On January 1, 2015, a new Board of Directors was elected for Bradley Hospital. The new board switched to a different accountant. After reviewing the hospital’s books, the accountant decided that the accounts should be adjusted. Effective January 1, 2015, the board decided that
1. Separate funds should be established for the General Fund, the Bradley Endowment Fund, and the Plant Replacement and Expansion Fund (the old balances will be reversed to eliminate them).
2. The accounts should be maintained in accordance with fund accounting principles. The balances in the general ledger at January 1, 2015, are presented here:
The following additional information is available:
1. Under the terms of the will of J. Ethington, founder of the hospital, “The principal of the bequest is to be fully invested in trust forevermore in mortgages secured by productive real estate in Central City and/or in U.S. Government securities . . . and the income therefrom is to be used to defray current expenses.”
2. The Endowment Fund consists of the following:
Cash received in 1898 by bequest from Ethington …………………………………………… $ 81,500
Net gains realized from 1956 through 1989 from the sale of real estate
acquired in mortgage foreclosures …………………………………………………………….. 23,500
Income received from 1990 through 2014 from 90-day U.S. treasury
bill investments ………………………………………………………………………………… 14,500
Balance per general ledger on January 1, 2015 ………………………………………………… $119,500
3. The land account balance is composed of
1900 appraisal of land at $10,000 and building at $5,000, received by
donation at that time. The building was demolished in 1934. …………………………………… $ 15,000
Appraisal increase based on insured value in land title policies issued in 1954. …………………. 380,000
Landscaping costs for trees planted. …………………………………………………………….. 12,000
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Balance per general ledger on January 1, 2015 ………………………………………………….. $407,000
4. The building balance is composed of
Cost of present hospital building completed in January 1974, when the
Adjustment to record appraised value of building in 1984. ……………………………………… (100,000)
Cost of elevator installed in hospital building in January 2000. ………………………………….. 45,000
Balance per general ledger on January 1, 2015 …………………………………………………… $ 245,000
The estimated useful lives of the hospital building and the elevator when new were 50 years and 20 years, respectively.
5. The hospital’s equipment was inventoried on January 1, 2015. The costs shown in the inventory agreed with the equipment account balance in the general ledger. The allowance for depreciation account at January 1, 2015, included $158,250 applicable to equipment, and that amount was determined to be accurate. All depreciation is computed on a straight-line basis.
6. A bank loan was obtained to finance the cost of new operating room equipment purchased in 2011. Interest was paid to December 31, 2014.
7. Common stock with a market value of $417,000 was donated to Bradley Hospital with the stipulation that the proceeds from the sale of the stock must be used for facilities expansion. The hospital plans to undertake expansion of its facilities next year and to sell these securities at that time.
Required:
Using the workpaper form below, prepare the entries necessary to establish the correct balances as of January 1, 2015.
SOLUTION
Trial Balance
Trial Balance
Adjustments
Adjustments
General Fund
General Fund
General Fund
Endowment Fund
Endowment Fund
Endowment Fund
Endowment Fund
Endowment Fund
Plant Replacement Fund
Plant Replacement Fund
Plant Replacement Fund
Plant Replacement Fund
Plant Replacement Fund
Account Description
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Credit
Credit
Debit
Debit
Debit
Credit
Credit
Cash
$50,000
$50,000
Investment in U.S. Treasury Bills
105,000
$105,000
$105,000
Investment in Common Stock
417,000
$ 417,000
$ 417,000
$ 417,000
Interest Receivable
4,000
4,000
Accounts Receivable
40,000
40,000
Inventory
25,000
25,000
Land
407,000
(2)$385,000
22,000
Building
245,000
(3)$100,000
345,000
Equipment
283,000
283,000
Allowance for Depreciation
376,000
(4) $62,000
$438,000
Accounts Payable
70,000
70,000
Bank Loan
150,000
150,000
Endowment Fund Balance
119,500
(1) 14,500
$105,000
$105,000
Other Fund Balances
860,500
(2) 385,000
(1) 14,500
(4) 62,000
(3) 100,000
(5) 528,000
Plant Replacement Fund Balance
(5) 417,000
$417,000
$417,000
General Fund Balance
(5) 111,000
111,000
Totals
$1,576,000
$1,576,000
$1,089,500
$1,089,500
$769,000
$769,000
$105,000
$105,000
$105,000
$105,000
$105,000
$417,000
$417,000
$417,000
$417,000
$417,000
Adjusting Entries (not required)
(1)
Endowment Fund Balance Other Fund Balances To eliminate from the Endowment Fund Balance the investment income earned on U.S. Treasury Bills
14,500
14,500
(2)
Other Fund Balance Land To eliminate from the land account the $380,000 appraisal increase and the $5,000 cost of the old building which was demolished.
385,000
385,000
(3)
Building Other Fund Balance To eliminate the appraisal decrease and restate the hospital building at its actual cost.
100,000
100,000
(4)
Other Fund Balances Allowance for Depreciation To correct the allowance for depreciation through December 31, 2015 in accordance with the following computation: Building - $300,000 at 2% times 41 years Elevator - $45,000 at 5% times 15 years Equipment – ascertained to be accurate Total accumulated depreciation, as computed Less accumulated depreciation per books Understatement of accumulated depreciation
Other Fund Balances Plant Replacement Fund General Fund To close out Other Fund Balances and to allocate its balance to the General Fund and the Plant Replacement Fund.