Chapter 3, Problem 33AP

a.

To determine

Record the events and adjusting entries for Year 1 in general journal form.

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.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Record the events in general journal format.

Event	Account title and Explanation	Post ref.	Debit  (in $)	Credit (in $)
1.	Cash		35,000
	Common Stock			35,000
	(To record the issue of the common stock)
2.	Prepaid rent		12,000
	Cash			12,000
	(To record the payment of rent)
3.	Accounts receivable		72,000
	Service revenue			72,000
	(To record the service revenue earned on account)
4.	Operating Expenses		35,000
	Accounts payable			35,000
	(To record operating expenses on account)
5.	Cash		55,500
	Accounts receivable			55,500
	(To record the cash collected from accounts receivable)
6.	Salaries Expense		21,000
	Cash			21,000
	(To record salaries expense)
7.	Accounts payable		28,000
	Cash			28,000
	(To record the payment made to creditors on account)
8.	Rent Expense (1)		9,000
	Prepaid Rent			9,000
	(To adjust the prepaid rent)
9.	Salaries Expense		2,400
	Salaries payable			2,400
	(To record salaries expense)

Table (1)

Working note:

Calculate the amount of prepaid rent expired during the year.

$\begin{array}{c}\text{Prepaid rent expired during the year =Prepaid rent paid}\times \\ \frac{\text{Number of months rent expired}}{\text{Total number of months rent prepaid}}\\ \text{= \$12,000}\times \frac{9\text{months}}{12\text{months}}\\ =\$9,000\end{array}$ (1)

b.

To determine

Post the Year 1 events to T-accounts.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a)      The title of the account

b)      The left or debit side

c)      The right or credit side

Post the events to T-accounts as follows:

Cash
1.	35,000	2.	12,000
5.	55,500	6.	21,000
		7.	28,000
Balance              29,500

Accounts Receivable
3.	72,000	5.	55,500
Balance              16,500

Prepaid Rent
2.	12,000	8.	9,000
Balance                3,000

Accounts Payable
7.	28,000	4.	35,000
		Balance           7,000

Salaries Payable
		9.	2,400
		Balance           2,400

Common Stock
		1.	35,000
		Balance         35,000

Service Revenue
		3.	72,000
		Balance         72,000

Operating Expenses
4.	35,000
Balance              35,000

Rent Expense
8.	9,000
Balance                9,000

Salaries Expense
6.	21,000
9.	2,400
Balance              23,400

c.

To determine

Prepare a trial balance for Year 1.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare a trial balance for Year 1 as follows:

Enterprises C
Trial Balance
December 31, Year 1
Particulars	Debit $	Credit $
Cash	29,500
Accounts receivable	16,500
Prepaid rent	3,000
Accounts payable		7,000
Salaries payable		2,400
Common stock		35,000
Service revenue		72,000
Operating expenses	35,000
Rent expenses	9,000
Salaries expenses	23,400
Total	$116,400	$116,400

Table (2)

d.

To determine

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows for Year 1.

Explanation of Solution

Financial Statements:

A financial statement is a complete record of the financial transactions that takes place in a company at a particular point of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.

Four general-purpose financial statements:

The four general-purpose financial statements that business enterprises use are:

1. 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.

2. Statement of changes in Stockholder’s equity:

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

3. Balance Sheet:

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

4. Statement of cash flows:

Statement of cash flows 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, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows for Year 1 as follows:

Enterprises C Financial Statements For the Year Ended December 31, Year 1
Income Statement
Details	Amount ($)	Amount ($)
Revenues:
Service revenue		72,000
Less: Expenses
Operating  Expense	35,000
Rent Expense	9,000
Salaries Expense	23,400
Total Expenses		(67,400)
Net Income		$4,600
Statement of changes in Stockholders’ Equity
Beginning common stock	0
Add: Stock issued	35,000
Ending common stock		35,000
Beginning retained earnings	0
Add: Net income	4,600
Ending retained earnings		4,600
Total Stockholders’ Equity		$39,600
Enterprises C
Balance Sheet
As of December 31, Year 1
Assets:
Cash	29,500
Accounts Receivable	16,500
Prepaid rent	3,000
Total Assets		49,000
Liabilities:
Accounts Payable	7,000
Salaries Payable	2,400
Total Liabilities		9,400
Stockholders’ Equity:
Common stock	35,000
Retained earnings	4,600
Total Stockholders’ Equity		39,600
Total Liabilities and Owners’ Equity		$49,000
Statement of Cash Flows
Particulars
Cash Flow From Operating Activities:
Received cash from customers	$55,000
Paid cash for expenses	($61,000)
Net Cash Flow from Operating Activities		$(5,500)
Net Cash Flow From Investing Activities		0
Net Cash Flow From Financing Activities:
Received cash from Stock Issue	35,000
Net Cash Flow from Financing Activities		35,000
Net Change in Cash		29,500
Add: Beginning Cash Balance		0
Ending Cash Balance		29,500

Table (3)

e.

To determine

Record the entries to close the Year 1 temporary accounts to retained earnings in the general journal and post to the T-accounts.

