Chapter 3, Problem 3.20E

1

To determine

To record: The journal entries for the given transaction occurred during the year.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

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 R are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2015	Cash		20,000
February 15	Common stock			20,000
	(To record the common stock issued)
2015	Cash		35,000
May, 20	Account receivable		30,000
	Service revenue			65,000
	(To record the service revenue provided to customer on account and in cash)
2015	Salaries expense		23,000
August 31	Cash			23,000
	(To record the cash received from issuance of common stock)
2015	Prepaid rent		12,000
October 1	Cash			12,000
	(To record payment of one-year advance rent)
2015	Supplies		22,000
November 17	Accounts payable			22,000
	(To record the purchase of supplies on account)
2015	Dividends		2,000
December 30	Cash			2,000
	(To record the payment of dividend to stockholder)

Table (1)

2

To determine

To record: The adjusting entry for prepaid insurance.

Explanation of Solution

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

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.

Adjusting entries of Company R are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2015	Salaries expense		4,000
December 31	Salaries payable			4,000
	(To record salaries expense incurred at the end of accounting year)
2015	Rent expense		3,000
December 31	Prepaid rent			3,000
	(To record the rent expense incurred at the end of the accounting period)
2015	Supplies expense		25,000
December 31	Supplies			25,000
	(To record supplies expense incurred at the end of the accounting year)
2015	Unearned revenue		5,000
December 31	Service revenue			5,000
	(To record service revenue recognized at the end of the accounting year)

Table (2)

3

To determine

To prepare: The adjusted trial balance of Company R.

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 R is as follows:

Company R
Adjusted Trial Balance
December 31, 2015
Accounts	Debit ($)	Credit ($)
Cash	$30,000
Accounts Receivable	30,000
Supplies	5,000
Prepaid Rent	9,000
Land	60,000
Accounts Payable		$22,000
Salaries Payable		4,000
Common Stock		70,000
Retained Earnings		25,000
Dividends	2,000
Service Revenue		70,000
Salaries Expense	27,000
Rent Expense	3,000
Supplies Expense	25,000
Total	$191,000	$191,000

Table (3)

Therefore, the total of debit, and credit columns of adjusted trial balance is $191,000 and agree.

4

To determine

To prepare: An income statement, stockholder’s equity and classified balance sheet of Company R.

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

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.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Income statement:

Income statement of Company R is as follows:

Company R
Income Statement
For the year ended December 31, 2015
	($)	($)
Revenues:
Service revenue		70,000
Total revenues		70,000
Expenses:
Rent expense	3,000
Salaries expense	27,000
Supplies expense	25,000
Total expenses		55,000
Net income		15,000

Table (4)

Therefore, the net income of Company R is $15,000.

Statement of stockholder’s equity:

The statement of stockholder’s equity of Company R for the year ended December 31, 2015 is as follows:

Company R
Statement of Stockholders’ Equity
For the period ended December 31, 2015
	Common stock ($)	Retained earnings ($)	Total stockholders' equity ($)
Balance at January 1	50,00	$25,000	$75,000
Issuance of common stock	20,000		20,000
Add: Net income for 2018		15,000	15,000
Less: Dividends		-2,000	-2,000
Balance at December 31	$70,000	$38,000	$108,000

Table (5)

Therefore, the total stockholder’s equity of Company R for the year ended December 31, 2015 is $108,000.

Classified balance sheet:

Classified balance sheet of Company R is as follows:

Figure (1)

Therefore, the total assets of Company R are $134,000, and the total liabilities and stockholders’ equity are $134,000.

5

To determine

To prepare: The closing entries of Company R.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the retained earnings. Closing entries produce a zero balance in each temporary account.

Closing entries of Company R is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2015	Service revenue		70,000
December 31	Retained earnings			70,000
	(To close all revenue account)
2015	Retained earnings		55,000
December 31	Salaries expense			27,000
	Rent expense			3,000
	Supplies expense			25,000
	(To close all the expenses account)
2015	Retained earnings		2,000
December 31	Dividends			2,000
	(To close the dividends account)

Table (6)

Closing entry for revenue account:

In this closing entry, the service revenue account is closed by transferring the amount of service revenue to the retained earnings in order to bring the revenue accounts balance to zero.

Closing entry for expenses account:

In this closing entry, salaries expense, rent expense, and supplies expense are closed by transferring the amount of all expenses to the retained earnings in order to bring all the expense accounts balance to zero.