Chapter 2, Problem 35P

a.

To determine

Identify the two additional adjusting entries need to be made at the end of the year.

Answer to Problem 35P

The additional two transactions requiring adjusting entries are prepaid rent on April 1 and unearned revenue on September 1.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets}=\text{ Liabilities}+\text{Stockholders' equity}$

Prepare general ledger accounts under the accounting equation as given below:

Table (1)

Note 1: Entry is not recorded in the books when there is a change in the value of land.

Working Note 2: Determine the amount of prepaid rent.

$\begin{array}{c}\text{Prepaid rent}=\text{ Rent expense }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$7,200\times \frac{9}{12}\\ =\$5,400\end{array}$

Working note 3: Determine the amount of unearned revenue.

$\begin{array}{c}\text{Unearned revenue}=\text{ Revenue income }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$9,600\times \frac{4}{8}\\ =\$4,800\end{array}$

b.

To determine

Determine the amount of land that would be reported for on the balance sheet?

Explanation of Solution

Assets: Assets are those items that provide value for money and future economic benefit for an organization. In simple, it can be referred to as resources possess by a business.

Company W’s reported value of land on its balance sheet is $55,000 (Refer Table (1)).

c.

To determine

Determine the amount of cash flows from investing activities would be reported on the statement of cash flows.

Explanation of Solution

Cash flows from operating activities: This section of cash flow statement provides information about the cash received or cash paid in day-to-day operating activities of a company.

Determine the amount of net cash flow from operating activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash }\\ \text{flows from }\\ \text{operating }\\ \text{activities}\end{array}\}=\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{receivable}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Increase in }\\ \text{unearned }\\ \text{revenue}\end{array}\right)-\left(\begin{array}{l}\text{Increase in }\\ \text{prepaid }\\ \text{rent}\end{array}\right)-\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{payable}\end{array}\right)\\ =\$62,000+\$9,600-\$7,200-\$21,000\\ =\$43,400\end{array}$

Thus, the net cash flow from operating activities that would be reported on the statement of cash flows is $43,400.

d.

To determine

Determine the amount of rent expense that would be reported on the income statement.

Explanation of Solution

The amount of rent expense would be reported on the income statement is $5,400 (Refer working note 2).

e.

To determine

Determine the amount of total liabilities would be reported on the balance sheet.

Explanation of Solution

Liabilities: The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Determine the amount of total liabilities:

Particulars	Amount
Accounts payable	$39,200
Salaries payable	$18,000
Unearned revenue	$4,800
Total liabilities	$62,000

Table (2)

Thus, the amount of total liabilities that would be reported on the balance sheet is $62,000.

f.

To determine

Determine the amount of supplies expense would be reported on the income statement.

Explanation of Solution

The amount of supplies expense that would be reported on the income statement is $1,100$\left(\$1,200-\$100\right)$.

g.

To determine

Determine the amount of unearned revenue would be reported on the balance sheet.

Explanation of Solution

Unearned revenue: The revenue which is received in advance by the company for the services or goods to be delivered in future is referred to as unearned revenue. Since the revenue is received for the services not yet performed, the revenue is recorded as a liability until the services are performed. After the services are performed, the liability would be reduced and the revenue would be credited.

Hence, the amount of unearned revenue that would be reported on the balance sheet is $4,800 (Refer working note 3).

h.

To determine

Determine the amount of cash flows from investing activities would be reported on the statement of cash flows.

Explanation of Solution

Cash flow from investing activities: This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

Determine the amount of cash flows from investing activities.

Cash flows from investing activities
Particulars	Amount
Proceeds from the sale of land	$20,000
Less: Purchase of land	($40,000)
Cash outflow from investing activities	($20,000)

Table (3)

Thus, the net cash flow from investing activities that would be reported on the statement of cash flows is ($20,000).

i.

To determine

Determine the amount of total expenses would be reported on the income statement.

Explanation of Solution

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.

Calculate the amount of total expenses would be reported on the income statement:

Particulars	Amount
Operating expense	$27,000
Salaries revenue	$18,000
Supplies expense	$1,100
Prepaid rent expense	$5,400
Total expenses	$51,500

Table (4)

Thus, the amount of total expenses that would be reported on the income statement is $51,500.

j.

To determine

Determine the amount of service revenue would be reported on the income statement.

Explanation of Solution

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Calculate the amount of service revenue would be reported on the income statement:

Particulars	Amount
Service revenue	$75,000
Add: Unearned revenue	$4,800
Total revenue	$79,800

Table (5)

Thus, the amount of service revenue that would be reported on the income statement is $79,800.

k.

To determine

Determine the amount of cash flows from financing activities would be reported on the statement of cash flows.

Explanation of Solution

Cash flow from financing activities: This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

Determine the amount of cash flows from financing activities.

Cash flows from financing activities
Particulars	Amount
Issuance from common stock	$30,000
Less: Cash dividend	($5,000)
Cash inflow from financing activities	$25,000

Table (6)

Thus, the net cash flow from financing activities that would be reported on the statement of cash flows is $25,000.

l.

To determine

Determine the amount of net income would be reported on the income statement.

Explanation of Solution

Net income: Net income is the excess amount of revenue after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Determine the net income:

Income statement
Particulars	Amount
Service Revenue (Requirement j)	$79,800
Add: interest income	$120
Total revenue	$79,920
Less: Total expense (Requirement i)	($51,500)
Net income	$28,420

Table (7)

Thus, the net income that would be reported on the income statement is $28,420.

m.

To determine

Determine the amount of retained earnings would be reported on the balance sheet.

Explanation of Solution

Retained earnings: Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Determine the amount of retained earnings.

$\begin{array}{c}\begin{array}{l}\text{Ending retained}\\ \text{ earnings}\end{array}\}=\left(\begin{array}{l}\text{Beginning }\\ \text{retained }\\ \text{earnings}\end{array}\right)+\left(\begin{array}{l}\text{Net }\\ \text{Income}\end{array}\right)-\left(\begin{array}{l}\text{Dividends }\\ \text{paid}\end{array}\right)\\ =\$48,000+\$28,420-\$5,000\\ =\$71,420\end{array}$

Hence, the retained earnings that would be reported on the balance sheet amounts to $71,420.