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Record the entries to close the Year 1 temporary accounts to retained earnings in the general journal and post to the T-accounts as follows:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, Year 1	Service revenue		72,000
	Retained earnings			72,000
	(To close the balance of revenue account)
December 31, Year 1	Retained earnings		67,400
	Operating expense			35,000
	Rent Expense			23,400
	Salaries Expense			9,000
	Supplies Expense
	(To close the balances of expense accounts)

Table (4)

• Fees earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
• Operating Expense, Rent Expense, Salaries Expense, and Supplies expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.

Post the closing entries to T-accounts as follows:

Cash
Balance              29,500

Accounts Receivable
Balance              16,500

Prepaid Rent
Balance                3,000

Accounts Payable
	Balance           7,000

Salaries Payable
	Balance           2,400

Common Stock
	Balance         35,000

Retained earnings
Closing	67,400	Closing	72,000
		Balance           4,600

Service Revenue
Closing	72,000	Balance	72,000
		Balance                  0

Operating Expenses
Balance	35,000	Closing	35,000
Balance                       0

Rent Expense
Balance	9,000	Closing	9,000
Balance                       0

Salaries Expense
Balance	23,400	Closing	23,400
Balance                       0

f.

To determine

Prepare a post-closing trial balance for December 31, Year 1.

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

Prepare a trial balance for Year 1 as follows:

Enterprises C
Post – Closing Trial Balance
December 31, Year 1
Particulars	Debit ($)	Credit ($)
Cash	29,500
Accounts Receivable	16,500
Prepaid Rent	3,000
Accounts Payable		7,000
Salaries Payable		2,400
Common Stock		35,000
Retained Earnings		4,600
Total	$49,000	$49,000

Table (5)

g.

To determine

Repeat the requirements a through f for Year 2.

Explanation of Solution

Record the events in general journal format.

Event	Account title and Explanation	Post ref.	Debit  (in $)	Credit (in $)
1.	Salaries payable		2,400
	Cash			2,400
	(To record the cash paid for the accrued salaries)
2.	Cash		21,000
	Service revenue			21,000
	(To record the service revenue earned)
3.	Supplies		2,800
	Accounts payable			2,800
	(To record the purchase of supplies on account)
4.	Prepaid rent		13,200
	Cash			13,200
	(To record the payment of rent)
5.	Accounts receivable		88,000
	Service revenue			88,000
	(To record the service revenue earned on account)
6.	Operating Expenses		41,500
	Accounts payable			41,500
	(To record operating expenses on account)
.
7.	Cash		89,000
	Accounts receivable			89,000
	(To record the cash collected from accounts receivable)
8.	Accounts payable		39,000
	Cash			39,000
	(To record the payment made to creditors on account)
9.	Salaries Expense		31,500
	Cash			31,500
	(To record salaries expense)
10.	Dividends		10,000
	Cash			10,000
	(To record the dividends paid)
11.	Rent Expense (2)		12,900
	Prepaid Rent			12,900
	(To adjust the prepaid rent)
12.	Supplies Expense (3)		2,350
	Supplies			2,350
	(To record the supplies)

Table (6)

Working notes:

Calculate the amount of prepaid rent expired during the year.

$\begin{array}{c}\text{Prepaid rent expired during the year =}\left\{\begin{array}{c}\text{Prepaid rent paid in Year 1}\times \\ \frac{\text{Number of months rent expired}}{\text{Total number of months rent prepaid}}\end{array}\right\}+\\ \left\{\begin{array}{c}\text{Prepaid rent paid in Year 2}\times \\ \frac{\text{Number of months rent expired}}{\text{Total number of months rent prepaid}}\end{array}\right\}\\ \text{= }\left\{\text{\$12,000}\times \frac{3\text{months }\left(\text{January to March}\right)}{12\text{months}}\right\}+\\ \left\{\text{\$13,200}\times \frac{9\text{months }\left(\text{April to December}\right)}{12\text{months}}\right\}\\ =\$3,000+\$9,900\\ =\$12,900\end{array}$ (2)

Calculate the Supplies used during the year.

$\begin{array}{c}\text{Supplies used during the year}=\left(\text{Supplies at year end}-\text{Supplies remaining on hand}\right)\\ =\$2,800-\$450\\ =\$2,350\end{array}$ (3)

Post the events to T-accounts as follows:

Cash
Balance	29,500
2.	21,000	1.	2,400
7.	89,000	4.	13,200
		8.	39,000
		9.	31,500
		10.	10,000
Balance              43,400

Accounts Receivable
Balance	16,500
5.	88,000	7.	89,000
Balance              15,500

Prepaid Rent
Balance	3,000
4.	13,200	11.	12,900
Balance                3,000

Supplies
3.	2,800	12.	2,350
Balance                   450

Accounts Payable
		Balance	7,000
8.	39,000	3.	2,800
		6.	41,500
		Balance         12,300

