Transactions using accrual accounting Terry Mason organized The Fifth Season at the beginning of February 20Y4. During February, The Fifth Season entered into the following transactions:
a. Terry Mason invested $15000 in The Fifth Season in exchange for common stock.
h. Paid $2,700 on February 1 for an insurance premium on a 1-year policy.
c. Purchased supplies on account. $900.
d. Received fees of $28500 during February.
e. Paid expenses as follows: wages. $10,800; rent, $3,200; utilities, $1,400; and miscellaneous, $1,600.
f. Paid dividends of $4,000.
Record the preceding transactions using the integrated financial statement framework. Alt er each transaction, you should enter a balance for each item.
Concept Introduction:
Accrual Basis accounting:
Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.
To Indicate:
The Journal entries and balance of accounts using the accrual method
Answer to Problem 3.1E
The Journal entries and balance of accounts using the accrual method are as follows:
Terry Mason | ||||||
Journal entries | Account | Balance | ||||
# | Account Title | Debit | Credit | |||
a | Cash | $ 15,000 | Cash | $ 15,000 | ||
Common Stock | $ 15,000 | Common Stock | $ 15,000 | |||
b. | Prepaid Insurance | $ 2,700 | Prepaid Insurance | $ 2,700 | ||
Cash | $ 2,700 | Cash | $ 12,300 | |||
c. | Supplies | $ 900 | Supplies | $ 900 | ||
Accounts Payable | $ 900 | Accounts Payable | $ 900 | |||
d. | Cash | $ 28,500 | Cash | $ 40,800 | ||
Fees earned | $ 28,500 | Fees earned | $ 28,500 | |||
e. | Wages Expense | $ 10,800 | Wages Expense | $ 10,800 | ||
Rent Expense | $ 3,200 | Rent Expense | $ 3,200 | |||
Utilities Expense | $ 1,400 | Utilities Expense | $ 1,400 | |||
Misc. Expense | $ 1,600 | Misc. Expense | $ 1,600 | |||
Cash | $ 17,000 | Cash | $ 23,800 | |||
f. | Dividends | $ 4,000 | Dividends | $ 4,000 | ||
Cash | $ 4,000 | Cash | $ 19,800 |
Explanation of Solution
Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.
The Journal entries and balance of accounts using the accrual method are explained as follows:
Terry Mason | ||||||
Journal entries | Account | Balance | ||||
# | Account Title | Debit | Credit | |||
a | Cash | $ 15,000 | Cash | $ 15,000 | ||
Common Stock | $ 15,000 | Common Stock | $ 15,000 | |||
(Being amount invested in the business) | ||||||
b. | Prepaid Insurance | $ 2,700 | Prepaid Insurance | $ 2,700 | ||
Cash | $ 2,700 | Cash | $ 12,300 | |||
(Being amount paid for insurance in advance) | (15000-2700) | |||||
c. | Supplies | $ 900 | Supplies | $ 900 | ||
Accounts Payable | $ 900 | Accounts Payable | $ 900 | |||
(Being Supplied purchased on account) | ||||||
d. | Cash | $ 28,500 | Cash | $ 40,800 | ||
Fees earned | $ 28,500 | (12300+28500) | ||||
(Being fees received) | Fees earned | $ 28,500 | ||||
e. | Wages Expense | $ 10,800 | Wages Expense | $ 10,800 | ||
Rent Expense | $ 3,200 | Rent Expense | $ 3,200 | |||
Utilities Expense | $ 1,400 | Utilities Expense | $ 1,400 | |||
Misc. Expense | $ 1,600 | Misc. Expense | $ 1,600 | |||
Cash | $ 17,000 | Cash | $ 23,800 | |||
(Being expenses paid in cash) | (40800-17000) | |||||
f. | Dividends | $ 4,000 | Dividends | $ 4,000 | ||
Cash | $ 4,000 | Cash | $ 19,800 | |||
(Being dividend paid in cash) | (23800-4000) |
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