Any help would be greatly appreciated! I have been studying this for a while and
ID: 2371303 • Letter: A
Question
Any help would be greatly appreciated! I have been studying this for a while and am having a very hard time understanding this. Thank you!
On July 1, 2012, Justin Steele created a new accounting firm, Justin Steele & Associates, LLC. The firm
provides accounting services and sells computer software and hardware. The firm uses the perpetual
inventory method. The following transactions occurred during the month of July.
1 Steele invested the following amounts in the firm: $60,000 cash, $40,000 inventory (computer
software & hardware), $35,000 office equipment. Steele received 1,000 shares of common
stock with a par value of $1 per share.
1 Paid $10,000 for leasehold improvements to remodel the rented office.
2 Purchased $800 of office supplies for cash.
3 Paid $4,800 cash for a 12 month insurance policy
10 Paid $2,200 cash for the July office rent.
14 Paid $2,000 cash for salaries.
15 Sold bonds with a par value of $10,000. The bonds sold at 98.
16 Performed $10,000 of accounting services for a client on account.
17 Sold computer software and hardware costing $3,000 for $8,000 cash.
18 Purchased $700 of subscriptions to professional publications on account.
23 Performed $5,000 of accounting services for a client on account.
28 Paid $2,000 cash for salaries.
28 Collected $2,000 in advance from a client to prepare financial statements.
28 Paid $800 cash in commissions to the firm's software sales rep.
29 Paid $300 cash for repairs to the office equipment.
30 Paid $550 cash for the July telephone bill and $600 cash for the July utility bill.
31 Paid $1,000 cash for dividends.
Additional information for July 31 adjusting entries:
Bad debt expense is estimated to be 1% of credit sales.
One month of the insurance policy premium has expired.
$500 of office supplies were still on hand as of July 31.
Depreciation expense on the equipment and leasehold improvements is $325.
There was $100 of salaries earned, but not paid as of July 31.
The firm performed $200 in accounting services of the amount collected in advance.
There was $850 of payroll taxes owed as of July 31.
Interest owed on the bonds was $100. The amount of discount to be amortized
on the bond issue is $10.
Required
1. Prepare journal entries to record the July transactions.
2. Prepare the adjusting journal entries.
3. Post all journal entries to the general ledger.
4. An adjusted trial balance will automatically be prepared from the general ledger.
5. Prepare the financial statements for July.
6. Prepare closing entries and post them to the general ledger.
7. Prepare a post-closing trial balance.
Check figures
Adjusted trial balance totals 172,225
Total assets 156,175
Post-closing trial balance totals 156,840
Explanation / Answer
The Perpetual Inventory Method
The ESA95 recommends the Perpetual Inventory Method (PIM) for the calculation of the stock of
fixed assets whenever direct information is missing (par. 6.04). The calculation of consumption of
fixed capital can be based on these stocks of assets. Besides net capital stock which appears in the
balance sheets can be derived within a PIM approach. In this paragraph the basic principles of the
PIM will be discussed.
Using the PIM, gross capital stock is calculated as the sum of gross fixed capital formation in
previous years, of which the service live is not yet expired. In the most simple case it is assumed that
the total investment of a particular asset does not deteriorate during the expected service life of that
asset and is discarded as a whole after that period of time. That is, denoting the expected service life
of an asset by d, an asset lasts exactly d years (See figure 3.1.)
d
1
0
Figure 3.1: PIM-Survival function
In formula:7
(3.1) GCS I P tt t i t it
i
d
, ,
= *
? ?
=
?
?0
1
of which: GCSt,t = stock of fixed assets (gross) in year t in prices of year t
It
= gross fixed capital formation in year t in current prices
Pt-i,t = price index of year t with base year t-i
d = expected service life
Calculations using the PIM result in a gross capital stock by the end of an accounting period.
Assuming straight-line depreciation, consumption of fixed capital can be calculated using formula
(3.2).
(3.2) CFC d GCS tt tt , ,
=1/ *
However this calculation gives raise to a bias, because consumption of fixed capital is also imputed to
the investments of December. Assuming an even distribution of the acquisitions of fixed assets over
the year, the average of the stock of the current year t and the previous year t-1 (of course both in
prices of year t) seems to be a better base for the estimation. Subsequently, assuming again a straightline depreciation of the fixed assets, consumption of fixed capital (CFC) is compiled as follows:
(3.3) CFC d GCS GCS tt tt t t , ,,
= + 1 2 / * ( )/ { } ?1
Net capital stock, which appears in the balance sheets, can be compiled as gross capital stock minus
accumulated consumption of fixed capital.
For each vintage of capital goods, the net value equals:
i It-i
(3.4) NVt-i,t = It-i * Pt-i,t - ? CFC
j=0 t-j
of which:
NVt-i,t = net value of vintage t-i in year t
It-i
CFC = consumption of fixed capital It-i of vintage t-i in year t-j
t-j8
The net capital stock equals the sum of the net values of still lasting vintages of gross fixed capital
formation.
In formula:
d - 1
i I
(3.5) NCSt, t = ? { It - i * Pt - i, t - ? CFC }
i = 0
j=0 t- j
of which: NCSt, t = net capital stock in year t in current prices
Assuming a straight line depreciation, the consumption of fixed capital per vintage equals:
{1/2d} * It
in year t
{2/2d} * It
in year t+1 to t+d-1
{1/2d} * It
in year t+d
Accumulated consumption of fixed capital per vintage can hence be written as:
i I
(3.6) ? CFC = It
* {1+2i}/2d
j=0 t-j
Combining formulae (3.4) to (3.6) results in formula (3.7) which can be used to calculate the net
capital stock
d - 1
(3.7) NCSt, t = ? (It - i * Pt - i, t) * (1 - (2i + 1)/2d)
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