Chapter 3, Problem 27BP

a.

To determine

Record the given events in T-accounts.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increase or decrease 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

Record the given events in T-accounts as follows:

Cash
1. 40,000	6. 8,000
2. 2,000	8. 1,000
3. 9,000	9. 7,200
7. 17,000	10. 6,000
	11. 4,000
	12. 840
Bal. 40,960

Accounts Receivable
4. 24,000	7. 17,000
Bal. 7,000

Interest Receivable
19. 900
Bal. 900

Supplies
5. 840	17. 1,600
8. 1,000
Bal. 240

Prepaid Rent
9. 7,200	18. 1,800
Bal. 5,400

Land
6. 8,000
Bal. 8,000

Accounts Payable
12. 840	5. 840
	13. 300
	14. 250
	Bal. 550

Unearned Revenue
15. 6,000	3. 9,000
	Bal. 3,000

Salaries Payable
	16. 1,800
	Bal. 1,800

Common Stock
	1. 40,000
	Bal. 40,000

Dividends
11. 4,000
Bal. 4,000

Service Revenue
	2. 2,000
	4. 24,000
	15. 6,000
	Bal. 32,000

Interest Revenue
	19. 900
	Bal. 900

Advertising Expense
13. 300
Bal. 300

Rent Expense
18. 1,800
Bal. 1,800

Salaries Expense
10. 6,000
16.1,800
Bal. 7,800

Supplies Expense
17. 1,600
Bal. 1,600

Utilities Expense
14. 250
Bal. 250

b.

To determine

Prepare a before-closing trial balance of Company L.

Explanation of Solution

Before-closing trial balance:

Before-closing 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.

Prepare a before-closing trial balance of Company L as follows:

Company L
Before-closing trial balance for 2016
Accounts	Debit ($)	Credit ($)
Cash	40,960
Accounts Receivable	7,000
Interest receivable	900
Supplies	240
Prepaid Rent	5,400
Land	8,000
Accounts Payable		550
Unearned Revenue		3,000
Salaries Payable		1,800
Common Stock		40,000
Dividends	4,000
Service Revenue		32,000
Interest revenue		900
Salaries expense	7,800
Advertising Expense	300
Utilities Expense	250
Supplies Expense	1,600
Rent expense	1,800
Totals	78,250	78,250

Table (1)

Therefore, the total of debit, and credit columns of before-closing trial balance is $78,250 and agree.

c.

To determine

Indicate the event that affects the balance sheet, income statement, and statement of cash flows and also indicated whether the increases (+), decreases (-), or does not affect (NA) each element of the financial statements.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Balance Sheet:

Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows:

The financial statement that shows the changes in cash flows from operating, investing, and financing activities is referred to as statement of cash flows.

Indicate the event that affects the balance sheet, income statement, and statement of cash flows and also indicated whether the increases (+), decreases (-), or does not affect (NA) each element of the financial statements as follows:

Table (2)

1. Issuance of common stock: In this transaction, cash and common stock accounts are affected. Cash account increases the value of assets account, and common stock increases the value of stockholders’ equity in the balance sheet. Issuance of common stock is considered as the financing activity of business and it increases the value of cash in the cash flow statement.

2. Provided services for cash: In this transaction, cash and service revenue accounts are affected. Cash account increases the value of assets account, and service revenue increases the value of stockholder’s equity in the balance sheet. Provided service for cash is considered as an operating activity of business, and it increases the value of operating cash in the cash flow statement.

3. Cash received for service performed in the future: In this transaction, cash and unearned revenue accounts are affected. Cash account increases the value of assets account, and unearned revenue increases the value of liabilities in the balance sheet. Cash received for service performed in the future is considered as an operating activity of business, and it increases the value of operating cash in the statement of cash flow.

4. Service provided on account: In this transaction, accounts receivable and service revenue accounts are affected. Accounts receivable increases the value of assets, and service revenue increases the value of stockholder’s equity in the balance sheet. In the income statement, service revenue increases the value of revenue account and net income.

5. Supplies purchased on account: In this transaction, supplies and accounts payable accounts are affected. Supplies increase the value of assets, and accounts payable increases the value of liabilities in the balance sheet.

