Queta Johnson is about to open a new business – Chocolate Nirvana

Introduction

Queta Johnson is about to open a new business – Chocolate
Nirvana. It will be a small chocolate
specialties store. She plans on selling
a limited number of hand-made molded candies, some of which are holiday
specific and others that are of a more generic nature, as well as carrying a
line of top-end candy bars. The majority
of her sales will come from walk-in customers which will all be on a cash only
basis. In addition, she will also sell
direct to two local businesses, on account, with terms 1/10,n/30. She anticipates working full-time at the
store and needing the help of four part-time employees. She uses
a perpetual FIFO (First-in, First-Out) method to account for her
inventory. So, every time you record a
sale of merchandise, whether on account or for cash, you must also figure out
the cost of the goods while recording the sale in the inventory subsidiary.

The purpose of this practice set is to allow you the chance
to see how each of the separate components we have worked on this semester fit
together. As you complete the set, you
may find it necessary to look back at what we learned in various chapters to
help remember exactly what to do.

Instructions

1. Record the
transactions for Chocolate Nirvana found on the enclosed forms in one of the
journals provided:
Cash Payments –
any time you spend money
Cash Receipts –
any time you receive money
Purchase – any
time you purchase something on account
Sales – any
time you sell something on account
General – only
transactions that do NOT fit into one of the previous journals

Chocolate Nirvana uses Accounts Receivable, Accounts
Payable, and Merchandise Inventory Subsidiary Ledgers as well as a check book
Remember
to post to the subsidiary ledgers any time those accounts are used

The first work you will be doing will be do determine which
journal each form belongs in. Each form
will only go into one journal. If we can
post it into one of the special journals, we will. If it does not belong in a special journal –
that is the only time we will use the general journal for our
transactions. This will be fairly
rare. Pay attention to the words used on
the forms. If it indicates that we have
received money – FOR ANY REASON – we will record that in the Cash Receipts
Journal. If it indicates that we need to
write out a check – FOR ANY REASON – it must go into the Cash Payments Journal. If we sell something on account then it would
go into the Sales Journal. And if we buy
something on account or we receive a service on account, then it would go into
the Purchases Journal. If it is a sales
return, a purchase return, or the payroll entries it must go into the General
Journal.
As we record the information from the forms into the
journals we need to watch the columns where we record the information. If we record something in the Cash Receipts
or the Cash Payments Journals, then we will have to affect cash. Any number we put in the Cash debit column
from Cash Receipts we will also put into the check book as a deposit. Any number we put in the Cash credit column
from Cash Payments we will also put into the check book as a check we write out. If we affect Accounts Receivable, Accounts
Payable, or Merchandise Inventory in any of the special journals OR in the
general journal, we must ALSO take that amount into that subsidiary
ledger. If we debited it in the journal
we will debit it in the subsidiary; if we credited it in the journal we will
credit it in the subsidiary. If we
purchased the merchandise inventory we will show it as a purchase in the
inventory sheets, if we sold it we will show it under the cost of goods sold
section – we will determine our cost for the sale by applying the FIFO rules
and determining our cost in the goods we sold.

Payroll – record the payroll as instructed first into their
employee earnings records, then transfer the information into the payroll
register and after totaling the payroll register use that information to
prepare a general journal entry.
Specific data for each individual regarding their pay rate, status and
number of allowances can be found on their earnings record sheets. Specific rates to be used for social
security, medicare, and the unemployment amounts can be found down in the next
section. Prepare the journal entries
based off what we were taught in the textbook.
You will need to debit the salary expense account for total gross wages
and credit each of the things we withheld (as summarized on the payroll
register). However you must credit
Payroll Checking Account for the net pay because this business uses a separate
checking account for normal checks and payroll checks.
When you are asked to transfer enough funds to cover payroll,
you will debit the Payroll Checking account for the same amount you credited in
the first payroll entry in the general journal (net pay) but now it will be in
the Cash Payments Journal. This will
give you a debit and a credit and will result in a zero balance (and nothing
recorded in the Wages Payable account yet).

Keep in mind that after recording the general journal entry
to record the actual payroll you must also prepare a journal entry to record
the payroll tax expense for the business.
Chocolate Nirvana is responsible for matching the Social Security and
Medicare amounts withheld from its employees and also must pay in for Federal
and State Unemployment. This means that
when it comes time to post into the ledger you will have two identical amounts
in the Social Security account and two identical amounts in the Medicare
account. This entry was shown in the
textbook so please follow the format we saw there. The following rates apply:
Social
Security 6.2%, on the first $110,000
earned each year by each employee
Medicare 1.45%
FUTA .8%, on the first $7,000
earned each year by each employee
SUTA 9%, on the first $12,000
earned each year by each employee
We will NOT actually write out the individual payroll checks
Hint: If you are
asked to write out a check to cover more than one thing you must take more than
one line so that you properly record the affect to each account.
To this point you should NOT have anything recorded in the
General Ledger. Wait until you have your
journals completed, TOTALED, and corrected, before putting anything into the
general ledger.

