Chapter 3, Problem 32BP

a.

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Journal entry:

Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

Rules of Debit and Credit:

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

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

Ø  Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare journal entry to record the given transactions.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January 1	Cash	25,000
	Common stock		25,000
	(To record the capital amount received on issuance of common )
March 1	Prepaid rent	8,400
	Cash		8,400
	(To record the prepaid rent)
April 14	Supplies	400
	Accounts payable		400
	(To record the purchase of supplies account)
June 30	Cash	12,000
	Unearned revenue		12,000
	(To record the cash received in advance for the service provided)
July 5	Accounts payable	300
	Cash		300
	(To record the payment made on accounts payable )
August 1	Accounts receivable	4,800
	Service revenue		4,800
	(To record the bill provided to the customer for the service provided)
August 8	Cash	1,600
	Service revenue		1,600
	(To record the cash received on service rendered)
September 1	Salaries expense	18,000
	Cash		18,000
	(To record the salaries paid to the employees)
September 9	Cash	4,250
	Accounts receivable		4,250
	(To record the cash received from accounts receivable)
October 5	Accounts receivable	17,000
	Service revenue		17,000
	(To record the bill provided to the customer for the service provided)
November 2	Dividend	500
	Cash		500
	(To record the cash dividend paid)
December 31	Unearned revenue (1)	6,000
	Service revenue		6,000
	(To record the adjusting entry to recognize the service provided on the contract of June 30)
December 31	Salaries expense	1,100
	Salaries payable		1,100
	(To record the accrued salaries on December 31)
December 31	Rent expense (2)	3,500
	Prepaid rent		3,500
	(To record the rent expense for the year)
December 31	Supplies Expense (3)	350
	Supplies		350
	(To adjust the supplies account)

(Table 1)

Working Notes:

Calculate the amount that was stated at the time of adjusting the unearned revenue account.

$\begin{array}{c}\text{Unearned Revenue = }\left(\begin{array}{l}\text{Cash received on }\\ \text{service provided}\end{array}\right)\times \text{Time period}\\ =\$12,000\times \frac{6\text{(July to December})}{12}\\ =\$6,000\end{array}$ (1)

Calculate the amount of rent expense for the year.

$\begin{array}{c}\text{Rent expense = }\frac{\text{Prepaid rent}}{\left(\begin{array}{l}\text{Number of months prepaid}\\ \text{ rent was paid}\end{array}\right)}\times \text{ Time period }\\ \text{=}\frac{\$8,400}{\text{24 years }}\times \text{ 10 ( March to December)}\\ \text{=\$3,500}\end{array}$ (2)

Calculate the amount of supplies expense for the year.

$\begin{array}{c}\text{Supplies Expense = Supplies purchased on account }-\left(\begin{array}{l}\text{Supplies on hand at the }\\ \text{end of the period}\end{array}\right)\\ =\$400-\$50\\ =\$350\end{array}$ (3)

b.

To determine

Post the transactions to T-accounts and calculate the account balances.

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.

	Cash
1-Jan	25,000	1-Mar	8,400
30-Jun	12,000	5-July	300
8-Aug	1,600	1-Sep	18,000
9-Sep	4,250	2-Nov	500
Bal.	15,650

	Accounts receivable
1-Aug	4,800	9-Sep	4,250
5-Oct	17,000
Bal.	17,550

	Prepaid rent
1-Mar	8,400	31-Dec	3,500
Bal.	4,900

	Supplies
14-Apr	400	31-Dec	350
Bal.	50

	Accounts Payable
5-Jul	300	14-Apr	400
		Bal.	100

	Unearned revenue
31-Dec	6,000	30-Jun	12,000
		Bal.	6,000

	Salaries payable
		31-Dec	1,100
		Bal.	1,100

	Common Stock
		1-Jan	25,000
		Bal.	25,000

	Retained earnings
		Bal.	0

	Dividends
2-Nov	500
Bal.	500

	Service revenue
		1-Aug	4,800
		8-Aug	1,600
		5-Oct	17,000
		31-Dec	6,000
		Bal.	29,400

	Rent expense
31-Dec	3,500
Bal.	3,500

	Salaries expense
1-Sep	18,000
31-Dec	1,100
Bal.	19,100

	Supplies expense
31-Dec	350
Bal.	350

c.

To determine

Prepare a trial balance.

Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given time.  It is usually prepared at end of the accounting period.  Debit balances are listed in left   column and credit balances are listed in right column.  The totals of debit and credit column should be equal.  Trial balance is useful in the preparation of the financial statements.

Prepare a trial balance.

Company P
Trial Balance
December 31, Year 1
Account Titles	Debit  $	Credit $
Cash	15,650
Accounts Receivable	17,550
Prepaid Rent	4,900
Supplies	50
Accounts Payable		100
Unearned Revenue		6,000
Salaries Payable		1,100
Common Stock		25,000
Dividends	500
Service Revenue		29,400
Salaries Expense	3,500
Rent Expense	19,100
Supplies Expense	350
Totals	61,600	61,600

(Table 2)

d.

To determine

Prepare the income statement, statement of stockholder’s equity, balance sheet and the statement of cash flows.

Explanation of Solution

Income statement:

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

Statement of changes in stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’  equity during the end of an accounting period by explaining about the increase or  decrease in the capital reserves of shares.

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Statement of cash flows:

This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the income statement.

Company P
Income statement
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in $
Service Revenue		29,400
Expenses:
Salaries Expense	19,100
Rent Expense	3,500
Supplies Expense	350
Total Expenses		(22,950)
Net Income		6,450

(Table 3)

Therefore, Company P reported an amount of $6,450 as net income in its income statement for the year ended, December31, Year 1.

