Even Springs Trading Company
A Practice Problem
INTRODUCTION
This short practice problem gives you, the student, an opportunity to practice the accounting
concepts and skills acquired in an introductory financial accounting course. The objective of the
practice problem is to have you complete a comprehensive example of the accounting cycle.
You will evaluate transactions, use the general journal to record events, adjust the accounts,
close the temporary accounts, maintain an ongoing general ledger, prepare a worksheet and
prepare financial statements.
In following the instructions for the Practice Problem, keep in mind that an accountant prepares accounting
records in a neat fashion and in proper format. If you prepare this practice set by hand, using a pencil for the
accounting work gives you a better opportunity to maintain neat records.
COMPANY OPERATIONS
The Even Springs Trading Company, a sole proprietorship owned by Max Gator, began operations
at the beginning of the month in SmallTown, Texas. Even Springs sells items such as small office
machines, office supplies, magazines, make-up, hair products, etc. and is located in a new
shopping mall. Even Springs sells on account to some customers and on a cash basis to other
customers.
Even Springs has retained you to install the companys manual accounting system, to implement
the system, to maintain the companys accounting records, and to produce monthly financial
statements. The accounting system for accounting records and financial statements includes
the general journal, general ledger accounts, the worksheet, the Multiple-Step Income
Statement, the Statement of Owners Equity, and the classified Balance Sheet.
Additionally, Even Springs has asked you to prepare the unadjusted trial balance, the
adjusted trial balance, and the post-closing trial balance.
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Information p 1 of 64
Even Springs Trading Company, continued
Even Springs Trading Company specifies these accounting method choices:
1 -- use the gross method to record all purchases and all sales;
2 -- special journals or subsidiary ledger accounts are not yet needed;
3 -- do not make any provision for income taxes since this is the first month of operations;
4 -- use the perpetual inventory method;
Hint: Determine the cost per unit for each inventory purchase.
5 -- record inventory cost valuation on a FIFO basis;
6 -- use the accounts receivable method for computing bad debt expense;
7 -- take a full month of depreciation for assets purchased in the first half of the month;
8 -- take a half-month of depreciation for assets purchased in the second half of the month.
REQUIREMENTS
As the accountant for Even Springs Trading Company, you must
1 -- Record the transactions for the month in the general journal.
2 -- Post the general journal entries to the general ledger accounts and
also provide the proper referencing and running totals.
3 -- Prepare the trial balance, based on the ledger balances, before adjusting entries are made.
4 -- Prepare the worksheet.
5 -- Prepare any necessary adjusting journal entries to the general ledger accounts.
6 -- Post the adjusting journal entries to the general ledger accounts.
7 -- Prepare the adjusted trial balance, based on the ledger balances.
8 -- Prepare the closing journal entries as of the month end.
9 -- Post the closing journal entries to the general ledger accounts.
10 -- Prepare the post-closing trail balance, based on the ledger balances.
11 -- Prepare the financial statements, including the
Multiple-step Income Statement
Statement of Owner's Equity
classified Balance Sheet
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Information p 2 of 64
Even Springs Trading Company, continued
CHART OF ACCOUNTS
Account
Number
Account
101
105
106
108
110
120
123
125
126
130
131
200
205
210
215
300
305
400
402
404
501
510
512
514
516
518
520
525
530
535
540
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Inventory
Office Supplies
Prepaid Rent
Prepaid Insurance
Store Fixtures
Accum. Depr.-Store Fixtures
Office Equipment
Accum. Depr.-Office Equipment
Accounts Payable
Salaries Payable
Interest Payable
Notes Payable
Capital
Withdrawals
Sales Revenue
Sales Returns and Allowances
Sales Discounts
Cost of Merchandise Sold
Salaries Expense
Freight-Out
Depreciation Expense
Rent Expense
Bad Debts Expense
Utilities Expense
Supplies Expense
Insurance Expense
Interest Expense
Bank Charges Expense
NOTE: All accounts are specified. Do not create any new accounts.
