Chapter 3, Problem 1AP

Requirement – 1

To determine

Prepare the journal entry to record the transactions from July 1 through December 31.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

The journal entries for given transactions of Company G are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2021	Cash		10,000
July 1	Common stock			10,000
	(To record the issuance of common stock in cash to Company S)
2021	Cash		10,000
July, 1	Common stock			10,000
	(To record the issuance of common stock in cash to Company T)
2021	Prepaid insurance		4,800
July 1	Cash			4,800
	(To record the purchase of one year insurance policy in cash)
2021	Legal fees expense		1,500
July, 2	Cash			1,500
	(To record the payment of legal fees)
2021	Supplies (office)		1,800
July, 4	Accounts payable			1,800
	(To record purchase of office supplies on account)
2021	Advertising expense		300
July, 7	Cash			300
	(To record payment of advertising expense)
2021	Equipment (Bikes)		12,000
July, 7	Cash			12,000
	(To record the purchase of mountain bike)
2021	Cash		2,000
July, 15	Service revenue (Clinic)			2,000
	( To record the cash received for service revenue)
2021	Cash		2,300
July, 22	Service revenue (Clinic)			2,300
	( To record the cash received for service revenue)
2021	Advertising expense		700
July, 22	Cash			700
	(To record the payment of advertising expense in cash)
2021	Cash		4,000
July, 30	Deferred revenue			4,000
	(To record advance cash received from customer)
2021	Cash		30,000
August, 1	Notes payable			30,000
	(To record loan received from city council)
2021	Equipment (Kayaks)		28,000
August, 4	Cash			28,000
	(To record the purchase of equipment in cash)
2021	Cash		3,000
August, 10	Deferred revenue		4,000
	Service revenue			7,000
	(To record the cash received from service revenue and recognized service revenue)
2021	Cash		10,500
August, 17	Service revenue			10,500
	(To record cash received from service revenue)
2021	Accounts payable		1,800
August, 24	Cash			1,800
	( To record payment of cash to creditors)
2021	Prepaid rent		2,400
September 1	Cash			2,400
	(To record the payment of one year advance rent)
2021	Cash		13,200
September 21	Service revenue (Clinic)			13,200
	(To record the cash received from customer)
2021	Cash		17,900
October 17	Service revenue (Clinic)			17,900
	(To record the cash received from customer)
2021	Miscellaneous expense		1,200
December 8	Cash			1,200
	(To record the payment of miscellaneous expense)
2021	Supplies (Racing)		2,800
December 12	Accounts payable			2,800
	(To record purchase of supplies on account)
2021	Cash		20,000
December 15	Service revenue (Racing)			20,000
	(To record cash received from service revenue)
2021	Salaries expense		2,000
December 16	Cash			2,000
	(To record the supplies expense incurred)
2021	Dividend		4,000
December 31	Cash			4,000
	(To record the payment of cash dividends)

Table (1)

Requirement – 2

To determine

Prepare the adjusting journal entries on December 31.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

The adjusting journal entries for given transactions of Company G are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2021	Depreciation expense		8,000
December 31	Accumulated depreciation			8,000
	(To record depreciation expense incurred at the end of the accounting year)
2021	Insurance expense		2,400
December 31	Prepaid insurance			2,400
	(To record the insurance expense incurred at the end of the accounting period)
2021	Rent expense		800
December 31	Prepaid rent			800
	(To record the rent expense incurred at the end of the accounting year)
2021	Supplies expense (Office) $\left(\$1,8000-\$300\right)$		1,500
December 31	Supplies			1,500
	(To record supplies expense incurred at the end of the accounting year)
2021	Interest expense $\left(\$30,000\times 0.06\times \frac{5}{12}\right)$		750
December 31	Interest payable			750
	(To record interest expense incurred at the end of the accounting year)
2021	Supplies expense (Racing) $\left(\$2,800-\$200\right)$		2,600
December 31	Supplies			2,600
	(To record supplies expense incurred at the end of the accounting year)
2021	Income tax expense		14,000
December 31	Income tax payable			14,000
	(To record the income tax expense incurred at the end of the accounting year)

Table (2)

Requirement – 3

To determine

Prepare the T-accounts and post the transactions in the T-accounts of Company G.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

T-accounts for above transactions are as follows:

Requirement – 4

To determine

Prepare an adjusted trial balance of Company G.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Adjusted trial balance of Company G is as follows:

