CM Corporation (CMC) was founded in 2010 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as “entrepreneurial geeks,” met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In early January 2015, CMC hired you as an accounting intern to assist the CFO and the entire corporate accounting team.
Lately Conner and Martin have been working with “radio frequency identification” (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries. One of the most basic applications is tracking manufacturing components; if tagged components “go walking” (if employees attempt to take them), companies can easily track and find them. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terroristsand competitors. To date, CMC’s cash flow from sales and services has adequately funded its operations.
CMC anticipates growth potential for its products. As a result, it is planning a new public offering of their common stock at the end of 2015. The accounting department is currently quite small and the CFO has requested additional staff to help keep pace with the company’s fast-paced growth. Therefore, as an accounting intern you can immediately become a valuable member to their corporate accounting team. To familiarize you with the company’s operations, the CFO has provided an unadjusted trial balance from the end of their last fiscal year (2014) on an Excel spreadsheet.
(a) Download the excel file “CASE 1 – CMC” which has the unadjusted trial balance with the existing accounts. This file also contains an accounting “system” comprised of a series of linked spreadsheets. The linkages enable the effects of all accounting entries (journal, adjusting, and closing) to flow through to spreadsheets to update the income statement, balance sheet, and retained earnings. You notice that for the fiscal year ended December 31, 2014, the bookkeeper has made all the routine general journal entries throughout the year, but none of the adjusting or closing entries have been recorded.
The following information is provided for adjustments prior to closing the books. Connor and Martin ask you to enter the adjustments into the spreadsheet using the tab labeled “AJE’s & Closing Entries”. Also post these adjustments to the Trial Balance in the two columns to the right of the unadjusted trial balance. (CMC uses a perpetual inventory system.) You MUST use cell referencing when posting to the Trial Balance or your grade will be assessed an 8 point penalty.
Adjusting Journal Entries (AJE’s):
1. Wages earned by employees during December (’14) and to be paid in January (’15) are $33,875; associated payroll taxes on these wages are $2,710. (Record in two separate adjusting entries. The payroll taxes are an expense to the company for unemployment benefits and recorded as a payable to the state & federal taxing authority.)
2. On July 1, 2014 a client paid CMC $205,720 cash in advance for a 12-month consulting services contract. This was the only prepayment received from clients during the entire 2014 fiscal year and recorded with a credit to Unearned Revenue. Of the remaining balance in Unearned Revenue, 60% of the work has now been completed by year end.
3. You discover that a sale of a product was made on account and recorded in December for $128,600; the product has not yet been shipped (i.e. delivered to the customer). The cost of the product was $68,742. CMC uses the perpetual inventory method.
4. Bad debt expense is estimated to be 7% of ending Accounts Receivable. (Round to the nearest whole dollar.)
5. The Prepaid Expense account has a balance of $22,774. This balance includes $11,200 for a two-year insurance policy purchased on January 1, 2014. Of the remaining prepaid balance, 30% of the benefit has now expired. (Round to the nearest whole dollar.)
6. Annual depreciation rates are 7% for Buildings & Equipment/Furniture. No salvage. (Round to the nearest whole dollar.)
7. The long-term liabilities were outstanding for all of 2014 and accrue interest at 6% APR. CMCrecords accrued interest quarterly (interest was last updated on Sept. 30.) The company is required to pay the interest annually each January 31st.
8. On December 15, CMCdeclareda dividend of $110,000, to be paid on January 20, 2015. It had not yet been recorded.
9. At December 31, the Long-Term Investments (Available-for-sale securities or “AFS”) had a fair value of $160,186. The AFS Investment was originally purchased on May 1, 2014 for $140,186. CMCuses a “Fair Value Adjustment” account (an adjunct/contra account to the Investments) to mark-to-market the investment portfolio at year end. CMC’s tax rate is 35%.
10. Income tax is based on a 35% tax rate.
(b) After making the adjusting entries in (a), make the appropriate closing entries on the spreadsheet provided. Post to the Trial Balance.
(c) Complete the each of the required financial statements (Balance Sheet, Income Statement, Statement of Comprehensive Income, and Statement of Stockholder’s Equity) in good form. The Statement of Stockholder’s Equity should reconcile with your balance sheet, income statement, & Statement of Comprehensive Income. (Use cell referencing to link the appropriate cells from the other financial statements. Keep in mind that not all cells on the Statement of Stockholder’s Equity will require any updates. For example, no new stock was issued during 2014; the balance in the contributed capital accounts will therefore not change.)
|General Ledger Account Name||Unadj. Balance 12/31/14|
|Cash and cash equivalents||70,277|
|Allowance for doubtful accounts||34,962|
|Other Current Assets||16,063|
|Equipment and furniture||3,36,983|
|Fair Value Adjustment||0||0|
|Other intangible assets||2,53,900|
|Unearned Consulting Revenue||3,29,220|
|Payroll taxes payable||8,850|
|Income tax payable|
|Long term liabilities||5,88,500|
|Paid-in capital common stock||1,05,000|
|OCI-Unrealized Gain – AFS||0||0|
|Product cost of goods sold||53,84,590|
|Service cost of goods sold||5,70,811|
|Bad debt expense||0|
|Depreciation and amortization||0|
|Professional Dues & subscriptions||21,470|
|Gain/loss on disposal||0|
|Income tax expense||0|
|Legal and accounting fees||1,06,650|
|Repair and maintenance||42,028|
|Research and development||4,70,680|
|Travel and entertainment||38,391|
|Wages – Officers||7,10,000|
To Submit your finished Case:
1. Make a cover page for your Case 1 which includes your name. Hand in (1) print copy of your TB, AJE’s & Closing Entries, and a copy of each financial statement at the start of class (stapled together with your cover page on top).