NOTE: List each account, in numerical order, in the general ledger.
NOTE: Each account listed on any trial balance or the worksheet should be listed in numerical order.
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Information p 3 of 64
Even Springs Trading Company
Transactions
Date [of an unspecified month]
1
Max Gator contributes the following as start-up capital for Even Springs Trading Company:
Cash
Equipment (to be depreciated on the straight-line basis)
The equipment is estimated to last the following number of years
The estimated salvage value at the end of the estimated life will be
$ 35,000.00
$ 50,000.00
5
$ 5,000.00
Max hires a clerk to help with stocking of inventory and sales. Max will pay the clerk a monthly salary of
Max has instituted a payroll process of paying employees on the first and fifteenth of each month.
$ 2,800.00
Even Springs borrows cash from the Small Town Bank in the amount of.
The loan is for one year at the following interest rate of
$ 30,000.00
4%
Even Springs finds rental space in the newest mall in town.
Even Springs pays M & M Realty the following rent for this month and the next four as well)
Total months of the lease
$ 8,000.00
5
Even Springs pays cash to Office Depot for office supplies in the amount of
Even Springs orders inventory on credit from Texas Novelties with payment terms of 2/10, n/30.
The order was for the following number of items
The order cost for each item was
The total order on account from Texas Novelties was
500
$
20.00
$ 10,000.00
900.00
After inspecting the inventory, Even Springs returns the following number of items due to defects in quality
60
Therefore, the total amount of inventory returned to Texas Novelties was
$ 1,200.00
Even Springs will not expect a refund for any freight charges paid by Even Springs related to this return of inventory
14
After proper consideration of the discount terms, Even Springs pays for the inventory purchased on account
15
Even Springs makes a sale on account to Valley High School (terms 2/10, n/30, FOB destination)
The sale was for the following number of items
The sale price for each item was
ACC 2301 Even Springs Practice Set
400
30.00
Transactions p 4 of 64
The total sale on account to Valley High School was for
15
$ 12,000.00
Even Springs paid Cajun Shipping to ship the goods to Valley High. Even Springs will not collect this from Valley.
The amount paid to Cajun for the shipping cost was
$
ACC 2301 Even Springs Practice Set
110.00
Transactions p 5 of 64
Even Springs Trading Company, Transactions Continued
15
Even Springs paid the clerk hired back on the first of the month. Nothing was withheld from the clerk's salary payment.
16
Even Springs prepays American Republic Insurance Co. for an insurance policy lasting this number of months
The amount paid to American for the liability and casualty coverage policy was
6
$ 3,600.00
16
Even Springs buys Even Springs fixtures from Office Depot in the amount of
Even Springs made a cash down payment of
The remaining balance placed on account with Office Depot was
The equipment is estimated to last the following number of years
The estimated salvage value at the end of the estimated life will be
Even Springs fixtures will be depreciated on the double-declining-balance basis
$ 18,000.00
$ 4,000.00
$ 14,000.00
6
$ 1,000.00
16
Max Gator withdraws the following amount of cash from the company account
$ 3,500.00
18
Even Springs receives payment (after discount as appropriate) on the A/R with Valley High
20
Even Springs orders inventory on credit from Small Town Supply Company with payment terms of n/30.
The order was for the following number of items
The order cost for each item was
The total order on account from Small Town Supply Company was
500
$
22.00
$ 11,000.00
21
When the inventory arrives, Even Springs pays Small Town Shipping Company directly for the freight bill of
22
Even Springs makes a sale to the Nearby Shrine.
