Question: you are the finance manager of elaine inc your staff...
You are the Finance Manager of Elaine Inc. Your staff member has prepared draft financial statements as at/for the year ended December 31, 2018.
On review of the statements you note the following relating to events occurring in 2018:
1. Elaine sold product to a customer on 30 day credit terms and shipped it December 31, 2018, arriving at the customer on January 4, 2019. The product terms were fob destination. Elaine recorded the $1,000 sale and $750 cost of goods sold in 2018.
2. Elaine pays for a full year of rent costs for $12,000 with rent beginning Oct 1, 2018. All of the amount was expensed when paid.
3. Elaine paid $5,000 for a generator on July 1, 2018. The generator is being depreciated straight line over 4 years with no residual value. You determine that the generator is being used 100% for personal use by the majority shareholder of the company.
4. Elaine was served with a lawsuit during 2018 for wrongful dismissal of an employee. The claim is $20,000 and Elaine’s lawyer indicates that the claim is baseless therefore, Elaine will not have to pay anything for this claim (and will be reimbursed for any legal costs incurred). Elaine recorded a liability of $20,000 related to the lawsuit in 2018 “just to be safe”.
Required (State any assumptions needed):
For each numbered item above prepare the following:
A) Prepare any necessary adjusting journal entries for 2018. If no adjustment is necessary, you must indicate “No Entry”. (Always show any calculations.)
B) EXPLAIN why you made the adjustment (or no adjustment) in (A) using and applying at least one foundational principle or element characteristic from the conceptual framework as support.