The University of Texas at El Paso

College of Business Administration, Department of Accounting

ACCT 3321-Intermediate Accounting I

Solution In-Class Exercise ICC2a, Spring Semester 2005

Adjusting Journal Entries and Trial Balance:

Spencer Company was capitalized with $100,000. Spencer purchased 10,000 shares of common stock at a par value of $10 per share. This is a closely held corporation with no other shareholders.

The unadjusted trial balance for Spencer Company for the year ended September 30, 2000 is located after the adjusting journal entries in this document.

Spencer Company is in the pet consulting business. On occasion the company receives a retainer from new clients. Existing clients are billed at the end of each month.

At inception the company bought a piece of property for $250,000. The land was appraised at $50,000 so the value of the building was set at $200,000. The building is expected to have a 25 year life and a salvage value of $20,000. The seller of the property accepted a down payment of $50,000 and agreed to carry a mortgage for the remaining balance. The terms of the note is for 20 years with payments made annually starting December 31, 1999 with interest at the rate of 10% per annum. The following is a partial amortization schedule of the mortgage.

At the same time the company purchased equipment at a cost of $195,000. The equipment is expected to have a 15 year life and a salvage value of $19,500. The company elected to have a September 30 fiscal year end.

The following information pertains to the accounts at the fiscal year end.

(1)  Cash: The September 30th bank reconciliation reflects bank charges in the amount of $270.

(2)  Allowance for doubtful accounts: Based on the aged accounts receivable at September 30, 2000 the chief financial officer estimates that the allowance account should be approximately 5% of accounts receivable.

(3)  Prepaid insurance: The Company purchased an insurance policy for $9,000 on April 1, 2000. The policy expires on March 31, 2001.

(4)  Supplies: A physical count of the supplies on hand at year-end was $980.

(5)  Accounts payable: The Company received a utility bill for $290 from the power company on September 29th. The bill was not included in account payable.

(6)  Salaries payable: Salaries are paid on the first day of each month. The salaries for September were $4,790.

(7)  Unearned revenue: Spencer Company earned $5,300 in September on the retainers that are currently on the books.

(8)  Income taxes payable: The applicable income tax rate is 15%. The company makes estimated income tax payments to the IRS on January 15, April 15 and July 15 with the final payment due on October 15 or with the filing of the income tax return, whichever is sooner.

Instructions: Using the materials attached please complete the year-end adjusting journal entries. Round all computations to the nearest dollar. Post the adjusting journal entries to the working trial balance and extend the trial balance. Once you have determined income before income tax you can prepare the last adjusting journal entry to accrue the income taxes. Once you have completed the working trial balance prepare the following financial statements.

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