The sale was for the following number of items
The sale price for each item was
Therefore, the total sale to the Nearby Shrine was for
Cash received from Nearby Shrine at the time of the sale was
The remaining balance placed on account (terms 2/10, n/30) with Nearby Shrine was
400
$
33.00
$ 13,200.00
$ 9,200.00
$ 4,000.00
23
Nearby Shrine returned this number of items for full refund; it did not have enough room to Even Springs the ite
26
Even Springs received a utility bill from Small Town Lighting and Power (due 7th of next month) in the amount of
ACC 2301 Even Springs Practice Set
225.00
30
$
310.00
Transactions p 6 of 64
31
Even Springs received its current month's bank statement, which it was able to reconcile after identifying the following:
Service charge by the bank in the amount of
$
50.00
Fee for new accounts in the amount of
$
10.00
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Transactions p 7 of 64
Even Springs Trading Company, Transactions Continued
31
***
Additional information, possibly related to adjustments, as of the end of month includes:
Office supplies on hand
Physical count of inventory on hand of
Max Gator estimates the following percentage of accounts receivable will be uncollectible
100.00
170
2%
Remember that there may be other necessary adjustments in addition to those indicated above
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Transactions p 8 of 64
Even Springs Trading Company
General Journal
Day
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Account Titles and Explanations
Ref.
General Journal p 9 of 64
Even Springs Trading Company
General Journal
Day
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Ref.
General Journal p 10 of 64
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Even Springs Trading Company
General Journal
Date
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Ref.
General Journal p 12 of 64
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Even Springs Trading Company
General Journal
Date
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Ref.
General Journal p 14 of 64
Even Springs Trading Company
General Journal
Date
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Ref.
General Journal p 15 of 64
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ny
Debit
Credit
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ny
Debit
Credit
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ny
Debit
Credit
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ny
Debit
Credit
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ny
Debit
Credit
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Even Springs Trading Company
General Ledger
Account: CASH
Day
Explanation
Ref.
Account: A/R
Day
Explanation
Ref.
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General Ledger p 25 of 64
Even Springs Trading Company
General Ledger
Account: ADA
Day
Explanation
Ref.
Account: Inventory
Day
Explanation
Ref.
Account: Office Supplies
Day
Explanation
Ref.
ACC 2301 Even Springs Practice Set
General Ledger p 26 of 64
Even Springs Trading Company
General Ledger
Account: Prepaid Rent
Day
Explanation
Ref.
Account: Prepaid Insurance
Day
Explanation
Ref.
Account: Store Fixtures
Day
Explanation
Ref.
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General Ledger p 27 of 64
Even Springs Trading Company
General Ledger
Account: A/D - Store Fixtures
Day
Explanation
Ref.
Account: Office Equipment
Day
Explanation
Ref.
Account: A/D - Office Equipment
Day
Explanation
Ref.
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General Ledger p 28 of 64
Even Springs Trading Company
General Ledger
Account: A/P
Day
Explanation
Ref.
Account: Salaries/P
Day
Explanation
Ref.
Account: Interest/P
Day
Explanation
Ref.
Even Springs Trading Company
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General Ledger p 29 of 64
General Ledger
Account: N/P
Day
Explanation
Ref.
Account: Capital
Day
Explanation
Ref.
Account Withdrawals
Day
Explanation
Ref.
Even Springs Trading Company
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General Ledger p 30 of 64
General Ledger
Account:Sales Revenue
Day
Explanation
Ref.
Account: Sales Returns & Allowances
Day
Explanation
Ref.
Account: Sales Discounts
Day
Ref.
Explanation
Even Springs Trading Company
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General Ledger
Account: Cost of Merchandise Sold
Day
Explanation
Ref.
Account: Salaries Expense
Day
Explanation
Ref.
Account: Freight-Out
Day
Explanation
Ref.
Even Springs Trading Company
General Ledger
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Account: Depreciation Expense
Day
Explanation
Ref.
Account: Rent Expense
Day
Explanation
Ref.
Account: Bad Debts Expense
Day
Explanation
Ref.
Even Springs Trading Company
General Ledger
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General Ledger p 33 of 64
Account: Utilities Expense
Day
Explanation
Ref.
Account: Supplies Expense
Day
Explanation
Ref.
