35. (Transaction analysis, journal entries, and adjusting journal entries)
Ricardo Sanchez repairs automobiles. He started calendar year 2013 year with the following account balances: Cash - $5,000; Accounts receivable - $30,000; Allowance for uncollectible accounts - $3,000; Repair parts inventory - $23,000; Equipment - $60,000; Accumulated depreciation - $25,000; Accounts payable - $10,000; and R. Sanchez, Capital -$80,000. The following transactions occurred during the month of January.
a. Ricardo paid rent of $8,000 for the months of January and February.
b. He purchased $10,000 of repair parts for inventory. The purchase was made on credit.
c. He paid outstanding invoices in the amount of $12,000.
d. He billed customers a total of $35,000 for repair services.
e. In performing the repairs in transaction d., he used repair parts that cost him $13,000.
f. He received $40,000 from his customers against previous billings for repair work.
g. One of his customers, who owed him $2,000, went bankrupt. Ricardo received $400 in cash and wrote off the remaining $1,600 as a bad debt.
h. He paid his mechanics $8,000 for four weeks' salary.
i. He used $10,000 of his idle cash to purchase a short-term certificate of deposit (CD). The CD pays interest at the rate of 3% a year.
j. He purchased new equipment for $5,000 on credit.
Ricardo wants financial statements at the end of the month. The following adjusting journal entries are needed:
k. To recognize one month's depreciation on the $60,000 of equipment on hand at the beginning of the month. Ricardo assumes the equipment will have a 10-year life.
l. To recognize estimated bad debts. Ricardo wants to provide for additional bad debts at the rate of 2% of the month's billings (see transaction d.)
m. To recognize unpaid salaries of $1,200 for the last few days in January.
n. To recognize interest earned for one-month on the CD purchased in transaction i., above.
o. To recognize the expiration of one month's rent paid in transaction a.
Required:
a. Analyze the above transactions on a work sheet. The work sheet should show columns for individual accounts classified as cash, other assets, liabilities, and equity.
b. Prepare journal entries to record all of the above transactions.