Enoteca Fine Wines Capstone
Work through one accounting cycle
Enoteca is a wine retailer using the periodic inventory system. Its source case covers the year ended December 31, 2020. Use the historical case facts, including its supplied payroll rates, only for the exercise.
Starting unadjusted trial balance
Account | Debit (₱) | Credit (₱) |
|---|---|---|
Cash | 298,860 | — |
Accounts receivable | 17,000 | — |
Allowance for doubtful accounts | — | 200 |
Prepaid advertising | 4,800 | — |
Supplies | 3,000 | — |
Beginning merchandise inventory | 150,000 | — |
Store equipment | 270,000 | — |
Accumulated depreciation, store equipment | — | 25,000 |
Furniture and fixtures | 60,000 | — |
Accumulated depreciation, furniture | — | 15,000 |
Notes payable, due in 2022 in the case | — | 200,000 |
Accounts payable | — | 47,050 |
Capital | — | 333,800 |
Drawings | 141,100 | — |
Unearned seminar fees | — | 80,000 |
Sales | — | 1,540,000 |
Sales returns and allowances | 1,500 | — |
Sales discounts | 500 | — |
Purchases | 910,000 | — |
Purchase returns and allowances | — | 12,000 |
Purchase discounts | — | 3,000 |
Freight in | 2,250 | — |
Commissions income | — | 9,700 |
Rent expense | 132,000 | — |
Salaries and wages expense | 240,000 | — |
Payroll taxes expense | 33,240 | — |
Interest expense | 1,500 | — |
Total | 2,265,750 | 2,265,750 |
Complete additional information
Physical ending inventory is 140,000.
Required doubtful-account allowance is 2% of ending Accounts receivable; the unadjusted allowance has a 200 credit balance.
Prepaid advertising covers four evenly earned months ending January 31, 2021; three months have expired by December 31.
Supplies remaining at year-end are 1,300.
Store equipment was bought July 1, 2019; estimated useful life is five years and residual value 20,000. The prior 25,000 accumulated depreciation is already recorded.
Furniture is depreciated at 15% of its 60,000 cost per year; prior accumulated depreciation is 15,000.
Notes payable is a two-year, 6% annual-interest bank loan received May 1, 2020. Accrue May–December loan interest as an additional adjustment to the 1,500 already in Interest expense; no interest on this loan has yet been recorded.
Advance seminar fees cover eight equally priced seminars, six completed by year-end.
Another 8,300 commissions has been earned but not collected or recorded.
The 132,000 recorded rent pays nine months at a constant monthly rate; the remaining three months are unpaid.
Salaries are evenly incurred through the year. Employer payroll taxes on December salary remain unpaid: 6.2% social security and 1.45% Medicare. These supplied historical rates apply only to this exercise.
Required work
Prepare the December 31, 2020 worksheet, journalize all adjusting entries, and prepare profit or loss, changes in owner’s equity, financial position, and their notes. Then record closing entries, prepare the post-closing trial balance, and record the selected January 1, 2021 reversing entries. The full unadjusted trial balance above and all eleven facts here are the starting problem; the sections below are worked solutions.
Calculate the adjustments
Fact | Calculation | Adjustment/result |
|---|---|---|
Ending inventory counted | Use physical count | ₱140,000 |
Required allowance 2% of AR | 17,000 × 2% = 340, less credit balance 200 | ₱140 expense |
Advertising covers four months through January | 4,800 × 3/4 used | ₱3,600 expense; ₱1,200 prepaid |
Supplies remaining 1,300 | 3,000 − 1,300 | ₱1,700 expense |
Store equipment cost 270,000, scrap 20,000, life five years | (270,000 − 20,000)/5 | ₱50,000 annual expense |
Furniture cost 60,000, annual depreciation rate 15% | 60,000 × 15% | ₱9,000 expense |
Loan 200,000 at 6% since May 1 | 200,000 × 6% × 8/12 | ₱8,000 interest accrual |
Six of eight seminars completed | 80,000 × 6/8 | ₱60,000 earned; ₱20,000 unearned |
Commissions earned, not collected | Given | ₱8,300 receivable and revenue |
Only nine months’ rent paid | 132,000/9 × 3 unpaid months | ₱44,000 accrued rent |
December salary evenly incurred | 240,000/12 = 20,000 | ₱20,000 salary base |
Supplied social-security rate 6.2% | 20,000 × 6.2% | ₱1,240 payable |
Supplied Medicare rate 1.45% | 20,000 × 1.45% | ₱290 payable |
The payroll adjustment is ₱1,530. The source already includes all ₱240,000 of annual salaries; the additional adjustment is employer payroll taxes. Furniture depreciation credits Accumulated depreciation—Furniture and fixtures, consistent with its asset and the worksheet.
