Question

You have been assigned to examine the financial statements of Zarle Company for the year ended December 31, 2017. You discover the following situations.

1. Depreciation of \(3,200 for 2017 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2016, improperly excluded merchandise costing \)19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system.

3. A collection of \(5,600 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

4. In 2017, the company sold for \)3,700 fully depreciated equipment that originally cost \(25,000. The company credited the proceeds from the sale to the Equipment account.

5. During November 2017, a competitor company filed a patent-infringement suit against Zarle claiming damages of \)220,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is \(125,000. The company has not reflected or disclosed this situation in the financial statements.

6. Zarle has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2016 \)95,000 \(95,000 December 31, 2017 \)84,000 \(82,000

7. At December 31, 2017, an analysis of payroll information shows accrued salaries of \)12,200. The Salaries and Wages Payable account had a balance of \(16,000 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

8. A large piece of equipment was purchased on January 3, 2017, for \)40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment.

9. A \(12,000 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

10. A trademark was acquired at the beginning of 2016 for \)50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

Instructions

Assume the trial balance has been prepared but the books have not been closed for 2017. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.)

Short answer

The trial balance is a financial worksheet that shows debit and credit sides, and all the adjustment journal entries are passed.

Step-by-step solution

Definition of trial Balance

The trial balance is defined as the financial worksheet into which the balance of all the ledger accounts is transferred to check the accuracy.

Journal entries

Date	Particulars	Debit ($)	Credit ($)
1.	Depreciation	3,200
	Delivery vehicles		3,200
	(Being adjustment recorded)
2.	Closing Stock	19,000
	Trading account		19,000
	(Being adjustment recorded)
3.	Bank	5,600
	Customer Account		5,600
	(Being adjustment recorded)
4.	Equipment	3,700
	Profit on sale of equipment		3,700
	(Being adjustment recorded)
5.	No entry
6.	Fair Value Adjustment	2,000
	Investment Account		2,000
	(Being adjustment recorded)
7.	Salaries and wages expense	12,200
	Salaries and wages payable		12,200
	(Being adjustment recorded)
8.	Equipment	40,000
	Maintenance and repair		40,000
	(Being adjustment recorded)
	Depreciation	5,000
	Accumulated depreciation		5,000
9.	Prepaid Insurance	6,000
	Insurance expense		6,000
	(Being adjustment recorded)
10.	Amortization	10,000
	Trademark		10,000
	(Being adjustment recorded)