Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows: $2,990,000 Total cash paid Assets acquired: $600,000 Land $600,000 Building $500,000 Machinery $600,000 Patents The building is depreciated using the double-declining balance method. Other information is: $60,000 Salvage value 30 Estimated useful life in years The machinery is depreciated using the units-of-production method. Other information is: 10% Salvage value, percentage of cost 400,000 Estimated total production output in units Actual production in units was as follows: 40,000 2019 80,000 2020 120,000 2021 The patents are amortized on a straight-line basis. They have no salvage value. 20 Estimated useful life of patents in years On December 31, 2020, the value of the patents was estimated to be $900,000 Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31. The machinery was traded on December 2, 2021 for new machinery. Other information is: $240,000 Fair value of old machinery $336,000 Trade-in allowance $504,000 List price for new machinery 20 Estimated useful life of new machinery in years $15,120 Estimated salvage value of new machinery The new machinery if depreciated using the stright-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows: $100,000 Amount of addition, paid in cash Number of years of useful life from 2023 (original 20 machinery and addition): 10% Salvage value, percentage of addition Required: Prepare journal entries to record: 1 The purchase of the assets of Coffee. 2 Depreciation and amortization expense on the purchased assets for 2019. 3 The decline (if any) in value of the patents at December 31, 2020. 4 The trade-in of the old machinery and purchase of the new machinery. 5 Depreciation on the new machinery for 2021. 6 Cost of the addition to the machinery on August 14, 2023. 7 Depreciation on the new machinery for 2023. Brown Company GENERAL JOURNAL Dec. 2019 Description PR Debit Credit Brown Company GENERAL JOURNAL Dec. 2019 Description F Debit Credit Brown Company GENERAL JOURNAL Dec. 2019 Description F Debit Credit Copyright © 2018 David Annand Published by David Annand Box 308, Rochester AB T0G 1Z0 ISBN: 978-0-9953266-6-8 Library and Archives Canada Cataloguing in Publication Annand, David, 1954– This case is licensed under a Creative Commons License, Attribution–Noncommercial–Share Alike 4.0 USA see www.creativecommons.org. This material may be reproduced for non-commercial purposes and changes may be used by others provided that credit is given to the author. To obtain permission for uses beyond those outlined in the Creative Commons license, such as personalized assignments for students, please contact David Annand at davida@athabascau.ca. Latest version available at https://open.bccampus.ca/find-open-textbooks/ Please forward suggested changes to davida@athabascau.ca. First US Edition July 31, 2018 Before you begin, print out all the pages in this workbook. The unadjusted trial balance of Morgan Manufacturing Corp. at December 31, 2019 is shown on the "Trial Bal" page (see tab below). Refer also to the additional year-end information for the company shown on the "Adjusting Entries" page (see tab below). Required: 1 Prepare year-end adjusting entries. General ledger account numbers are not necessary. Show your calculations below each adjusting entry. 2 Post the adjusting entries to the trial balance and prepare an adjusted trial balance. 3 Using the amounts from the adjusted trial balance, complete the financial statements for the year ended December 31, 2019. Morgan Manufacturing Corp. Adjusting Entries For the Year Ended December 31, 2019 The following additional information is available at the corporation's year-end. GST of 5% only applies when indicated. a. A sale on account has not been recorded in the amount of: Applicable sales tax is: b. Warranty expense for the year as a percentage of sales should be: c. Unpaid gross salaries at year-end amount to: Deductions from unpaid salaries are as follows: Employee Portion 12% Employee income taxes 4% FICA Social Security taxes* 2% FICA Medicare taxes 4% Company health insurance * these are not the actual required percentages d. The estimated year-end audit fees are: $5,000 8% 2% $10,000 Company Portion 0% 4% 2% 4% $90,000 e. Rent revenue consists of 13 equal monthly payments, including one paid in advance for January 2020. f. A trade account payable was converted to a note payable during the year. No entry has been made to record this. The note payable is due at the end of 2020. The amount of the note payable is: The annual interest rate on the note payable is: The note payable was created at the end of this month: (January = 1; December = 12) $40,000 3% 9 g. A