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ROCKFORD CORPORATION:
A N ACCOUNTING PRACTICE SET
to accompany
INTERMEDIATE
ACCOUNTING
DONALD E. KIESO, Ph.D., C.P.A.
KPMG Emeritus Professor of Accountancy Northern Illinois University DeKalb, Illinois
JERRY J. WEYGANDT, Ph.D., C.P.A.
Arthur Andersen Alumni Emeritus Professor of Accounting University of Wisconsin Madison, Wisconsin
TERRY D. WARFIELD, Ph.D.
PricewaterhouseCoopers Research Scholar University of Wisconsin Madison, Wisconsin
PREPARED BY
LARRY FALCETTO, C.P.A., C.M.A.
Associate Professor of Accounting Emporia State University Emporia, Kansas
John Wiley & Sons, Inc.
Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.
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CONTENTS
Narrative and Instructions
Rockford Corporation is a wholesale plumbing sup- ply distributor. The corporation was organized in 1981, under the laws of the State of Illinois, with an authorized capitalization of 10,000 shares of no-par common stock with a stated value of $30 per share. The common stock is sold over the counter in the local area. You have been hired as of Monday, December 27, 2010, to replace the controller, who has resigned. As controller, you are responsible for the corporation’s accounting records, preparation of the financial statements, safeguarding the corpo- rate assets, and providing management with finan- cial information to set prices and to monitor and control operations. You have an assistant who keeps the payroll records, the plant asset ledger, and the perpetual inventory (by quantity only). The corpo- ration secretary maintains the stockholder records, and the receptionist/secretary acts as the petty cashier. Rockford Corporation closes its books annually on December 31 but prepares financial statements quarterly. Adjusting entries are posted to the gener- al ledger only at year-end; at the end of the first, second, and third quarter the adjustments are entered only on a ten-column work sheet, not in the general ledger. Therefore, the adjusting entries to be recorded on December 31 are annual adjust- ments that you must journalize and then post to the general ledger accounts before preparing the finan- cial statements. Rockford Corporation maintains a quantity-only perpetual inventory system and takes a physical count on December 31 to cost the inventory on hand and to adjust the inventory carrying amount per the general ledger. Purchases are recorded at the gross amount (discounts taken are recognized at the date of payment) of the supplier’s invoice, and the terms vary with each supplier. Sales on account are subject to terms of 2/10, n/30. Discounts are taken and granted only when the terms are met. The corporation uses the following journals and ledgers:
JOURNALS
- A sales journal (S)–to record sales of merchandise on account.
- A purchases journal (P)–to record purchases of merchandise on account.
- A cash receipts journal (CR)–to record all cash receipts.
- A cash disbursements journal (CD)–to record all cash payments.
- A general journal (J)–to record all transactions that cannot be recorded in the other journals.
LEDGERS
- A general ledger.
- An accounts receivable subsidiary ledger.
- An accounts payable subsidiary ledger.
In recording sales transactions, each sale should be posted on the day of the sale directly to the customer’s account in the subsidiary ledger, using the invoice number as the posting reference number in the subsidiary account. Also, cash receipts from customers should be posted to the subsidiary ledger on the day they are received. The purchase order number should be used as the posting reference number in the subsidiary ledger for purchases on account from suppliers. Purchases from suppliers and payments to them should be posted daily. All other individual posting may be made weekly or at the month-end. Account numbers should be used as posting reference numbers in the journals. Officers, sales, and office personnel are salaried employees and are paid monthly on the last day of each month. The delivery truck drivers and warehouse employees are hourly wage employees and are paid biweekly. Each biweekly pay period ends Friday. On the following Monday your assistant, who maintains the payroll records, pro- vides you with a payroll summary from which you prepare general journal entries to record the biweekly payroll and the employer’s taxes on the
ROCKFORD CORPORATION
A PRACTICE SET TO ACCOMPANY
Intermediate Accounting, by Kieso, Weygandt, and Warfield
PERIODIC INVENTORY
payroll. The biweekly employees’ paychecks are dis-
tributed on the following day (Tuesday). The general ledger chart of accounts is shown below:
CHART OF ACCOUNTS
Account The January 1, 2010, balances appear in the gen- eral ledger accounts as well as the November 30, 2010, balances, for those accounts whose balances have changed. All transactions affecting the non- current accounts from January 1, 2010, through November 30, 2010, with explanations, appear in these accounts to facilitate the preparation of the statement of cash flows. Subsidiary ledger account balances as of November 30, 2010, are as follows (the balances appear in the appropriate subsidiary ledger accounts):
- Preface
- Narrative and Instructions Periodic Inventory Method
- Alternative Set of Instructions
- Journals
- General Ledger
- Subsidiary Ledgers
- Ten-Column Work Sheet
- Schedules and Financial Statements
- Narrative and Instructions Perpetual Inventory Method
- Alternative Set of Instructions
- Journals
- General Ledger
- Subsidiary Ledgers
- Ten-Column Work Sheet
- Schedules and Financial Statements
- Cash Accounts Number
- Petty Cash
- Accounts Receivable
- Allowance for Doubtful Accounts
- Notes Receivable
- Interest Receivable
- Merchandise Inventory
- Office Supplies
- Prepaid Insurance
- Prepaid Rent
- Other Assets
- Land
- Buildings
- Accum. Depr.–Buildings
- Office Equipment
- Accum. Depr.–Off. Equip.
