Question

Bug-Off Exterminators provides pest control services and sells extermination products manufactured by other companies. The following six-column table contains the company’s unadjusted trial balance as of December 31, 2017.

BUG-OFF EXTERMINATORS December 31, 2017
Particulars	Unadjusted trial balance		Adjustments		Adjusted trial balance
	Debit \(	Credit \)	Debit \(	Credit \)	Debit \(	Credit \)
Cash	\(17,000
Accounts receivables	4,000
Allowance for doubtful accounts		\)828
Merchandise inventory	11,700
Trucks	32,000
Accumulated depreciation – trucks		0
Equipment	45,000
Accumulated depreciation – equipment		12,200
Account payable		5,000
Estimated warranty liability		1,400
Unearned service revenue		0
Interest payable		0
Long-term note payable		15,000
Common stock		10,000
Retained earnings		49,700
Dividend	10,000
Extermination service revenue		60,000
Interest revenue		872
Sales		71,026
Cost of goods sold	46,300
Depreciation expenses – truck	0
Depreciation expenses – equipment	0
Wages expenses	35,000
Interest expenses	0
Rent expenses	9,000
Bad debt expenses	0
Miscellaneous expenses	1,226
Repair expenses	8,000
Utility expenses	6,800
Warranty expenses	0
Total	\(226,026	\)226,026

The following information in a through h applies to the company at the end of the current year.

a. The bank reconciliation as of December 31, 2017, includes the following facts.

Cash balance per bank	\(15,100
Cash balance per book	17,000
Outstanding checks	1,800
Deposit in transit	2,450
Interest earned (on bank account)	52
Bank service charges (miscellaneous expenses)	15

Reported on the bank statement is a canceled check that the company failed to record. (Information from the bank reconciliation allows you to determine the amount of this check, which is a payment on an account payable.)

b. An examination of customers’ accounts shows that accounts totaling \)679 should be written off as uncollectible. Using an aging of receivables, the company determines that the ending balance of the Allowance for Doubtful Accounts should be \(700.

c. A truck is purchased and placed in service on January 1, 2017. Its cost is being depreciated with the straight-line method using the following facts and estimates.

Original cost	\)32,000
Expected salvage value	8,000
Useful life (years)	4

d. Two items of equipment (a sprayer and an injector) were purchased and put into service in early January 2015. They are being depreciated with the straight-line method using these facts and estimates.

	Sprayer	Injector
Original cost	\(27,000	\)18,000
Expected salvage value	3,000	2,500
Useful life (years)	8	5

e. On August 1, 2017, the company is paid \(3,840 cash in advance to provide monthly service for an apartment complex for one year. The company began providing the services in August. When the cash was received, the full amount was credited to the Extermination Services Revenue account.

f. The company offers a warranty for the services it sells. The expected cost of providing warranty service is 2.5% of the extermination services revenue of \)57,760 for 2017. No warranty expense has been recorded for 2017. All costs of servicing warranties in 2017 were properly debited to the Estimated Warranty Liability account.

g. The \(15,000 long-term note is an 8%, five-year, interest-bearing note with interest payable annually on December 31. The note was signed with First National Bank on December 31, 2017.

h. The ending inventory of merchandise is counted and determined to have a cost of \)11,700. Bug-Off uses a perpetual inventory system.

Required

1. Use the preceding information to determine amounts for the following items.

a. Correct (reconciled) ending balance of Cash, and the amount of the omitted check.

b. Adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts.

c. Depreciation expense for the truck used during year 2017.

d. Depreciation expense for the two items of equipment used during year 2017.

e. The adjusted 2017 ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts.

f. The adjusted 2017 ending balances of the Warranty Expense and the Estimated Warranty Liability accounts.

g. The adjusted 2017 ending balances of the Interest Expense and the Interest Payable accounts. (Round amounts to nearest whole dollar.)

2. Use the results of part 1 to complete the six-column table by first entering the appropriate adjustments for items a through g and then completing the Adjusted Trial Balance columns. (Hint: Item b requires two adjustments.)

3. Prepare journal entries to record the adjustments entered on the six-column table. Assume Bug-Off’s adjusted balance for Merchandise Inventory matches the year-end physical count.

4. Prepare a single-step income statement, a statement of retained earnings (cash dividends during 2017 were $10,000), and a classified balance sheet.

Short answer

1. Adjusted balance

(a) Corrected cash balance: $15,750.

(b) Credit to allowance for doubtful accounts: $551.

(c) Depreciation expenses for truck: $6,000.

(d) Depreciation expenses for equipment: $6,100.

(e) Extermination for service revenue: $57,760.

(f) Balance of warranty liability: $2,844.

(g) Interest expense: $0and interest payable: $0.

2. Both sides of the adjusted trial balance total $238,207.

3. Both sides of the adjusting journal total $19,716.

4. The net income of the business entity is$9,274.

Step-by-step solution

Definition of Income Statement

The statement prepared by the business entity for the purpose of reflecting the profitability by reporting the revenue and expenses of the business entity is known as an income statement.