6. Purchase of land for cash: In this transaction, land and cash accounts are affected. Land increases the value of assets account and cash decreases the value of assets in the balance sheet. Purchase of land in cash is considered as an investing activity of a business, and it decreases the value of cash in the cash flow statement.

7. Cash received from customer: In this transaction, cash and accounts receivable accounts are affected. Cash increases the value of assets, and accounts receivable decreases the value of assets in the balance sheet. Cash received from customer is considered as an operating activity of business, and it increases the value of operating cash in cash flow statement.

8. Purchase of supplies in cash: In this transaction, supplies and cash accounts are affected. Supplies increase the value of assets, and cash decreases the value of assets in the balance sheet. Purchase of supplies for cash is considered as an operating activity of business, and it decreases the value of operating cash in the cash flow statement.

9. Paid advance rent for one year: In this transaction, prepaid rent and cash accounts are affected. Prepaid rent increases the value of assets account, and cash decreases the value of assets in balance sheet. Paid advance rent for office space is considered as an operating activity of business, and it decreases the value of operating cash in the cash flow statement.

10. Salaries paid to employees: In this transaction, salaries expense and cash accounts are affected. Salaries expense decreases the value of stockholder’s equity, and cash decreases value of assets in the balance sheet. In the income statement, salaries expense increases the value of expense, and decreases the net income of business. Paid cash for salaries expense is considered as an operating activity of business, and it decreases the value of operating cash in the cash flow statement.

11. Paid cash dividends to stockholders: In this case, dividends and cash accounts are affected. Dividends decrease the value of stockholder’s equity and cash decreases the value of assets in the balance sheet. Dividends paid to stockholders are considered as a financing activity of the business, and it decreases the value of financing cash in the cash flow statement.

12. Cash paid to creditors: In this case, cash and accounts payable accounts are affected. Cash decreases the value of assets and accounts payable decreases the value of liabilities in the balance sheet. Cash paid to creditors is considered as an operating activity of business, and it decreases the operating cash in the cash flow statement.

13. Advertising expense incurred on account: In this transaction, advertising expense and accounts payable accounts are affected. Advertising expense decreases the value of stockholder’s equity, and accounts payable increases the value of liabilities in the balance sheet. In the income statement, advertising expense increases the expense account, and decreased the net income.

14. Utilities expense incurred on account: In this transaction, utilities expense and accounts payable accounts are affected. Utilities expense decreases the value of stockholder’s equity, and accounts payable increases the value of liabilities in the balance sheet. In the income statement, advertising expense increases the expense account, and decreased the net income.

15. Service revenue recognized for prior performance: In this case, service revenue and unearned revenue accounts are affected. Unearned revenue decreases the value of liabilities and service revenue increases the value of stockholder’s equity in the balance sheet. In the income statement, service revenue increases the revenue account and net income.

16. Salaries expense incurred at the end of the accounting 2016: In this transaction, salaries expense and salaries payable accounts are affected. Salaries expense decreases the stockholder’s equity, and salaries payable increases the value of liabilities in the balance sheet. In the income statement, salaries expense increased the expense account and decreased the value of net income.

17. Supplies expense incurred at the end of the account period: In this transaction, salaries expense and supplies accounts are affected. Salaries expense decreases the value of stockholder’s equity, and supplies decreases value of assets in the balance sheet. In the income statement, salaries expense increases the value of expense and decreased the net income of business.

18. Recognized four month prepaid rent at the end of the accounting period: In this transaction, rent expense and prepaid rent accounts are affected. Rent expense decreases the value of stockholder’s equity, and prepaid rent decreases the value of assets in the balance sheet. In the income statement, rent expense increases the expense account and decreased the net income.

19. Interest revenue recognized at the end of the accounting year: In this case, cash and interest revenue accounts are affected. Cash increases the value of cash, and interest revenue increases the value of stockholder’s equity in the balance sheet. In the income statement, interest revenue increases the value of revenue and net income.

Note:

FA = Financing activity, OA = Operating activity, and IA = Investing activity