Comprehensive Problem
This is a NOT a group project—the project is due in TWO parts. The general journal, the ledger and the adjusted trial balance is due first. The final portion consists of a full set of financial statements and is due the last day of class.
ABC Consulting.
One night while sitting at the bar in Maxies, three friends (Ahmad, Barbara and Chen) decided to start a consulting business. They decided to name the Business “ABC Consulting.” They specialize in marketing services for small creative businesses. Although all three were marketing majors they did remember some accounting and decided to use the following chart of accounts.
Account Name / Account NameCash / Capital Stock
Accounts Receivable / Retained Earnings
Prepaid Rent / Dividends
Unexpired Insurance / Income Summary
Office Supplies / Consulting Fees Earned
Office Equipment / Salaries Expense
Accumulated Depreciation—Office Equipment / Promotional Materials (supplies)
Notes Payable / Utilities Expense
Accounts Payable / Rent Expense
Interest Payable / Office Supplies Expense
Salaries Payable / Depreciation Expense
Dividends Payable / Interest Expense
Unearned Consulting Fees / Income Taxes Expense
Income Taxes Payable / Promotional Expense
Other Expenses
ABC Consulting Inc. closes its accounts and prepares financial statements at the end of each month. During Sept (their first month of operations) they had the following transactions.
Sept 1, 2010 / 25,000 shares of capital stock issued to each shareholder in exchange for $100,000 contribution from each.
Sept 1, 2010 / Purchased all of the office equipment owned by "Dewey, Cheatum and Howe." (a bankrupt telemarketer). The equipment that was bought had a fair market value of $500,000, but the actual purchase price was $300,000. They signed a 5-year 6% note payable and paid $150,000 cash.
Sept 1, 2010 / Paid $24,000 rent to Li-Mehta Realty Company. They are occupying the same office space as " Dewey, Cheatum and Howe."
Sept 4, 2010 / Purchased from Midnite Office Supply office supplies worth $2250 on account. Payment terms are 2/10 net 30. They expect that these supplies will last for several months.
Sept 5, 2010 / Hired a new administrative aide, his annual salary is $36,500 per year plus a benefit package that is worth $12,500.
Sept 8, 2010 / Received a $12,000 cash advance payment from a new winery (Chateau Traileur Parc) to help market their new wine “Nasti Spumante”. Use a liability account.
Sept 12, 2010 / Paid the salaries for the first two weeks of Sept. $7500.
Sept 15, 2010 / Excluding the advance from Chateau Traileur Parc, $22,000
was earned. The amount of cash received was $8,000.
Sept 17, 2010 / Purchased business cards, coasters, and other promotional items. They are trading $500 worth of their consulting services to the printer in exchange for these items. These items are considered supplies and are expected to last quite a while.
Sept 23, 2010 / Of the accounts receivable recorded on Sept 15th, $7,000 was collected.
They received their combined utility bill for the first three weeks. The bill is for $350 net 10.
Sept 25, 2010 / Rented a sound system for a 10 day promotional event. This system rents for 250 dollars per day. ABC, Inc. will settle their account when they return the sound system.
Sept 26, 2010 / Paid the salaries for the two weeks ended Sept. 26. $7,250.
Sept 27, 2010 / Paid utility bill.
Sept 28, 2010 / A dividend was declared, which they intend to pay at $0.05 per share by the end of the year.
Sept 29, 2010 / A child was slightly injured when he tripped over the sound system. The child is the only son of a lawyer and an orthopedic surgeon. Surprisingly they have filed a half million dollar lawsuit. The actual liability for the accident has not yet been determined.
Sept 29, 2010 / Purchased a one-year public liability insurance policy for $7,500. The policy becomes effective at 12:01 a.m. October 1, 2010.
Sept 30, 2010 / They received their Attorney’s bill for $2000. It is due no later than October 15th.
Sept 30, 2010 / For the last two weeks of Sept, they earned $15,000. Of the $15,000, the amount of cash received amounted to $6,750.
Adjusting Entries
Date / Transaction or EventSept 30, 2010 / The rent paid to Li-Mehta Realty Company was for 6 months.
Sept 30, 2010 / They recorded the interest accrued on the note payable was.
Sept 30, 2010 / Office equipment is being depreciated over 15 years. They have chosen to use the straight-line method of depreciation. They estimate that the equipment has no residual value.
Sept 30, 2010 / At the end of the month office supplies worth $1,000 were on hand. There was $450 worth of promotional supplies were still on hand.
Sept 30, 2010 / During the month, Chateau Traileur Parc had used $9,000 worth of consulting services..
Sept 30, 2010 / By the end of the month, thye had not returned the sound system
Sept 30, 2010 / Salaries earned by employees amounted to $1,500 since the last payroll date (Sept 26th).
Sept 30, 2010 / Ahmad, Barbara and Chen have consulted with their independent accountant, Paul Murky (a senior partner at the firm of Murky, Margin and Error, P.C.) and he advised them that they are likely subject to a combined local, state, & federal tax rate of 40% The taxes will be paid by December 15.
Instructions—
1-Journalize ( in good form ) the above transactions.
2- Post to ledger accounts. (Use a running balance form of ledger accounts.)
3- Prepare a 10 column worksheet for the month ended Sept 30, 2010.
4- Prepare adjusting and closing entries and post to ledger accounts.
5- Prepare an income statement and a statement of retained earnings for the month of Sept, and a balance sheet (in report form) as of Sept 30.
6- Prepare required disclosures to accompany the Sept 30 financial statements of ABC Consulting Inc. Your solution should include a separate note addressing each of the following areas (a.) depreciation policy, (b.) maturity dates of major liabilities, and (c.) potential liability due to pending litigation.
7- Prepare an after- closing trial balance as of Sept 30.
8- During Sept, this company’s cash balance has fallen significantly. Does this appear headed for solvency in the near future? Explain your reasoning.
9- Would it be ethical for Chen to maintain the accounting records for this company, or must they be maintained by someone who is independent of the organization?