- Delivery Trucks
- Accum. Depr.–Delivery Trucks
- Notes Payable
- Accounts Payable
- Wages Payable
- Salaries Payable
- FICA Taxes Payable
- Federal Income Taxes Payable
- Federal Income Tax Withholding Payable
- State Income Tax Withholding Payable
- Federal Unemployment Taxes Payable
- State Unemployment Taxes Payable
- Interest Payable
- Dividends Payable
- Notes Payable (LT Liability)
- Bonds Payable
- Discount on Bonds Payable
- Common Stock
- P-I-C in Excess of Stated Value
- Retained Earnings
- Treasury Stock-Common
- Dividends Declared
- Income Summary
- Sales
- Sales Returns and Allowances
- Sales Discounts
- Purchases
- Purchases Returns and Allowances
- Purchases Discounts
- Freight-in
- Advertising Expenses
- Bad Debt Expense
- Depreciation Expense-Trucks
- Sales Salaries Expense
- Wage Expense
- Freight-out
- Miscellaneous Selling Expense
- Depreciation Expense–Buildings
- Depreciation Expense–Off. Equip.
- Insurance Expense
- Office Salaries Expense
- Office Supplies Expense
- Rent Expenses
- Payroll Taxes Expense
- Utilities Expense
- Interest Revenue
- Gain on Plant Assets
- Interest Expense
- Loss on Plant Assets
- Income Tax Expense
- Boecker Builders $62, ACCOUNTS RECEIVABLE
- The Potts Company 50,
- Swanson Brothers Construction 24,
- Trudy’s Plumbing 15,
- Coconino Contractors, Inc. 27,
- Rankin Plumbing Corp. 74,
- Beverly’s Building Products 14,
- Bilder Construction Company 45,
- Iwanaga Plumbing and Heating 3,
- Total accounts receivable $317,
NARRATIVE OF THE DECEMBER TRANSACTIONS
NOTE: All transactions from Dec. 1 thru Dec. 23 have already been recorded
December
1 Received a check in the amount of $23,569 from Swanson Brothers Construction in full payment of invoice No. 1120 dated November 26 in the amount of $24,050.
1 Sold sewer and drainage pipe to Beverly’s Building Products on account, invoice No. 1201 for $13,150.
2 Purchased copper tubing and fittings from Edward’s Plumbing Supplies Inc. on account, purchase order No. 315 for $24,320, terms n/60.
2 Issued check No. 1580 for $26,400 to Oxenford Copperworks in settlement of the balance owed on purchase order No. 280.
3 A court notice indicates that Iwanaga Plumbing and Heating is bankrupt and payment of its account improbable; the president orders the account to be written off as a bad debt (invoice No. 780).
3 Sold bathroom fixtures to Bilder Construction Company on account, invoice No. for $44,900.
6 Received a check in the amount of $49,294 from The Potts Company in full payment of invoice No. 1128 dated November 27 for $50,300.
6 Sold plumbing supplies and plastic pipe to Coconino Contractors, Inc. on account, invoice No. 1203 for $10,300.
6 Issued check No. 1581 for $810 to Standard Oil Co. in payment of gas, oil, and truck repair from Tierney’s Standard Service.