Prepare the statement of changes in stockholder’s equity.

Company P
Statement of Changes in Stockholders’ Equity
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in $
Beginning Common Stock	0
Add: Stock Issued	25,000
Ending Common Stock		25,000
Beginning Retained Earnings	0
Add: Net Income	6,450
Less: Dividends	(500)
Ending Retained Earnings		5,950
Total Stockholders’ Equity		30,950

(Table 4)

Therefore, Company P reported an amount of $30,950 as its total stockholders’ equity for the year ended, December31, Year 1.

Prepare the balance sheet.

Company P
Balance sheet
As of December 31, Year 1
Particulars	Amount in $	Amount in $
Assets:
Cash	15,650
Accounts Receivable	17,550
Prepaid Rent	4,900
Supplies	50
Total Assets		38,150
Liabilities:
Accounts Payable	100
Unearned Revenue	6,000
Salaries Payable	1,100
Total Liabilities		7,200
Stockholders’ Equity:
Common Stock	25,000
Retained Earnings	5,950
Total Stockholders’ Equity		30,950
Total Liabilities and Stockholders’ Equity		38,150

(Table 5)

Therefore, Company P reported an amount of $38,150 as total assets and total liabilities and stockholders’ equity in its balance sheet for the year ended, December31, Year 1.

Prepare the statement of cash flows.

Company P
Statement  of cash flow
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in$
Cash Flows From Operating Activities:
Received cash from Customers (4)	17,850
Paid cash for Expenses (5)	(26,700)
Net Cash Flow from Operating Activities		(8,850)
Cash Flows From Investing Activities:		0
Cash Flows From Financing Activities:
Received cash from Stock Issue	25,000
Paid cash for Dividends	(500)
Net Cash Flow from Financing Activities		24,500
Net Change in Cash		15,650
Add: Beginning Cash Balance		0
Ending Cash Balance		15,650

(Table 6)

Therefore, an amount of $15,650 was reported as ending cash balance in the Company P’s statement of cash flow for the year ended, December31, Year 1.

Working Notes:

Calculate the amount of cash received from the customers:

$\begin{array}{c}\begin{array}{l}\text{Cash received from }\\ \text{the customers}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\\ \text{from service provided}\\ \text{ on June 30}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Cash received from }\\ \text{service rendered }\\ \text{on August 8}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Cash received}\\ \text{ on September 9}\end{array}\right)\\ =\$12,000+\$1,600+\$4,250\\ =\$17,850\end{array}$ (4)

Calculate the amount of cash paid for expense:

$\begin{array}{c}\text{Cash paid for expense}\}\text{ = }\left(\begin{array}{l}\text{Prepaid rent paid}\\ \text{ on March 1}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Acounts payable}\\ \text{ on July 5}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Salaries expense}\\ \text{ on September1}\end{array}\right)\\ =\$8,400+\$300+\$18,000\\ =\$26,700\end{array}$ (5)

e.

To determine

Prepare the closing entries at December 31.

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 account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entry for revenue account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Service revenue	29,400
	Retained earnings		29,400
	(To record the closing entry for the service revenue account on December 31)

(Table 7)

• In this closing entry, the service revenue account balance is being transferred to the retained earnings account, to bring the revenues account balance to zero.
• Thereby, the retained earnings account balance gets increased by $29,400 and, the revenue account balance gets decreased by $29,400.

Prepare the closing entry for expenses account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Retained earnings	22,950
	Salaries expense		19,100
	Rent expense		3,500
	Supplies expense		350
	(To record the closing entry for the expense on December 31)

(Table 8)

• In this closing entry, all the expenses account balances are transferred to the retained earnings account, to bring the expenses account balances to zero.
• Thereby, both the retained earnings account, and the expenses account balances get decreased by $22,950.

Prepare the closing entry for dividend account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Retained earnings	500
	Dividends		500
	(To record the closing entry for cash dividend)

(Table 9)

• In this closing entry, the dividend account balance is being transferred to the retained earnings account, to bring the dividend account balance to zero.
• Thereby, the retained earnings account balance gets decreased by $500 and, the dividend account balance gets decreased by $500.

Posting the closing entries to the T-account:

Cash
Bal.15,650

Accounts Receivable
Bal.17,550

Prepaid Rent
Bal.4,900

Supplies
Bal.50

Accounts Payable
	Bal.100

Unearned Revenue
	Bal.6,000

Salaries Payable
	Bal.1,100

Common Stock
	Bal.25,000

Retained Earnings
Cl22,950	cl29,400
Cl500
	Bal.5,950

Dividends
Bal.500	cl500
Bal.0

Service Revenue
Cl29,400	Bal.29,400
	Bal.0

Salaries Expense
Bal.19,100	cl19,100
Bal.

Rent Expense
Bal.3,500	cl3,500
Bal.0

Supplies Expense
Bal.350	cl350
Bal.0

f.

To determine

Prepare a trial balance after the closing entries are posted.

Explanation of Solution

Prepare a trial balance after the closing entries are posted.

Company P
Post-Closing Trial Balance
December 31, Year 1
Account Titles	Debit	Credit
Cash	15,650
Accounts Receivable	17,550
Prepaid Rent	4,900
Supplies	50
Accounts Payable		100
Unearned Revenue		6,000
Salaries Payable		1,100
Common Stock		25,000
Retained Earnings		5,950
Totals	38,150	38,150

(Table 10)

Therefore, the post –closing trial balance of Company P reported a total amount of $38,150 on its debit and credit column.