Reference no: EM132325727

Question

CM Corporation (CMC) was founded in 2014 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. On January 2, 2019 CMC hired you as an accounting intern to assist the CFO and the entire corporate accounting team.

Lately Conner and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products.

This technology has numerous applications in multiple industries. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and competitors. To date, CMC's cash flow from sales and services has adequately funded its operations.

CMC anticipates growth potential for its products. As a result, it is planning a new public offering of their common stock at the end of 2019. The accounting department is currently quite small and the CFO has requested additional staff to help keep pace with the company's fast-paced growth.

Therefore, as an accounting intern you can immediately become a valuable member to their corporate accounting team. To familiarize you with the company's operations, the CFO has provided an unadjusted trial balance from the end of their last fiscal year (2018) on an Excel spreadsheet.

Instructions

(a) Download the excel file "CASE 1 - CMC" which has the unadjusted trial balance with the existing accounts. This file also contains an accounting "system" comprised of a series of linked spreadsheets.

The linkages enable the effects of all accounting entries (journal, adjusting, and closing) to flow through the spreadsheets to update the income statement, balance sheet, and retained earnings. You notice that for the fiscal year ended December 31, 2018, the bookkeeper has made most of the routine general journal entries throughout the year, but none of the adjusting or closing entries have been recorded.

The following information is provided for adjustments prior to closing the books. The CFO asks you to enter the adjustments into the spreadsheet using the tab labeled "AJE's & Closing Entries".

Also post these adjustments to the Trial Balance in the two columns to the right of the unadjusted trial balance. (CMC uses a perpetual inventory system.) You MUST use cell referencing when posting to the Trial Balance or your grade will be assessed an 8 point penalty.

Adjusting Journal Entries (AJE's):

1. As of December 31st, wages of $45,700 should be accrued; associated payroll taxes on these wages are $2,910. (Record in two separate adjusting entries. The payroll taxes are an expense to the company for unemployment benefits and recorded as a payable to the state & federal taxing authority.)

2. The Unearned Consulting Revenue account has a balance before adjustment of $261,220 as of December 31, 2018. On May 1, 2018 a client paid CMC $148,400 cash in advance for a 14-month consulting services contract. CMC will earn revenue evenly over this 14-month period.

This was the only prepayment received from clients during the entire 2018 fiscal year and recorded with a credit to Unearned Revenue. Of the remaining balance in Unearned Revenue (i.e. Beg. Balance at Jan 1 2018), 70% of the work was completed by year end.

3. You discover that a sale of a product was made on account and recorded in December for $136,200; the product has not yet been shipped, therefore it is not considered to be "delivered to the customer." The cost of the product was 55% of its selling price. CMC uses the perpetual inventory method.

4. Bad debt expense is estimated to be 6% of ending Accounts Receivable. (Round to the nearest whole dollar.)

5. CMC prepays for some insurance and advertising. The Prepaid Expense account has a balance of $26,774 at year end but before adjustment. This balance includes $9,180 for an 18-month casualty insurance policy purchased on June 1, 2018. Of the remaining prepaid balance, 80% of the advertising has now been used. (Round to the nearest whole dollar.)

6. CMC records depreciation and amortization expense annually. They do not use an accumulated amortization account. (i.e. Amortization Expense is recorded with a debit to Amort. Exp and a credit to the Patent.) Annual depreciation rates are 7% for Buildings/Equipment/Furniture, no salvage.

(Round to the nearest whole dollar.) Annual Amortization rates are 10% of original cost, straight-line method, no salvage. CMC owns two patents: Patent #FJ101 and Patent #CQ510. Patent #CQ510 was acquired on October 1, 2016. Patent #FJ101 was acquired on April 1, 2018 for $119,000. The last time depreciation & amortization were recorded was December 31, 2017.

7. The long-term liabilities were outstanding for all of 2018 and accrue interest at 8% APR. CMCrecords accrued interest quarterly (interest was last updated on Sept. 30.) The company is required to pay the interest annually each January 1st.

8. CMC often allows customers to finance the purchase of their products through long-term lending agreements and therefore reports Long-term Notes Receivable on their Balance Sheet. These notes are interest bearing and earn CMC interest revenue. The beginning balance of Interest Receivable at January 1, 2018 was $3,500.

The notes accrue interest at 8% APR and were outstanding for all of 2018. Interest is payable to CMC each December 31st. You confirm that cash was received for interest in the amount of $15,900 at December 31, 2018 however no journal entry for this cash receipt has been recorded and the customer's checks are still in the company safe waiting to be deposited in the bank. The adjusting entry to accrue interest revenue has not yet been recorded.

9. On December 15, CMCdeclareda dividend of $220,000, to be paid on January 20, 2019. It had not yet been recorded.

10. At December 31, the Long-Term Investments (Available-for-sale securities or "AFS") had a fair value of $195,400. The AFS Investment was originally purchased on June 1, 2018 for $160,500. CMCuses a "Fair Value Adjustment" account (an adjunct/contra account to the Investments) to mark-to-market the investment portfolio at year end. CMC's tax rate is 21%.

11. Income tax is based on a 21% tax rate.