Account: Insurance Expense
Day
Explanation
Ref.
Even Springs Trading Company
General Ledger
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General Ledger p 34 of 64
Account: Interest Expense
Day
Explanation
Ref.
Account: Bank Charges Expense
Day
Explanation
Ref.
Account: Income Summary
Day
Ref.
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Explanation
General Ledger p 35 of 64
g Company
er
Debit
Debit
Credit
Acct. No: 101
Balance
Credit
Acct. No: 105
Balance
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General Ledger p 36 of 64
g Company
er
Debit
Debit
Debit
Credit
Acct. No: 106
Balance
Credit
Acct. No: 108
Balance
Credit
Acct. No: 110
Balance
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General Ledger p 37 of 64
g Company
er
Debit
Debit
Debit
Credit
Acct. No: 120
Balance
Credit
Acct. No: 123
Balance
Credit
Acct. No: 125
Balance
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General Ledger p 38 of 64
g Company
er
Debit
Debit
Debit
Credit
Acct. No: 126
Balance
Credit
Acct. No: 130
Balance
Credit
Acct. No: 131
Balance
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General Ledger p 39 of 64
g Company
er
Debit
Debit
Debit
Credit
Acct. No: 200
Balance
Credit
Acct. No: 205
Balance
Credit
Acct. No: 210
Balance
g Company
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General Ledger p 40 of 64
er
Debit
Debit
Debit
Credit
Acct. No: 215
Balance
Credit
Acct. No: 300
Balance
Credit
Acct. No: 305
Balance
g Company
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General Ledger p 41 of 64
er
Debit
Debit
Debit
Credit
Acct. No:400
Balance
Credit
Acct. No: 402
Balance
Credit
Acct. No: 404
Balance
g Company
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General Ledger p 42 of 64
er
Debit
Debit
Debit
Credit
Acct. No: 501
Balance
Credit
Acct. No: 510
Balance
Credit
Acct. No: 512
Balance
g Company
er
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General Ledger p 43 of 64
Debit
Debit
Debit
Credit
Acct. No: 514
Balance
Credit
Acct. No: 516
Balance
Credit
Acct. No: 518
Balance
g Company
er
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General Ledger p 44 of 64
Debit
Debit
Debit
Credit
Acct. No: 520
Balance
Credit
Acct. No: 525
Balance
Credit
Acct. No: 530
Balance
g Company
er
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General Ledger p 45 of 64
Debit
Debit
Debit
Credit
Acct. No: 535
Balance
Credit
Acct. No: 540
Balance
Credit
Acct. No: 999
Balance
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Even Springs Trading Company
Trial Balance
31st of Month one
Acct. No.
Account Titles
Debits
Credits
Adjusted Trial Balance
31st of Month one
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Trial Balances p 47 of 64
Acct. No.
Account Titles
Debits
Credits
Even Springs Trading Company
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Post Closing Trial Balance
31st of Month one
Acct. No.
Account Titles
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Debits
Credits
Trial Balances p 49 of 64
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Even Springs Trading Company
Acc. #
Account Titles
ACC 2301 Even Springs Practice Set
Trial Balance
Debits
Credits
Worksheet
End of Month One
Adjustments
Debits
Credits
Adjusted Trial Balance
Debits
Credits
Income Statement
Debits
Credits
Worksheet p 53 of 64
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Worksheet p 54 of 64
Balance Sheet
Debits
Credits
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Worksheet p 55 of 64
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Worksheet p 56 of 64
Even Springs Trading Company
INCOME STATEMENT
For the month ending on the 31st
NOTE: on financial statements, remember that the columns are NOT debit and credit columns
instead, columns to the left have more detail and columns to the right have totals
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Even Springs Trading Company
STATEMENT of CAPITAL [or OWNER'S EQUITY]
For the month ending on the 31st
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Even Springs Trading Company
BALANCE SHEET
31st of Month one
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Y]
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