Intermediate Financial Accounting (ACCT 430) – Spring 2023

Project

Instructions:

 Answer all questions.

 5 marks per question, 10 marks in total.

Q1. A consolidated income statement and selected comparative consolidated balance sheet data for Palano
Company and subsidiary follow:

Palano Company and Subsidiary

Consolidated Income Statement
for the Year Ended December 31, 2020
Sales $701,000
Cost of sales 263,000
Gross profit 438,000
Operating Expenses:
Depreciation expense $76,000
Selling expenses 122,000
Administrative expenses 85,000 283,000
Consolidated net income 155,000

December 31
2019 2020
Accounts receivable $229,000 $318,000
Inventory 194,000 234,000
Prepaid selling expenses 26,000 30,000
Accounts payable 99,000 79,000
Accrued selling expenses 96,000 84,000
Accrued administrative expenses 56,000 39,000

Required:
Prepare the cash flow from operating activities section of a consolidated statement of cash
flows assuming use of the indirect method. (5 marks)
Q2. El Gato Painting Company maintains a checking account at American Bank. Bank state-
ments are prepared at the end of each month. The November 30, 2021, reconciliation of the
bank balance is as follows:

Balance per bank, November 30 $ 3,231

Add: Deposits outstanding 1,200
Less: Checks outstanding
#363 $ 123
#365 201
#380 56
#381 86
#382 340 (806)
Adjusted balance per bank, November 30 $ 3,625

The company’s general ledger checking account showed the following for December:

Balance, December 1 $ 3,625

Receipts 42,650
Disbursements (41,853)
Balance, December 31 $ 4,422

The December bank statement contained the following information:

Balance, December 1 $ 3,231

Deposits 43,000
Checks processed (41,918)
Service charges (22)
NSF checks (440)
Balance, December 31 $ 3,851

The checks that were processed by the bank in December include all of the outstanding
checks at the end of November except for check #365. In addition, there are some December
checks that had not been processed by the bank by the end of the month. Also, you discover
that check #411 for $320 was correctly recorded by the bank but was incorrectly recorded on
the books as a $230 disbursement for advertising expense. Included in the bank’s deposits is a
$1,300 deposit incorrectly credited to the company’s account. The deposit should have been
posted to the credit of the Los Gatos Company. The NSF checks have not been redeposited
and the company will seek payment from the customers involved.

Required:
1. Prepare a bank reconciliation for the El Gato checking account at December 31, 2021.
2. Prepare any necessary adjusting journal entries indicated. (5 marks)