Question

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.
1. January cash receipts recorded in the December cash book consisting of:
Cash sales $28,000
Collections on account, for which $360 of cash discounts were given 17,640
$45,640

2.January cash disbursements recorded in the December check register liquidated accounts $22,450
Discounts taken 250
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December 31, 2017.

The company uses the periodic method of inventory.

Required:
a. Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
b. To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open?

Answer 1

Answer:

a. Francis Equipment Co

  Adjusting entries

  December 31 2017

1. Revenues                                        Debit       $ 28,000

  Cash                                                Credit                                 $ 28,000

To reverse the cash sales recorded in December

2. Account receivable                       Debit         $ 18,000

   Sales Discounts                             Credit                                  $     360

   Cash                                                Credit                                 $ 17,640

To reverse the collections from customers and sales discounts allowed

                   

3. Cash                                                 Debit       $ 22,450

   Purchase Discounts                        Debit        $     250  

   Accounts payable                            Credit                                $  22,700

To reverse the payments made and discounts  availed

4. No entry for inventory                  

b. Francis Equipment company managed to show a higher retained earnings of $ 28,110

Explanation:

Computation for change in balance sheet

Cash sales reversed                                                              $ 28,000

Sales discounts allowed reversed                                         $     360

Purchase discounts availed reversed                                    $  ( 250)

Net items affecting income statement                                $ 28,110

The income was higher by $ 28,110, so correspondingly the retained earnings account was also higher by $ 28,110

No entry is required for inventory since it was based on an inventory count conducted on December 31 and a periodic inventory system is in use.