2. After completing all journals, TOTAL
THEM and write the totals below the last
number in the column, compare to the check figures, and post to the general ledger. For any journal column with the name of a
specific account in the column heading you will post only the total from that
column into that account in the general ledger.
Journal columns shown as “Other” in the heading need to be
posted individually into the general ledger.
As you post remember that you have to use the post reference
numbers. In the ledger you fill in the
journal abbreviation and page number where you get your data and in the journal
you put the ledger account number where you posted it. Cash Receipts is CR; Cash Payments is CP;
Purchases is P; Sales is S; and General Journal is J. In the journal to show that you posted it
into a subsidiary ledger you put a check mark.

3. Prepare an
unadjusted trial balance. After getting
your numbers to match the check figure transfer the information into the first
columns of the worksheet.

4. Prepare month end
adjusting entries based on the following data:

a) Record accrued
interest on the long term note for 3 days – $16.77

b) Depreciation –
calculate depreciation for JUST the month of October based on the following
information:
Store Equipment –
5 year life, $2000 salvage value, purchased October 10, use straight line
depreciation
Office Equipment
– 5 year life, $200 salvage value, purchased October 10, use straight line
depreciation

c) Record entry for
expired insurance

d) Currently there
are $75 worth of office supplies on hand

e) Currently there
are $125 worth of store supplies on hand

f) Record entry amount of advertising expired for the period
just ended

g) Record wages
earned, but unpaid, on Oct 31 of $275

Adjusting entries need to be recorded in the general
journal, posted into the general ledger (remember to indicate Adjusting Entry
in the Item column), and added to the worksheet.

5. Complete the
worksheet, schedule of accounts receivable/payable, Income Statement, Statement
of Owners’ Equity, and Balance Sheet. Add
any accounts not already found on the worksheet as needed to complete your
adjusting entries.
The schedule of accounts receivable and schedule of accounts
payable are prepared by listing every business owing us money at the end of the
month and totaling them and listing every business we owe money to at the end
of the month and totalling them. We use
the two subsidiary ledgers to get this information.
Prepare the Income Statement using the Multiple step format
and the Balance Sheet using the classified format. The Notes Payable – current balance on the
Balance Sheet should be $15,000 and the Notest Payable – noncurrent balance on
the Balance Sheet should be $13,750.

6. Prepare closing
entries, post to the ledger, and prepare a post-closing trial balance
The easiest way to prepare your closing entries would be to
use your completed worksheet. Close the
credit amounts in the Income Statement column into income summary for the first
entry. Close the debit amounts from the
Income Statement columns into Income Summary for the second entry. Close the difference between the two income
summary amounts (should equal net income) in to the Capital account in the
third entry. Finally, close the drawing
account into the capital account in the fourth entry. These entries are done in the General Journal
and then posted into the General Ledger.
Be sure to indicate Closing entry in the Item column. You will then prepare the post-closing trial
balance by going through the ledger and listing every account that still has a
balance and listing the balance (as either a debit or a credit – based on what
it is in the ledger).

(Have you made sure that your balances in your subsidiary
ledgers match their controlling accounts in the general ledger? Does the net income from your work sheet
match the net income you reported on your Income Statement?)

In the Exhibit section you will find:
Chart of
Account
Tax Withholding
Chart
Check Figures

In the Forms section you will find:
The
transactions forms you need to record in the various journals

In the Journals section you will find:
Sales Journal –
begin with invoice 1001
Purchases
Journal
Cash Receipts
Journal – begin with invoice 101
Cash Payments
Journal – begin with check 1001
General Journal
(ONLY transactions that CANNOT go into one of the special journals)

In the Ledgers section you will find:
Accounts
Receivable Subsidiary Ledger
Accounts
Payable Subsidiary Ledger
Merchandise
Inventory Subsidiary Ledger
General Ledger

In the Checkbook section you will find:
Checkbook –
begin with check 1001

In the Payroll section you will find:
Individual
Earnings Records
Payroll Register
– Begin with check 101 (assign to employees in order – do not actually write
out checks to the employees)

In the Financial Statement section you will find:
Unadjusted
Trial Balance
Work Sheet
Schedule of
Accounts Receivable
Schedule of Accounts Payable
Income
Statement (Multiple Step format)
Statement of
Owners’ Equity
Balance Sheet
(Classified format)
Post Closing
Trial Balance