Music-Is-Us, Inc., is a supplier of musical instruments for professional and ama
ID: 2448686 • Letter: M
Question
Music-Is-Us, Inc., is a supplier of musical instruments for professional and amateur musicians. The company’s accountants make adjusting entries monthly, and they make all closing entries annually. The company is growing rapidly and prides itself on having no long-term liabilities.
The company has provided the following trial balance dated December 31, 2015:
The most recent bank statement reports a balance of $53,675. Included with the bank statement was a $2,400 check from Iggy Smarts, a professional musician, charged back to Music-Is-Us as NSF. The bank’s monthly service charge was $25. Three checks written by Music-Is-Us to suppliers of merchandise inventory had not yet cleared the bank for payment as of the statement date. These checks included: no. 508, $3,900; no. 511, $9,000; and no. 521, $7,600. Deposits of $16,400 reached the bank too late for inclusion in the current bank statement. The company prepares a bank reconciliation at the end of each month.
Music-Is-Us has a portfolio of marketable securities that originally cost $21,000. As of December 31, the market value of these securities was $29,100. All short-term investments are classified as "available for sale."
During December, $6,200 of accounts receivable were written off as uncollectible. A recent aging of the company's accounts receivable helped management to conclude that an allowance for doubtful accounts of $8,300 was needed at December 31, 2015.
The company uses a perpetual inventory system. A year-end physical count revealed that several guitars reported in the inventory records were missing. The cost of the missing units amounted to $1,350. This amount is not considered significant relative to the total cost of inventory on hand.
The company pays for its insurance policies 12 months in advance. Its most recent payment was made on November 1, 2015. The cost of this policy was slightly higher than the cost of coverage for the previous 12 months.
Depreciation expense related to the company's building and fixtures is $6,000 for the month ending December 31, 2015.
Although Music-Is-Us carries an extensive inventory, it is not uncommon for experienced musicians to order custom guitars made to their exact specifications. Manufacturers do not allow any sales returns of custom-made guitars. The entire sales amount is collected at the time a custom order is placed, and is credited to an account entitled “Unearned Customer Deposits.” As of December 31, $4,300 of these deposits remained unfilled because the special-order guitars have not been received from the manufacturer. The cost of goods sold and the reduction in inventory associated with all custom orders is recorded when the custom merchandise is delivered to customers. At that time, the adjusting entry requires only a decrease to unearned customer deposits and an increase in sales.
Accrued income taxes payable for the entire year ending December 31, 2015, total $82,000. No income tax payments are due until early in 2016.
Question #2 Prepare the necessary adjusting entries at December 31, 2015.
a.) Record the bank service charges for December and the NSF check received from Iggy Bates.
b.)Record to increase reported value of marketable securities.
c.)Record the uncollectible accounts expense for December.
d.)Record the inventory shrinkage of missing guitars.
e.)Record the office supplies used in December.
f.)Record the insurance policies expired during December.
g.)Record the depreciation expense for December.
h.)Record the revenue earned from advance special orders.
i.)Record the account for accrued income taxes in December.
Music-Is-Us, Inc., is a supplier of musical instruments for professional and amateur musicians. The company’s accountants make adjusting entries monthly, and they make all closing entries annually. The company is growing rapidly and prides itself on having no long-term liabilities.
Explanation / Answer
Since, there are multiple parts, the first 5 (from A to E) have been answered.
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Part a)
Bank Reconciliation is given below:
The adjustment for bank service charges and NSF check from Iggy Smarts would reduce the cash (as indicated by a credit to cash account). The journal entry is given below:
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Part B)
The increase in market value of marketable securities would be recorded as a credit to unrealized gain on investments, since, the investments have not been sold by the company. The amount that will be taken to calculate the unrealized gain would be the value as reported in the trial balance and market value on 31st December.
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Part C)
Since, we need to maintain an account balance $8,300 in the allowance for doubtful debts, we will have to increase the balance by $2,100 (as indicated by a credit) while making adjustment for uncollectible accounts expense.
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Part D)
The loss of missing units will be reported by debiting the cost of goods sold or inventory shrinkage expense and crediting inventory indicating a reduction in the balance of inventory.
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Part E)
The adjustment would be made for the supplies used (indicated by debit to supplies expense) by the company by comparing the value of office supplies in trial balance and supplies on hand at December 31.
Bank Reconciliation December 31, 2015 Balance As Per Bank Statement, December 31, 2015 $53,675 Add: Deposits in Transit 16,400 $70,075 Less: Outstanding Checks No. 507 $3,900 No. 511 9,000 No. 521 7,600 20,500 Adjusted Cash Balance $49,575 Balance As Per Depositor's Records, December 31, 2015 $52,000 Less: Bank Service Charge $25 NSF Check From Lggy Smarts 2,400 2,425 Adjusted cash balance (as above) $49,575Related Questions
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