Why these amounts belong in 2020
Allowance target versus expense: 17,000 × 2% = 340 is the total credit allowance needed. The existing 200 credit contributes toward it, so only 340 − 200 = 140 is additional expense; recording 340 again would leave an excessive 540 allowance.
Used benefits versus future benefits: three of four advertising months belong to 2020, so 4,800 × 3/4 = 3,600 is expense and January's 1,200 remains prepaid. Supplies expense is 3,000 available − 1,300 still unused = 1,700; the physical count measures the asset, not the expense.
Current versus accumulated depreciation: 2020 is a full year of store-equipment use, so its expense is 50,000 even though acquisition was halfway through 2019. Ending accumulated depreciation is 25,000 prior + 50,000 current = 75,000; furniture is 15,000 prior + 9,000 current = 24,000. Credit each asset's own contra-account.
Earned versus received: six completed seminars earn 80,000 × 6/8 = 60,000; the two still owed leave 20,000 unearned. Commissions of 8,300 are already earned, so record a receivable and revenue even though cash has not arrived.
Incurred versus paid: loan interest uses eight months, 200,000 × 6% × 8/12 = 8,000, and unpaid rent uses three months, (132,000/9) × 3 = 44,000. Record expenses and payables; do not credit Cash because they remain unpaid. Keep the rent calculation unrounded until the final amount.
Payroll base versus payroll tax: December salary is 240,000/12 = 20,000, already included in annual salaries. Only the unpaid employer taxes are additional: 20,000 × 6.2% = 1,240 and 20,000 × 1.45% = 290, totaling 1,530. Use these historical supplied rates solely for the case.
The adjusting-key PDF prints Store Equipment as the credit label for furniture depreciation. The worksheet, financial-statement notes and post-closing trial balance consistently identify Furniture and fixtures; that matching asset/contra-asset pair is the correct account.
Prepare profit or loss
Item | Calculation | Amount (₱) |
|---|---|---|
Net sales | 1,540,000 − 1,500 − 500 | 1,538,000 |
Net purchases | 910,000 − 12,000 − 3,000 | 895,000 |
Net purchase cost | 895,000 + 2,250 | 897,250 |
Goods available | 150,000 + 897,250 | 1,047,250 |
Cost of sales | 1,047,250 − 140,000 | 907,250 |
Gross profit | 1,538,000 − 907,250 | 630,750 |
Other operating income | (9,700 + 8,300) commissions + 60,000 seminars | 78,000 |
Selling expenses | 50,000 store depreciation + 3,600 advertising | (53,600) |
General and administrative | 240,000 salaries + 176,000 rent + 34,770 payroll taxes + 9,000 furniture depreciation + 1,700 supplies + 140 doubtful accounts | (461,610) |
Profit before financing | 630,750 + 78,000 − 53,600 − 461,610 | 193,540 |
Interest expense | 1,500 already recorded + 8,000 adjustment | (9,500) |
Net profit | 193,540 − 9,500 | 184,040 |
Returns and discounts reduce sales or purchase cost, so subtract them from the corresponding gross amounts. Freight in adds to the cost of bringing purchases into stock; ending inventory is deducted because unsold goods remain an asset. Gross profit is the trading margin before other income and expenses, while 193,540 is profit before financing; subtracting the complete 9,500 interest expense produces the final 184,040 profit.
The functional expense groups follow the supplied notes: store-equipment depreciation and advertising support selling, while the listed salaries, rent, payroll taxes, furniture, supplies and doubtful accounts enter general administration. Use adjusted balances: rent is 132,000 + 44,000 = 176,000 and payroll taxes are 33,240 + 1,530 = 34,770. Omitting accrued costs or earned commissions would put income and expenses in the wrong period.
Reconcile equity and financial position
Capital: 333,800 + 184,040 − 141,100 = 376,740.
Profit increases the owner's claim and drawings reduce it directly. Drawings are not a business expense, so do not deduct 141,100 from profit or add profit to ending capital again. The 517,840 subtotal before drawings is not the final capital balance.
Financial-position group | Calculation | Amount (₱) |
|---|---|---|
Trade and other receivables | 17,000 − 340 allowance + 8,300 commissions receivable | 24,960 |
Prepayments | 1,200 advertising + 1,300 supplies | 2,500 |
Current assets | 298,860 cash + 24,960 receivables + 140,000 inventory + 2,500 prepayments | 466,320 |
Store-equipment carrying amount | 270,000 − (25,000 + 50,000) | 195,000 |
Furniture carrying amount | 60,000 − (15,000 + 9,000) | 36,000 |
Total PPE | 195,000 + 36,000 | 231,000 |
Total assets | 466,320 + 231,000 | 697,320 |
Trade and other payables | 47,050 AP + 8,000 interest + 44,000 rent + 1,240 social security + 290 Medicare | 100,580 |
Current liabilities | 100,580 + 20,000 unearned seminars | 120,580 |
Non-current note | Given in the case | 200,000 |
Total liabilities | 120,580 + 200,000 | 320,580 |
Liabilities + capital | 320,580 + 376,740 | 697,320 |
Net receivables deduct the full 340 ending allowance, not merely the 140 expense adjustment, and include the earned 8,300 commission claim. PPE similarly deducts accumulated depreciation from prior and current periods. Unused advertising/supplies and unsold inventory remain assets; unpaid costs and the 20,000 of seminars still owed remain liabilities. These distinctions explain why 697,320 assets = 320,580 liabilities + 376,740 capital.