7 Issued check No. 1582 for $9,900 to Khatan Steel Corp. in full settlement of purchase order No. 312 for $10,000.
7 Issued check No. 1583 for $10,486 to Phoenix Plastics in full payment of Phoenix’s invoice dated November 28 in the amount of $10,700, for purchase order No. 313, terms 2/10, n/30.
7 Received a check in the amount of $72,863 from Rankin Plumbing Corp. in full payment of invoice No. 1129 dated November 28 for $74,350.
7 The payroll summary for the biweekly pay period ended Friday, December 3 contained the following information: Delivery and warehouse wages .............................. $4, FICA taxes withheld ................................................ 350 Federal income taxes withheld .............................. 900 State income taxes withheld .................................. 190 Net pay.............................................................. $3, Employer’s payroll taxes: FICA tax ............................................................ $ 350 Federal unemployment tax.............................. – State unemployment tax .................................. – Issued check No. 1584 for the amount of the net pay and deposited it in the payroll bank account. Individual payroll checks were then prepared for distribution to the biweekly employees on Tuesday, December 7.
8 Sold cast pipe to Trudy’s Plumbing on account, invoice No. 1204 for $26,300.
8 Received a check in the amount of $27,800 from Coconino Contractors, Inc. in full payment of invoice No. 1091 dated October 20.
8 Purchased bathroom fixtures from Phoenix Plastics, on account, purchase order No. 316 for $52,700 terms 1/10, n/30.
9 Received a check in the amount of $29,000 from Boecker Builders in partial payment of balance outstanding covering invoice Nos. 1050 and 1071.
9 Issued check No. 1585 for $600 to Scooter Gordon for lettering and sign painting on some delivery trucks.
9 Issued check No. 1586 for $6,750 to Phoenix Plastics, in payment of Phoenix’s invoice dated November 10 in the amount of $6,750, our purchase order No. 299.
10 Issued check No. 1587 for $37,719 to Smith Pipe Company in full payment of their invoice dated November 28, terms 1/15, n/60, our purchase order No. 314.
10 Received a check in the amount of $15,100 from Trudy’s Plumbing in full settlement of invoice No. 1106 dated November 7.
10 Sold pipe, fixtures, and accessories to Trudy’s Plumbing on account, invoice No. 1205 for $24,850.
13 Sold plumbing supplies and copper tubing to The Potts Company on account, invoice No. 1206 for $31,
13 Received a check in the amount of $33,920 from Boecker Builders in full payment of invoice No. 1071.
13 Cash sales to date totaled $12,292.
14 Received a check in the amount of $25,774 from Trudy’s Plumbing in payment of invoice No. 1204.
14 Sold plumbing fixtures and supplies to Boecker Builders, on account, invoice No. 1207 for $21,730.
15 The Potts Company returned defective copper tubing that it purchased on December 10. A credit memo in the amount of $4,680 is issued relative to invoice No. 1206.
15 The defective copper tubing is returned to Edward’s Plumbing Supplies, Inc. along with a debit memo in the amount of $3,550 in reduction of purchase order No. 315.
15 Issued check No. 1588 for $399 in payment of November telephone bill to Northern Illinois Communications.
16 Issued check No. 1589 in the amount of $11,360 in payment of federal withholding taxes, $9,573, and FICA taxes, $1,787, payable on November salaries and wages; the check is remitted to the Winnebago County Bank as the depository.
16 Issued check No. 1590 for $52,173 to Phoenix Plastics, Inc. in payment of purchase order No. 316.
17 The president informs you that Bilder Construction Company agrees to convert the $45,200 overdue account receivable (invoice No. 1120) to a 14% note due six months from today.
17 Purchased plumbing materials from Smith Pipe Company on account, purchase order No. 317 for $43,800 terms 1/15, n/60.
17 Sold drain tile, plastic pipe, and copper tubing to A & B Hardware on account, invoice No. 1208 for $7,920.
28 An invoice in the amount of $2,650 is received from Wayne McManus, lawyer, for legal services involved in the acquisition of the adjacent parcel of land; check No. 1596 is issued in payment.
28 Sold pipe and plumbing materials to Boecker Builders on account, invoice No. 1210 for $42,040.
29 Issued check No. 1597 in the amount of $500 to the Northern Star for advertisement run in the home building supplement of December 15.
29 Issued check No. 1598 in the amount of $925 to Standard Oil Co. in payment of gas, oil, and truck repairs from Standard Oil Co. (use Freight-out).
29 Purchased copper and cast iron pipe from Oxenford Copperworks on account, purchase order No. 320 for $55,940, terms 1/10, n/30.
