Reference no: EM132825815
Question - Medici Corporation ("Medici") is preparing a meeting with its banker to discuss the renewal of a long-term debt. The following trial balance was taken from the books of Medici Corporation on 31 December 2020.
|
Account
|
Debit
|
Credit
|
|
Cash
|
$12,000
|
|
|
Accounts Receivable
|
40,000
|
|
|
Note Receivable
|
7,000
|
|
|
Allowance for Doubtful Accounts
|
|
$1,800
|
|
Inventory
|
44,000
|
|
|
Prepaid Insurance
|
4,800
|
|
|
Equipment
|
105,000
|
|
|
Accumulated Depreciation-Equipment
|
|
15,000
|
|
Accounts Payable
|
|
10,800
|
|
Dividends Payable
|
|
10,000
|
|
Share Capital-Ordinary
|
|
44,000
|
|
Retained Earnings
|
|
55,000
|
|
Sales Revenue
|
|
260,000
|
|
Cost of Goods Sold
|
111,000
|
|
|
Salaries and Wages Expense
|
50,000
|
|
|
Prepaid Rent
|
12,800
|
|
|
Dividends
|
10,000
|
|
|
Total
|
$396,600
|
$396,600
|
The trial balance above has not yet reflected below:
1. Insurance expired during the year, $2,000.
2. Estimated doubtful debts at the year-end, 11% of the accounts receivable (gross). No doubtful debt is expected regarding the note receivable.
3. Depreciation on equipment, 10% per year. Residual value is insignificant. Straight-line depreciation method is adopted.
4. Interest at 5% is receivable on the note for one full year.
5. Rent expense for the year. (Two-year rental was prepaid on 1 January 2020 for $12,800.)
6. Accrued salaries and wages at 31 December 2020 is $5,800.
Required -
(a) Prepare the necessary adjusting entries.
(b) Compute Medici's income: (i) before recording the adjusting entries; and (ii) after recording the adjusting entries. Explain why Medici's banker would prefer to wait for Medici to complete its year-end adjustment process before making a decision on the loan renewal.
(c) Prepare the necessary closing entries after adjustments.