Calculation of various amounts of the item

a. Correcting ending balance of cash:

Particular	Amount $
Cash as per bank	$15,100
Less: outstanding checks	(1,800)
Add: deposit in transit	2,450
Correct cash balance	$15,750

b. Adjusted needed for allowance for doubtful accounts:

Particular	Amount $
Reported credit balance	$828
Less: written off	(679)
	149
Less: Estimated ending balance	(700)
Credit to allowance for doubtful accounts	$551

c. Depreciation expenses for the truck for year 2017

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{=}\frac{\mathbf{O}\mathbf{r}\mathbf{i}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{a}\mathbf{l}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{000}}{\mathbf{4}}\\ \mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{000}\end{array}$

d. Depreciation expenses for two equipment

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{\left(}\mathbf{S}\mathbf{p}\mathbf{r}\mathbf{a}\mathbf{y}\mathbf{e}\mathbf{r}\mathbf{\right)}\mathbf{=}\frac{\mathbf{O}\mathbf{r}\mathbf{i}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{a}\mathbf{l}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}}{\mathbf{8}}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{\left(}\mathbf{i}\mathbf{n}\mathbf{j}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{\right)}\mathbf{=}\frac{\mathbf{O}\mathbf{r}\mathbf{i}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{a}\mathbf{l}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{E}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{500}}{\mathbf{5}}\\ \mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{100}\end{array}$

e. Adjusting balance of extermination service revenue and unearned service revenue

Particular	Amount $
Reported service revenue	$60,000
Less: Unearned service revenue from advance receipt$\mathbf{(}\frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{840}}{\mathbf{12}}\mathbf{\times }\mathbf{7}\mathbf{)}$	(2,240)
Extermination service revenue for year	$57,760

Unearned service revenue balance is $2,240.

f. Adjusted balance of warranty expenses and warranty expenses

Particular	Amount $
Balance in warranty liability	$1,400
Add: Estimated warranty for 2017	1,444
Warranty liability corrected balance	$2,844

The balance of the warranty expense is $0.

g. Adjusted ending balance of interest expense and interest payable

The note was signed at the end of 2017. Therefore, the balance of interest expense and interest payable will be $0 only.

Preparation of six-column table

BUG-OFF EXTERMINATORS December 31, 2017
Particulars	Unadjusted trial balance		Adjustments		Adjusted trial balance
	Debit $	Credit $	Debit $	Credit $	Debit $	Credit $
Cash	$17,000			$1,250	$15,750
Accounts receivables	4,000			679	3,321
Allowance for doubtful accounts		$828	679	551		$700
Merchandise inventory	11,700				11,700
Trucks	32,000				32,000
Accumulated depreciation – trucks		0		6,000		6,000
Equipment	45,000				45,000
Accumulated depreciation – equipment		12,200		6,100		18,300
Account payable		5,000	1,287			3,713
Estimated warranty liability		1,400		1,444		2,844
Unearned service revenue		0		2,240		2,240
Interest payable		0				0
Long-term note payable		15,000				15,000
Common stock		10,000				10,000
Retained earnings		49,700				49,700
Dividend	10,000				10,000
Extermination service revenue		60,000	2,240			57,760
Interest revenue		872		52		924
Sales (of merchandise)		71,026				71,026
Cost of goods sold	46,300				46,300
Depreciation expenses – truck	0		6,000		6,000
Depreciation expenses – equipment	0		6,100		6,100
Wages expenses	35,000				35,000
Interest expenses	0				0
Rent expenses	9,000				9,000
Bad debt expenses	0		551		551
Miscellaneous expenses	1,226		15		1,241
Repair expenses	8,000				8,000
Utility expenses	6,800				6,800
Warranty expenses	0		1,444		1,444
Total	$226,026	$226,026	$18,316	$18,316	$238,207	$238,207

Adjusting journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
1	Account payable	1,287
	Miscellaneous expenses	15
	Interest revenue		52
	Cash		1,250
2	Allowance for doubtful accounts	679
	Accounts receivable		679
3	Bad debt expenses	551
	Allowance for doubtful accounts		551
4	Depreciation expenses – Truck	6,000
	Accumulated depreciation – Truck		6,000
5	Depreciation expenses – Equipment	6,100
	Accumulated depreciation– Equipment		6,100
6	Extermination service revenue	2,240
	Unearned service revenue		2,240
7	Warranty expenses	2,844
	Estimated warranty liability		2,844
		$19,716	$19,716

Single step income statement

Particular	Amount $	Amount $
Sales		$57,760
Sale of merchandise		71,026
Interest revenue		924
Less: Cost of goods sold		(46,300)
Gross profit		$83,410
Less: Operating expenses
Depreciation expenses – truck	6,000
Depreciation expenses – equipment	6,100
Wages expenses	35,000
Rent expenses	9,000
Bad debt expenses	551
Miscellaneous expenses	1,241
Repair expenses	8,000
Utility expenses	6,800
Warranty expenses	1,444	($74,136)
Net income		$9,274

Statement of Retained earnings:

Particular	Amount $
Opening balance of retained earnings	$49,700
Add: net income	9,274
Less: Dividend	(10,000)
Closing balance of retained earnings	$48,974

Classified balance sheet:

Particular	Amount $
Assets:
Cash	$15,750
Accounts receivables	3,321
Allowance for doubtful accounts	($700)
Merchandise inventory	11,700
Trucks	32,000
Accumulated depreciation – trucks	(6,000)
Equipment	45,000
Accumulated depreciation – equipment	(18,300)
Total assets	$82,771
Liabilities and stockholder’s equity:
Account payable	3,713
Estimated warranty liability	2,844
Unearned service revenue	2,240
Interest payable	0
Long-term note payable	15,000
Common stock	10,000
Retained earnings	48,974
Total liabilities and stockholder’s equity	$82,771