Salaries Payable
		Balance	2,400
1.	2,400
		Balance                  0

Common Stock
	Balance         35,000

Retained Earnings
	Balance           4,600

Dividends
10.	10,000
Balance              10,000

Service Revenue
		2.	21,000
		5.	88,000
		Balance       109,000

Operating Expenses
6.	41,500
Balance              41,500

Rent Expense
11.	12,900
Balance              12,900

Salaries Expense
9.	31,500
Balance              31,500

Supplies Expense
12.	2,350
Balance                2,350

Prepare a trial balance for Year 2 as follows:

Enterprises C
Trial Balance
December 31, Year 2
Particulars	Debit $	Credit $
Cash	43,400
Accounts receivable	15,500
Prepaid rent	3,300
Supplies	450
Accounts payable		12,300
Common stock		35,000
Retained earnings		4,600
Dividends	10,000
Service revenue		109,000
Operating expenses	41,500
Rent expenses	12,900
Salaries expenses	31,500
Supplies expenses	2,350
Total	$160,900	$160,900

Table (7)

Prepare the income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows for Year 2 as follows:

Enterprises C Financial Statements For the Year Ended December 31, Year 2
Income Statement
Details	Amount ($)	Amount ($)
Revenues:
Service revenue		109,000
Less: Expenses
Operating  Expense	41,500
Salaries Expense	31,500
Rent Expense	12,900
Supplies Expense	2,350
Total Expenses		(88,250)
Net Income		$20,750
Statement of changes in Stockholders’ Equity
Beginning common stock	35,000
Add: Stock issued	0
Ending common stock		35,000
Beginning retained earnings	4,600
Add: Net income	20,750
Less: Dividends	(10,000)
Ending retained earnings		15,350
Total Stockholders’ Equity		$50,350
Enterprises C
Balance Sheet
As of December 31, Year 2
Assets:
Cash	43,400
Accounts Receivable	15,500
Prepaid rent	3,300
Supplies	450
Total Assets		$62,650
Liabilities:
Accounts Payable	12,300
Total Liabilities		$12,300
Stockholders’ Equity:
Common stock	35,000
Retained earnings	15,350
Total Stockholders’ Equity		50,350
Total Liabilities and Owners’ Equity		$62,650
Statement of Cash Flows
Particulars
Cash Flow From Operating Activities:
Received cash from customers	110,000
Paid cash for expenses	(86,100)
Net Cash Flow from Operating Activities		23,900
Net Cash Flow From Investing Activities		0
Net Cash Flow From Financing Activities:
Paid cash for dividends	$(10,000)
Net Cash Flow from Financing Activities		10,000
Net Change in Cash		13,900
Add: Beginning Cash Balance		29,500
Ending Cash Balance		$43,400

Table (8)

Working Notes:

Calculate the cash received from customers.

$\begin{array}{c}\text{Cash received from customers=Service revenue received+Accounts receivable collected}\\ =\$21,000+\$89,000\\ =\$110,000\end{array}$

Calculate the cash paid for expenses.

$\begin{array}{c}\text{Cash paid for expenses=}\left(\begin{array}{l}\text{Accrued salaries paid+Rent}\text{expense+Accounts}\\ \text{payable paid+Salaries expense}\end{array}\right)\\ =\$2,400+\$13,200+\$39,000+\$31,500\\ =\$86,100\end{array}$

Record the entries to close the Year 2 temporary accounts to retained earnings in the general journal and post to the T-accounts as follows:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, Year 2	Service revenue		109,000
	Retained earnings			109,000
	(To close the balance of revenue account)
December 31, Year 2	Retained earnings		88,250
	Operating expense			41,500
	Rent Expense			12,900
	Salaries Expense			31,500
	Supplies Expense			2,350
	(To close the balances of expense accounts)
December 31, Year 2	Retained earnings		10,000
	Dividends			10,000
	(To close the dividend account to retained earnings account)

Table (9)

• Fees earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
• Operating Expense, Rent Expense, Salaries Expense, and Supplies expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.
• Closing entries are also passed in order to close the excess of expenses over the revenues, and the dividend account.

Post the closing entries to T-accounts as follows:

Cash
Balance              43,400

Accounts Receivable
Balance              15,500

Prepaid Rent
Balance                3,300

Supplies
Balance                   450

Accounts Payable
	Balance         12,300

Common Stock
	Balance         35,000

Retained earnings
Closing	88,250	Balance	4,600
Closing	10,000	Closing	109,000
		Balance         15,350

Dividends
Balance	10,000	Closing	10,000
Balance                       0

Service Revenue
Closing	109,000	Balance	109,000
		Balance                  0

Operating Expenses
Balance	41,500	Closing	41,500
Balance                       0

Rent Expense
Balance	12,900	Closing	12,900
Balance                       0

Salaries Expense
Balance	31,500	Closing	31,500
Balance                       0

Supplies Expense
Balance	2,350	Closing	2,350
Balance                       0

Prepare a trial balance for Year 2 as follows:

Enterprises C
Post – Closing Trial Balance
December 31, Year 2
Particulars	Debit ($)	Credit ($)
Cash	43,400
Accounts Receivable	15,500
Prepaid Rent	3,300
Supplies	450
Accounts Payable		12,300
Common Stock		35,000
Retained Earnings		15,350
Total	$62,650	$62,650

Table (10)