Solved: Bug Off Exterminators provides pest control services and sells extermination products

The following information in a through h applies to the company at the end of the current year.

a. The bank reconciliation as of December 31, 2017, includes the following facts.

Cash balance per bank ……………………………. $15,100

Cash balance per books …………………………… 17,000

Outstanding checks ……………………………….. 1,800

Deposit in transit …………………………………… 2,450

Interest earned (on bank account) ………………… 52

Bank service charges (miscellaneous expense) …… 15

Reported on the bank statement is a canceled check that the company failed to record. (Information from the bank reconciliation allows you to determine the amount of this check, which is a payment on an account payable.)

b. An examination of customers’ accounts shows that accounts totaling $679 should be written off as uncollectible. Using an aging of receivables, the company determines that the ending balance of the Allowance for Doubtful Accounts should be $700.

c. A truck is purchased and placed in service on January 1, 2017. Its cost is being depreciated with the straight-line method using the following facts and estimates.

Original cost ………………………….. $32,000

Expected salvage value ………………. 8,000

Useful life (years) …………………….. 4

d. Two items of equipment (a sprayer and an injector) were purchased and put into service in early January 2015. They are being depreciated with the straight-line method using these facts and estimates.

__________________________________ Sprayer ______ Injector

Original cost …………………………… $27,000 ……… $18,000

Expected salvage value ……………….. 3,000 ……… 2,500

Useful life (years) …………………….. 8 ………. 5

e. On August 1, 2017, the company is paid $3,840 cash in advance to provide monthly service for an apartment complex for one year. The company began providing the services in August. When the cash was received, the full amount was credited to the Extermination Services Revenue account.

f. The company offers a warranty for the services it sells. The expected cost of providing warranty service is 2.5% of the extermination services revenue of $57,760 for 2017. No warranty expense has been recorded for 2017. All costs of servicing warranties in 2017 were properly debited to the Estimated Warranty Liability account.

g. The $15,000 long-term note is an 8%, five-year, interest-bearing note with interest payable annually on December 31. The note was signed with First National Bank on December 31, 2017.

h. The ending inventory of merchandise is counted and determined to have a cost of $11,700. Bug-Off uses a perpetual inventory system.

Required

1. Use the preceding information to determine amounts for the following items.

a. Correct (reconciled) ending balance of Cash, and the amount of the omitted check.

b. Adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts.

c. Depreciation expense for the truck used during year 2017.

d. Depreciation expense for the two items of equipment used during year 2017.

e. The adjusted 2017 ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts.

f. The adjusted 2017 ending balances of the Warranty Expense and the Estimated Warranty Liability accounts.

g. The adjusted 2017 ending balances of the Interest Expense and the Interest Payable accounts. (Round amounts to nearest whole dollar.)

2. Use the results of part 1 to complete the six-column table by first entering the appropriate adjustments for items a through g and then completing the Adjusted Trial Balance columns.

3. Prepare journal entries to record the adjustments entered on the six-column table. Assume Bug-Off’s adjusted balance for Merchandise Inventory matches the year-end physical count.

4. Prepare a single-step income statement, a statement of owner’s equity (cash withdrawals during 2017 were $10,000), and a classified balance sheet.