lawsuit was commenced against the company in 2019. Damages claimed are: Lawyers for the company consider the likelihood of success to be: h. The interest rate on the mortgage is: Annual payments (blended principal and interest) are made on Dec. 31 and total: The 2019 payment has been recorded as Interest on Long-term Debt expense. i. The corporate income tax rate as a percentage of income before income taxes is: Corporate income tax installments during the year have been recorded as Income Tax expense in the records. Assume any 2019 loss before income taxes will result in the refund of income taxes at the current year's income tax rate. $30,000 Possible 8% $163,200 10% Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Morgan Manufacturing Corp. GENERAL JOURNAL Dec. 2019 Adjusting entries Debit Credit Account #REF! Cash in bank Accounts receivable Parts inventory Corp. income tax receivable Land Building Accumulated dep'n - bldg. Trade accounts payable Interest payable Estimated current liabilities Estimated warranty liability Salaries payable Employee inc. taxes pay. FICA Soc. Sec. pay. Trial Balance At December 31, 2019 Unadjusted TB Adjustments Debit Credit Debit Credit Adj. # 74,000 760,000 210,000 10,000,000 7,900,000 1,580,000 140,000 136,000 FICA Medicare payable Co. health insurance payable Corp. income tax payable Sales tax payable Note payable Unearned rent revenue Mortgage payable Common stock, $1 per sh. Retained earnings 1,000 1,632,000 9,000,000 2,963,800 Adj. # Debit Adjusted TB Credit Rent revenue Sales, net Cost of goods sold Bad debts expense Co. health ins. expense Delivery expense Dep'n. expense - building FICA Soc. Sec. exp. FICA Medicare exp. Interest and bank charges Interest on long-term debt Lawsuit damages expense Office supplies expense Professional fees Salaries expense Warranty expense Corp. income tax exp. 520,000 13,600,000 8,704,000 3,000 18,400 300,000 1,000 18,400 9,200 50,000 163,200 0 99,000 40,000 460,000 1,000 489,600 29,436,800 29,436,800 Morgan Manufacturing Corp. Income Statement For the Year Ended December 31, 2019 2019 Sales, net Less: Cost of goods sold Gross profit Operating expenses Selling Salaries and benefits Delivery Office supplies Warranty Total selling General and administrative Bad debts Depreciation Lawsuit damages Professional fees Total general and adminstrative Total operating expenses Income from operations Other income Rent revenue Income before interest and income taxes Interest expense Income before income taxes Income taxes Net income Balance at Jan. 1 Net income Balance at Dec. 31 Morgan Manufacturing Corp. Statement of Changes in Equity For the Year Ended December 31, 2019 2019 Common Retained Total equity stock earnings $9,000,000 $2,963,800 $11,963,800 $9,000,000 2018 $12,756,800 9,017,344 3,739,456 532,510 282,510 99,000 247,520 1,161,030 2,790 940 143,000 146,730 1,307,760 2,431,696 499,200 2,930,896 177,243 2,753,653 275,365 $2,478,288 2018 Total equity $9,485,512 2,478,288 $11,963,800 Morgan Manufacturing Corp. Balance Sheet At December 31, 2019 Assets Current Cash Accounts receivable, net Corporate income taxes receivable Inventories Non-current Land Building, net 2019 2018 $41,970 640,000 168,012 849,982 23,166,245 6,321,000 29,487,245 $30,337,227 Liabilities Current Trade accounts payable Estimated current liabilities Estimated warranty liabilities Note payable Interest payable Salaries and benefits payable Sales tax payable Unearned rent Current portion of mortgage payable Corporate income taxes payable $108,150 84,600 126,900 0 297 10,340 1,540 41,600 180,000 553,427 Non-current Mortgage payable Less: Current portion 18,000,000 (180,000) 17,820,000 18,373,427 Total liabilities Stockholders' Equity Common stock Retained earnings Total liabilities and S/H equity 9,000,000 2,963,800 11,963,800 $30,337,227 Copyright © 2018 David Annand Published by David Annand Box 308, Rochester AB T0G 1Z0 ISBN: 978-0-9953266-6-8 Library and Archives Canada Cataloguing in Publication Annand, David, 1954– This case is licensed under a Creative Commons License, Attribution–Noncommercial–Share Alike 4.0 USA see www.creativecommons.org. This material may be reproduced for non-commercial purposes and changes may be used by others provided that credit is given to the author. To obtain permission for uses beyond those outlined in the Creative Commons license, such as personalized assignments for students, please contact David Annand at davida@athabascau.ca. Latest version available at https://open.bccampus.ca/find-open-textbooks/ Please forward suggested changes to davida@athabascau.ca. First Edition July 31, 2018
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