Solution to Demonstration Problem

1.	Prepare necessary adjusting entries at December 31, 2015. Include general ledger account numbers and appropriate descriptions.
	a.	2015
		Dec. 31							Commissions Earned														410							300
																Unearned Comm. Rev.							242													300
									To adjust unearned commissions revenue to actualat December 31.
	b.	2015
		Dec. 31							Parts Inventory														151							1,000
									GST Payable														238							50
																Accounts Payable							210													1,050
									To record invoice from supplier.
	c.	2015
		Dec. 31		Accounts Receivable																					110								3,150
													Sales												500																3,000
													GST Payable												238																150
				Cost of Goods Sold																					570								2,500
													Merchandize Inventory												150																2,500
				To record missing sales on account. (GST would have been paid when the inventory was originally purchased, so there is no GST effect related to cost of goods sold.)
	d.	2015
		Dec. 31			Interest Expense														632							34
												Interest Payable							222															34
					To record interest on note payable [$10,000 x 4% x31/365 days = $34 (rounded)]
	e.	2015
		Dec. 31									Estimated Warranty Liability											213										600
																		Cost of Goods Sold				570													500
																		Salaries Expense				656													100
											To reallocate warranty repair expenditures.
	f.	2015
		Dec. 31				Warranty Expense														678							14,400
														Estimated Warranty Liab.						213																				14,400
						To record estimated warranty expense for 2015[($477,000 + 3,000¹) x 3% = $14,400] ¹ See c. above
	g.	2015
		Dec. 31					Salaries Expense														656							5,000
							Gov’t Employment Ins. Exp.														658							175
							Gov’t Pension Expense														659							100
							Company Health Insur. Exp.														660							75
							Company Pension Expense														661							500
															Salaries Payable						226																		3,275
															Emp’ee Income Tax. Pay.						227																		1,000
															Employment Insur. Pay.						228																		300
															Gov’t Pension Payable						229																		200
															Co. Health Plan Payable						230																		125
															Union Dues Payable						231																		200
															Co. Pension Payable						232																		750
							To record Dec. 24-31 salaries and benefits payableas follows:

	h.		2015
			Dec. 31					Professional Fees														653							5,000
																	Estimated Current Liab.					212																5,000
								To record estimated audit fees. (No GST will berecorded until the actual invoice is received.)
	i.		No entry. This only affects balance sheet presentation between current and non-current liabilities.
	j.		No entry. The event would only be recorded if the outcome was probable, even if the amount to be awarded can be reasonably estimated.
	k.		2015
			Dec. 31							Depreciation Expense – Bldg.														621							8,940
																	Accum. Dep’n – Bldg.							191													8,940
										To record depreciation expense for the year[(100%/10 yrs.) = 10% x 2 = 20%; ($214,700 –170,000) x 20% = $8,940].
	l.		No entry. This should be shown on the statement of changes in equity, though.
	m.		2015
			Dec. 31							Corporate Income Taxes Exp.														830							10,035
																	Corporate Inc. Tax. Pay.							260													10,035
										To record corporate income taxes for the year[($50,1761 x 20% = $10,035 (rounded)]
			1 See income statement. This entry is recorded after the partial income statement is prepared up to the income before income taxes amount. The income statement can be completed after this entry is recorded.
	n.		2015
			Dec. 31							Dividends Declared														350							2,000
																	Dividends Payable							221													2,000
										To record dividend declared, payable January 31,2016.
2.	Post the entries to the “Adjustments” column of the worksheet. Total the worksheet.

3.

4.	The journal entry to record payment of salaries and benefits payable would be: (Alternately, five separate entries could be made.)
5.	The journal entry to record the GST payment would be: No payment would be made for corporate income taxes. There is an amount receivable of $965 from the government at December 31, 2015 represented by: This amount will be refunded to Rockfish when its corporate income tax return is filed and assessed.
6.	The estimated warranty liability at December 31, 2014 was $30,000. It is only $3,800 at December 31, 2015. Management should review this. It may be that the estimated warranty expense of 3% of sales revenue is too low. Alternately, the amount of warranty claims in 2015 might have been abnormally high.
7.	A note should disclose more information about the note payable, the mortgage payable, and the finance lease – due dates, interest rates, repayment terms, and any assets pledged as security. A note should also disclose the details of the contingent liability related to the outstanding lawsuit. This should include the likelihood of success (possible) and the estimated amount of the award. Significant accounting policies should also be stated. These include depreciation rates and estimated useful lives of plant and equipment, and estimates used to establish some liabilities. The estimated warranty expense rate (3% of sales) should be disclosed, for instance.

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Solution to Demonstration Problem