29 Check No. 1599 for $15,000 is issued to the bond sinking fund trustee, Chicago Trust Co., for deposit in the sinking fund (use Other Assets).
30 Received a check for $21,730 from Boecker Builders in payment of invoice No. 1207.
30 Sold plumbing supplies to Swanson Brothers Construction on account, invoice No. 1211 for $24,650.
30 Issued check No. 1600 for $43,362 to Smith Pipe Company in payment of purchase order No. 317.
31 The custodian of the petty cash fund submits the following receipts for reimbursement and reports a cash-on-hand count of $8. Postage stamps used .............................................. $ United Parcel (freight-out) .................................... 23 C.O.D. postage (freight-in) .................................... 51 Christmas office decorations .................................. 30
Check No. 1601 is issued and cashed to reimburse the fund.
31 Sold an electric truck-lift to Leila Stierman Co. for $2,500 cash. The original cost was $7,900 with salvage value of $900, a life of 10 years, and accumulated depreciation recorded through 12/31/09 of $4,550. The straight-line method is used. (Note: the company follows the practice of recording a half year’s depreciation in the year of acquisition and a half year in the year of disposal.) First, bring the depreciation expense up to date in the general journal. Then journalize the entire entry for the sale in the cash receipts journal.
31 Sold bathroom fixtures and plumbing supplies to Trudy’s Plumbing on account, invoice No. 1212 for $55,770.
31 Because for some time the petty cash fund has been smaller than required for monthly expenditures, the fund is increased by $75 by cashing check No. 1602 and placing the money in the petty cash fund.
31 The payroll summary for the monthly paid employees is submitted so that December checks can be distributed before the year-end; the details are as follows:
Sales salaries ............................................................ $16, Office and administrative salaries.......................... 22, Federal income taxes withheld .............................. 7, State income taxes withheld .................................. 1, FICA taxes withheld ................................................ 2, Net pay.............................................................. $28, Issued check No. 1603 for the amount of the net pay and deposited it in the payroll bank account. Individual payroll checks were prepared for distribution to all monthly employees by the end of the day.
Employer’s payroll taxes: FICA tax (all office and administrative).......... $2, Federal unemployment tax.............................. – State unemployment tax .................................. –
31 Cash sales since December 13 total $25,980.
INSTRUCTIONS
- Make the entries in the appropriate journals for December 27 through December 31.
- Post any amounts to be posted as individual amounts from the journals to the general ledger and any amounts to be posted to the subsidiary ledger accounts. (If the normal practice of daily posting were followed, the postings would be in chronological order; proper date sequence for this practice set is not necessary.)
- Foot and cross-foot the columnar journals and complete the month-end postings of all books of original entry.
- Prepare a trial balance by entering the account balances from the general ledger in the first two columns of the ten-column work sheet (list all accounts, including those with zero balances).
- From the following information prepare adjusting entries in the general journal and enter them in the “adjustments” columns of the work sheet and cross-reference the amounts using the related alphabetic characters (round all calculations to the nearest dollar).
a. The annual provision for doubtful accounts receivable is recorded by providing a charge to Bad Debt Expense in an amount equal to 2% of net sales. (This entry should be entered below the middle of General Journal page 10.)
b. An inventory count of the office supplies revealed $830 of supplies on hand at year- end.
c. A physical inventory on Friday, January 7, 2011, results in a total dollar value assigned to the ending inventory at lower of cost or market of $539,930 (use Income Summary account for adjustment purposes).
- Complete the work sheet. In completing the worksheet, compute State of Illinois corpo- rate income taxes at 4 1 / 2 % of pretax income. The state income tax is deductible on the federal tax return, and the federal tax is not deductible on the Illinois return. Assume federal corporate income tax on income subject to federal tax is as follows: first $50,000 @15% next 25,000 @25% remainder @34% Income between $100,000 and $335,000 is assessed a 5% federal surtax, not to exceed $11,750. Hint: Corporations subject to federal income tax must make estimated tax payments throughout the year. At the time of the payment, the account Income Tax Expense is debited and Cash is credited. To determine the taxable income at year end, net the total debits and total credits from the income statement in the worksheet. Note that the estimated income tax expense is listed as a debit and must be subtracted from total debits when determining taxable income (federal tax is not a deductible item).
- Prepare the journal entry for income taxes. Post all adjusting entries.