Close, verify, then reverse
Close credit-balance revenue/contra-purchase accounts to Income summary: ₱1,633,000. Close debit-balance expenses, contra-sales, purchases, freight in, and beginning inventory: ₱1,588,960. With ending-inventory adjustment credit ₱140,000, Income summary equals 1,633,000 − 1,588,960 + 140,000 = 184,040 profit. Debit Income summary and credit Capital for that profit; debit Capital and credit Drawings for ₱141,100. Account for beginning inventory once across the worksheet/journal process; the source closing key includes it.
The post-closing trial balance contains permanent accounts only. Debit and credit totals are ₱796,660 each. This gross debit total exceeds net statement assets because contra-assets have credit balances.
The difference is 340 allowance + 75,000 store accumulated depreciation + 24,000 furniture accumulated depreciation = 99,340 contra-assets. Therefore 796,660 gross asset debits − 99,340 = 697,320 net assets. Profit is already transferred to capital and drawings are already closed; neither is an extra asset or another amount to add.
Complete post-closing balances
Enoteca Fine Wines · December 31, 2020. All amounts are Philippine pesos (₱). Closing entries have been posted. The complete remaining account balances are:
Account | Debit | Credit |
|---|---|---|
Cash | 298,860 | — |
Accounts receivable | 17,000 | — |
Allowance for doubtful accounts | — | 340 |
Commissions receivable | 8,300 | — |
Prepaid advertising | 1,200 | — |
Supplies | 1,300 | — |
Merchandise inventory | 140,000 | — |
Store equipment | 270,000 | — |
Accumulated depreciation—Store equipment | — | 75,000 |
Furniture and fixtures | 60,000 | — |
Accumulated depreciation—Furniture and fixtures | — | 24,000 |
Notes payable | — | 200,000 |
Accounts payable | — | 47,050 |
Rent payable | — | 44,000 |
Social security tax payable | — | 1,240 |
Medicare tax payable | — | 290 |
Interest payable | — | 8,000 |
Unearned seminar fees | — | 20,000 |
Vince Carbone, capital | — | 376,740 |
Sum each column independently. The table reports each asset’s gross debit balance and its contra-asset credit balance.
Debit check: 298,860 + 17,000 + 8,300 + 1,200 + 1,300 + 140,000 + 270,000 + 60,000 = 796,660. Credit check: 340 + 75,000 + 24,000 + 200,000 + 47,050 + 44,000 + 1,240 + 290 + 8,000 + 20,000 + 376,740 = 796,660. Matching totals prove that the remaining debit and credit balances agree; they do not replace checking recognition, classification and the underlying case facts.
Reversing entries
On January 1, reverse the accrued interest ₱8,000, accrued commissions ₱8,300, accrued rent ₱44,000, and payroll tax accrual ₱1,530. Do not reverse asset-method prepayments, liability-method unearned receipts, depreciation, doubtful accounts, or ending inventory.
Each reversal swaps the original debit and credit: Dr Interest payable / Cr Interest expense 8,000; Dr Commissions income / Cr Commissions receivable 8,300; Dr Rent payable / Cr Rent expense 44,000; and Dr Social security tax payable 1,240 plus Dr Medicare tax payable 290 / Cr Payroll taxes expense 1,530. This prepares later ordinary receipts/payments so they do not double-count 2020 amounts. The January reversal does not erase the income or expenses in the finalized 2020 statements.
Final checks
Required allowance is ₱340, while the adjusting expense is ₱140.
Depreciation expense is the current period; accumulated depreciation includes prior periods.
Cash is ₱298,860; these adjustments do not generate new cash.
Profit is ₱184,040; drawings do not reduce profit.
Total assets match total liabilities and ending capital.
Sources
Enoteca Fine Wines - Questionnaire.pdf; Enoteca Fine Wines - Answer Key_1_Worksheet.pdf; Enoteca Fine Wines - Answer Key_3_Financial Statements.pdf
Enoteca Fine Wines - Questionnaire.pdf, p. 2; Enoteca Fine Wines - Answer Key_2_Adjusting entries.pdf; Enoteca Fine Wines - Answer Key_4_Notes to FS.pdf
Enoteca Fine Wines - Answer Key_5_Closing entries.pdf; Enoteca Fine Wines - Answer Key_6_Post-Closing Trial Balance.pdf; Enoteca Fine Wines - Answer Key_7_Reversing entries.pdf