Question

1.On the “Adjusting Journal Entries” worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information. All information was provided to you as of 12/31/2018. (Round all numbers to the nearest dollar).

f. On November 1, 2018 Accounting Creations paid ABC Advertising $18,000 for a four-month campaign of advertising services. Equal services are provided each month.

g. Because of a new product line, Accounting Creations needed some temporary additional storage space so on August 1, 2018 they rented a unit for an annual rate of $19,200 and they paid the entire amount up front.

h. The storage building was self-constructed this year by Accounting Creations. The Company had their initial expenditure of $500,000 on January 1. They paid an additional $375,000 on May 1st, $250,000 on August 1st, and then the final payment of $150,000 on December 1st when the building was completed and occupancy occurred. The company has decided to use S/L method for depreciation. The storage building is estimated to have a life of 40 years and a salvage value of $78,000. The company depreciates using partial years (Hint: (1) only consider depreciation expense after the completion of the construction; (2) use the avoidable interest computed from i).

i. Accounting Creations Double Entry has two loans outstanding as of 12/31/2018. Interest is paid annually on January 1st. The facts on each loan are as follows: Onstar Bank Loan – outstanding since January 1, 2018 with a 4.0% interest rate. This loan was taken out to finance the construction of the Storage Building. Interest for the year and 10% of the principle will be paid to the bank on January 1, 2019. Except for recording the initial cash received and loan, no additional entries have been made. Coldstar Bank Loan – also outstanding all of 2018 with 3.06% interest rate. Interest is due on January 1, 2019. Principle is due on January 1, 2024. Since interest will not be paid to the Bank until 2019, Accounting Creations’ office staff did not accrue any interest.

Answer 1

Journal entries:-

f. Advertisement

Date	Particulars	Debit ($)	Credit ($)
Nov 2018	Advertising Expenses A/C	18,000
	To Bank A/C		18,000

This below entry will be passed on Nov and December 2018 :-

Particulars	Debit ($)	Credit ($)
Statement of Profit or loss A/C	4,500
To Advertising Expenses A/C		4,500

When on November the company paid $18,000 at once for advertising it is treated as asset and will be shown in balance sheet.

As the expense is for 4 months so it will be deferred and will be transferred to statement of profit or loss in each month ($18,000/4)=$4,500

g. Rent

Date	Particulars	Debit ($)	Credit ($)
August 2018	Rent A/C	19,200
	To Bank A/C		19,200

This below entry will be passed on August to December 2018 :-

Particulars	Debit ($)	Credit ($)
Statement of Profit or loss A/C	1,600
To Rent A/C		1,600

When on August the company paid the whole rent amount at once then it will treated as an asset and will be shown in balance sheet. As the expense is for 12 months so it will be deferred and will be transferred to statement of profit or loss A/C each month ($19,200/12)= $1,600

h. As the storage building was self constructed by the company it will be recorded in "Capital work in progress" by the company.

Date	Particulars	Debit ($)	Credit ($)
January	Capital Work in progress A/C	500,000
	To Bank A/C		500,000

Date	Particulars	Debit ($)	Credit ($)
May	Capital Work in progress A/C	375,000
	To Bank A/C		375,000

Date	Particulars	Debit ($)	Credit ($)
August	Capital Work in progress A/C	250,000
	To Bank A/C		250,000

Date	Particulars	Debit ($)	Credit ($)
December	Capital Work in progress A/C	150,000
	To Bank A/C		150,000

At the end of year when the Storage building is completed and ready then it is recorded as Building under Fixed Tangible Assets.

Date	Particulars	Debit ($)	Credit ($)
December	Storage Building A/C	1,275,000
	To Capital Work in progress A/C		1,275,000

i. Interest on Loan :-

As the onstar bank loan is taken out to finance the construction of the Storage Building, the interest paid  will be capitalized in storage building A/C till the completion of building. Then it means interest paid till December will be capitalized and after December 2018 when the building is completed the interest paid will be treated as an expense.

Interest on Coldstar Bank loan will be treated as an expense and will be transferred to Statement of Profit or loss A/C.

Note:-

Amount of Loan taken is not given so calculation of interest is not shown.

Depreciation = (Asset value - salvage value)/useful life

Depreciation = ($1,275,000 - $78,000)/40 = $29,925

But the entry of Depreciation will be recorded in next year.