- Prepare schedules of subsidiary accounts receivable and accounts payable and deter- mine that the total per each subsidiary schedule agrees with the related control account.
- Prepare an income statement (assume the weighted-average number of shares out- standing for the year 2010 is 5,600 shares). Assume that bad debt expense is an administrative expense. Assume that payroll taxes expense is 80% administrative.
- Prepare a statement of retained earnings.
- Prepare a balance sheet. (Hint: combine Petty Cash with Cash for balance sheet purposes.)
- OPTIONAL ASSIGNMENT (1 to 1 1 / 2 hours): Prepare a statement of cash flows using the indirect approach. (Hint: combine Petty Cash with Cash for purposes of determin- ing changes in cash.)
- Prepare and post closing entries.
- Prepare a post-closing trial balance.
AN ALTERNATIVE SET OF INSTRUCTIONS
FOR ROCKFORD CORPORATION
To the Student: These pages contain a second set of instructions which, if assigned by the instructor, are to be utilized in place of pages 14-16. The primary differences between these two sets are in the adjusting entries, instruction steps 5 through 9. All other information, forms, and requirements are the same.
ALTERNATIVE SET OF INSTRUCTIONS
- Make the entries in the appropriate journals for December 27 through December 31.
- Post any amounts to be posted as individual amounts from the journals to the general ledger and any amounts to be posted to the subsidiary ledger accounts. (If the normal practice of daily posting were followed, the postings would be in chronological order; proper date sequence for this practice set is not necessary.)
- Foot and cross-foot the columnar journals and complete the month-end postings of all books of original entry.
- Prepare a trial balance by entering the account balances from the general ledger in the first two columns of the ten-column work sheet (list all accounts, including those with zero balances).
- From the following information prepare adjusting entries in the general journal and enter them in the “adjustments” columns of the work sheet and cross-reference the amounts using the related alphabetic characters (round all calculations to the nearest dollar).
a. The annual provision for doubtful accounts receivable is recorded by providing a charge to Bad Debt Expense in an amount equal to 1^1 / 2 % of net sales. (This entry should be entered below the middle of General Journal page 10.)
b. An inventory count of the office supplies revealed $810 of supplies on hand at year- end.
c. A physical inventory on Wednesday, January 2, 2011, results in a total dollar value assigned to the ending inventory at lower of cost or market of $543,200 (use Income Summary account for adjustment purposes).
d. The insurance premium outstanding on January 1, 2010, covers the period January 1 through August 31, 2010. The insurance premium of $7,050 recorded in August covers the period of September 1, 2010 through August 31, 2011. Rockford estimates that 80% of the premiums are attributable to general activities and 20% to selling activities (use Miscellaneous Selling Expense).
- Complete the work sheet. In completing the worksheet, compute State of Illinois corpo- rate income taxes at 4% of pretax income. The state income tax is deductible on the fed- eral tax return, and the federal tax is not deductible on the Illinois return. Assume fed- eral corporate income tax on income subject to federal tax is as follows: first $50,000 @15% next 25,000 @25% remainder @34% Income between $100,000 and $335,000 is assessed a 5% federal surtax, not to exceed $11,750. Hint: Corporations subject to federal income tax must make estimated tax payments throughout the year. At the time of the payment, the account Income Tax Expense is debited and Cash is credited. To determine the taxable income at year end, net the total debits and total credits from the income statement in the worksheet. Note that the esti- mated income tax expense is listed as a debit and must be subtracted from total debits when determining taxable income (federal tax is not a deductible item).
- Prepare the journal entry for income taxes. Post all adjusting entries.
- Prepare schedules of subsidiary accounts receivable and accounts payable and deter- mine that the total per each subsidiary schedule agrees with the related control account.
- Prepare an income statement (assume the weighted-average number of shares out- standing for the year 2010 is 5,592 shares). Assume that bad debt expense is an admin- istrative expense. Assume payroll taxes expense is 80% administrative.
- Prepare a statement of retained earnings.
- Prepare a balance sheet. (Hint: combine Petty Cash with Cash for balance sheet purposes.)
- OPTIONAL ASSIGNMENT (1 to 1^1 / 2 hours): Prepare a statement of cash flows using the indirect approach. (Hint: combine Petty Cash with Cash for purposes of determining changes in cash.)
- Prepare and post closing entries.
- Prepare a post-closing trial balance.
