivable 250000 Sales 300000 Entry for recording sales 4 End of the year Cost of Goods Sold 150000 Inventory 150000 Entry for recording consumption of stock 5 17/10/2017 Cash 18000 Advance for Sales 18000 Entry for recording advance obtained against a sales contract 6 - Machine 100000 Cash 100000 Entry for acquiring an additional machinery 7 - Accounts Payable 80000 Cash 80000 Entry for payment made to suppliers 8 - Cash 230000 Accounts Receivable 230000 Entry for recording collections from customers 9 - Salary 89500 Salary Payable 3000 Cash 90000 Salary Payable 2500 Entry for recording salaries paid and salaries payable 10 - Insurance 6000 Cash 6000 Entry for recording insurance expense 11 31/12/2017 Advertisement 24000 Prepaid Advertisement 24000 Entry for recording advertisement expenditure of current year 12 31/12/2017 Depreciation 5000 Accumulated Depreciation 5000 Entry for recording depreciation on existing machine (50000/10) Note: Did not consider the additional purchase as nothing has been given in the question 13 31/12/2017 Bad Debts 3000 Allowance for doubtful accounts 3000 Entry for recording bad debts of 10% on closing Debtors 14 01/08/2018 Interest 833 Cash 833 Entry for interest on loan 14 31/12/2017 Income Tax Income Tax payable T Accounts in the books of Winter Carnival Co. for the year 2017 Accounts Receivable Debit Credit S.No. Amount S.No. Amount 1 30000 8 230000 3 250000 Balance 50000 280000 280000 Cash Debit Credit S.No. Amount S.No. Amount 1 50000 6 100000 2 500000 7 80000 3 50000 9 90000 5 18000 10 6000 8 230000 14 833 Balance 571167 848000 848000 Inventory Debit Credit S.No. Amount S.No. Amount 1 220000 4 150000 Balance 70000 220000 220000 Prepaid Advertisement Debit Credit S.No. Amount S.No. Amount 1 36000 11 24000 Balance 12000 36000 36000 2% Loan Debit Credit S.No. Amount S.No. Amount 2 500000 Balance 500000 500000 500000 Advance for Sales Debit Credit S.No. Amount S.No. Amount 5 18000 Balance 18000 18000 18000 Depreciation Debit Credit S.No. Amount S.No. Amount 12 5000 Balance 5000 5000 5000 Interest Debit Credit S.No. Amount S.No. Amount 12 833 Balance 833 833 833 Machine Debit Credit S.No. Amount S.No. Amount 1 50000 Balance 150000 6 100000 150000 150000 Allowance for doubtful accounts Debit Credit S.No. Amount S.No. Amount Balance 6000 1 3000 13 3000 6000 6000 Salary Payable Debit Credit S.No. Amount S.No. Amount 9 3000 1 3000 Balance 2500 9 2500 5500 5500 Accounts Payable Debit Credit S.No. Amount S.No. Amount 7 80000 1 70000 Balance 10000 80000 80000 Sales Debit Credit S.No. Amount S.No. Amount 3 300000 Balance 300000 300000 300000 Salary Debit Credit S.No. Amount S.No. Amount 9 89500 Balance 89500 89500 89500 Advertisement Debit Credit S.No. Amount S.No. Amount 11 24000 Balance 24000 24000 24000 Accumulated Depreciation Debit Credit S.No. Amount S.No. Amount Balance 15000 1 10000 12 5000 15000 15000 Common Stock Debit Credit S.No. Amount S.No. Amount Balance 100000 1 100000 100000 100000 Retained Earnings Debit Credit S.No. Amount S.No. Amount Balance 200000 1 200000 200000 200000 Cost of Goods Sold Debit Credit S.No. Amount S.No. Amount 4 150000 Balance 150000 150000 150000 Insurance Debit Credit S.No. Amount S.No. Amount 10 6000 Balance 6000 6000 6000 Bad Debts Debit Credit S.No. Amount S.No. Amount 13 3000 Balance 3000 3000 3000 Pre-closing Trial Balance as on 31st December, 2017 in the books of Winter Carnival Co. Account Debit Credit Accounts Receivable 50000 Cash 571167 Inventory 70000 Prepaid Advertisement 12000 2% Loan 500000 Advance for Sales 18000 Depreciation 5000 Interest 833 Machine 150000 Allowance for dubtful debts 6000 Salary Payable 2500 Sales 300000 Accounts Payable -10000 Salary 89500 Advertisement 24000 Accumulated Depreciation 15000 Common Stock 100000 Retained Earnings 200000 Cost of Goods sold 150000 Insurance 6000 Bad Debts 3000 Total 1131500 1131500 Income Statement of Winter Carnival Co. for the year 2017 Sales 300000 Total Sales 300000 Expenses Cost of Goods sold 150000 Salary 89500 Advertisement 24000 Insurance 6000 Interest 833 Depreciation 5000 Bad Debts 3000 Total Expenses 278333 Income 21667 Income Tax (21%) 4550 Net Income 17117 Statement of Retained Earnings of Winter Carnival Co. for the year 2017 Retained Earnings on January 1st, 2017 200000 Net income for the period 17117 Dividends paid 0 Retained Earnings as at 31st December, 2017 217117 Assets Particulars Amounts Accounts Receivable 50000 Cash 571167 Inventory 70000 Prepaid Advertisement 12000 Machine 150000 Total Assets 853167 Equity and Liabilities Particulars Amounts 2% Loan 500000 Advance for Sales 18000 Allowance for dubtful debts 6000 Salary Payable 2500 Accounts Payable -10000 Accumulated Depreciation 15000 Common Stock 100000 Retained Earnings 217117 Income Tax payable 4550 Total Liabilities and equity 853167 Post closing Trial Balance as on 31st December, 2017 Account Debit Credit Accounts Receivable 50000 Cash 571167 Inventory 70000 Prepaid Advertisement 12000 2% Loan 500000 Advance for Sales 18000 Machine 150000 Allowance for dubtful debts 6000 Salary Payable 2500 Accounts Payable -10000 Accumulated Depreciation 15000 Common Stock 100000 Retained Earnings 217117 Income Tax payable 4550 Total 853167 853167

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