Question

orthern Company adjusts and closes its books each December 31. It is now December 31, 20x5, and the adjusting entries are to be made. You are requested to prepare the adjusting entry that should be made for each of the following items (note that the original entries have been made, i.e. you do not need to provide the original entry):

1. Credit sales for the year amounted to $220,000. The estimated loss rate on bad debts is 3% of sales.

2. Unpaid and unrecorded wages incurred at December 31 amounted to $5,800.

3. The company paid a two-year insurance premium in advance on April 1, 20x5, amounting to $9,600, which was debited to prepaid insurance.

4. Machine A, which cost $80,000, is to be depreciated for the full year. The estimated useful life is 10 years, and the residual value, $4,000. Use straight-line depreciation.

5. The company rented a warehouse on June 1, 20x5, for one year. It had to pay the full amount of rent one year in advance on June 1, amounting to $12,000, which was debited to rent expense.

6. The company received from a customer a 9% note with a face amount of $12,000. The note was dated September 1, 20x5; the principal plus the interest is payable one year later. Notes receivable was debited, and sales revenue was credited on the date of sale, September 1, 20x5.

7. On April 1, 20x5, the company signed a $60,000, 10% note payable. On that date, cash was debited and notes payable credited for $60,000. The note is payable on March 31, 20x6, for the face amount plus interest for one year.

8. The company purchased a patent on January 1, 20x5, at a cost of $11,900. On that date, the patent account was debited and cash credited for $11,900. The patent has an estimated useful life of 17 years and no residual value.

2

9. On January 1, Northern Company had a supplies inventory of $4,400. During the year, supplies of $21,900 were purchased and debited to supplies expense. At the end of the year, inventory of $9,200 was on hand.

9. During the year, Northern Company sold 10,000 units of a product that was subject to a warranty. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. The sales have been recorded; costs incurred for the warranty to date, totalling $8,700, were debited to warranty liability when paid. No warranty expense has been recognized.

9. Northern Company wrote off a $15,000 bad debt.

9. Pre-tax income has been computed to be $80,000 after all the above adjustments. Assume an average income tax rate of 30%.

Answer 1

Transaction	General Journal	Debit	Credit
a.	Bad debts expense (3% x $220000)	6600
	Allowance for doubtful accounts		6600
	(To record bad debts expense)
b.	Wages expense	5800
	Wages payable		5800
	(To record unpaid wages)
c.	Insurance expense ($9600 x 9/24)	3600
	Prepaid insurance		3600
	(To record expired insurance)
d.	Depreciation expense [($80000 - $4000)/10]	7600
	Accumulated depreciation-equipment		7600
	(To record depreciation expense)
e.	Prepaid rent ($12000 x 5/12)	5000
	Rent expense		5000
	(To record unexpired rent)
f.	Interest receivable (9% x $12000 x 4/12)	360
	Interest revenue		360
	(To record interest accrued on note receivable)
g.	Interest expense (10% x $60000 x 9/12)	4500
	Interest payable		4500
	(To record interest accrued on note payable)
h.	Amortization expense ($11900/17)	700
	Patent*		700
	(To record amortization of patent)
i.	Supplies ($9200 - $4400)	4800
	Supplies expense		4800
	(To record adjustment for supplies on hand)
j.	Warranty expense (10000 x 3% x $40)	12000
	Warranty liability		12000
	(To record warranty expense)
k.	Allowance for doubtful accounts	15000
	Accounts receivable		15000
	(To record bad debt written-off)
l.	Income tax expense ($80000 x 30%)	24000
	Income tax payable		24000
	(To record income tax expense)

*Amortization of patent is typically credited to the patent account without maintaining a separate contra-asset account.