Company G
Adjusted Trial Balance
December 31, 2021
Accounts	Debit ($)	Credit ($)
Cash	64,200
Prepaid Insurance	2,400
Prepaid Rent	1,600
Supplies (Office)	300
Supplies (Racing)	200
Equipment (Bikes)	12,000
Equipment (Kayaks)	28,000
Accumulated Depreciation		$8,000
Accounts Payable		2,800
Income Tax Payable		14,000
Interest Payable		750
Notes Payable		30,000
Common Stock		20,000
Dividends	4,000
Service Revenue (Clinic)		52,900
Service Revenue (Racing)		20,000
Advertising Expense	1,000
Depreciation Expense	8,000
Income Tax Expense	14,000
Insurance Expense	2,400
Interest Expense	750
Legal Fees Expense	1,500
Miscellaneous Expense	1,200
Rent Expense	800
Salaries Expense	2,000
Supplies Expense (Office)	1,500
Supplies Expense (Racing)	2,600
Totals	148,450	148,450

Table (3)

Requirement –5

To determine

Prepare an income statement, stockholders’ equity and classified balance sheet of Company G.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for Company G:

Company G
Income Statement
For the year ended December 31, 2021
	($)	($)
Revenues:
Service revenue (clinic)	52,900
Service revenue (racing)	20,000
Total revenues		72,900
Expenses:
Advertising expense	1,000
Depreciation expense	8,000
Income tax expense	14,000
Insurance expense	2,400
Interest expense	750
Legal fees expense	1,500
Miscellaneous expense	1,200
Rent expense	800
Salaries expense	2,000
Supplies expense (office)	1,500
Supplies expense (racing)	2,600
Total expenses		35,750
Net income		37,150

Table (4)

Therefore, the net income of Company G is $37,150.

Statement of stockholders’ equity:

This statement reports the beginning stockholder’s equity and all the changes, which led to ending stockholder’s’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholder’s equity to arrive at the result of closing balance of stockholders’ equity.

Prepare the statement of stockholders’ equity:

Company G
Statement of Stockholders’ Equity
For the period ended December 31, 2021
Particulars	Common stock ($)	Retained earnings ($)	Total stockholders' equity ($)
Balance at July 1	$0	$0	$0
Issuance of common stock	20,000		20,000
Add: Net income for 2021		37,150	37,150
Less: Dividends		(4,000)	(4,000)
Balance at December 31	$20,000	$33,150	$53,150

Table (5)

Therefore, the total stockholder’s equity of Company G for the year ended December 31, 2021 is $53,150.

Classified balance sheet:

The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare the classified balance sheet:

Table (6)

Therefore, the total assets of Company G are $100,700, and the total liabilities and stockholders’ equity are $100,700.

Requirement – 6

To determine

Record the closing entries of Company G.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Closing entries of Company G is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2021	Service revenue (Clinic)		52,900
December 31	Service revenue (Racing)		20,000
	Retained earnings			72,900
	(To close all revenue account)
2021	Retained earnings		37,750
December 31	Advertising expense			1,000
	Depreciation expense			8,000
	Income tax expense			14,000
	Insurance expense			2,400
	Interest expense			750
	Legal fees expense			1,500
	Miscellaneous expense			1,200
	Rent expense			800
	Salaries expense			2,000
	Supplies expense (office)			1,500
	Supplies expense (Racing)			2,600
	(To close all the expenses account)
2021	Retained earnings		4,000
December 31	Dividends			4,000
	(To close the dividends account)

Table (6)

Requirement – 7

To determine

Prepare the T-account and post the closing entries to the T-accounts.

Explanation of Solution

Requirement – 8

To determine

Prepare a post-closing trial balance of Company G.

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted. The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare a post-closing trial balance:

Company G
Post-closing Trial Balance
For the year ended December 31, 2021
Accounts	Debit ($)	Credit ($)
Cash	$64,200
Prepaid Insurance	2,400
Prepaid Rent	1,600
Supplies (Office)	300
Supplies (Racing)	200
Equipment (Bikes)	12,000
Equipment (Kayaks)	28,000
Accumulated Depreciation		$8,000
Accounts Payable		2,800
Income Tax Payable		14,000
Interest Payable		750
Notes Payable		30,000
Common Stock		20,000
Retained Earnings		33,150
Total	$108,700	$108,700

Table (7)

Therefore, the total of debit, and credit columns of post-closing trial balance is $108,700.