Chapter 3, Problem 3.8BP

The general ledger of Pipers Plumbing at January 1, 2018, includes the following account balances:

Accounts	Debits	Credits
Cash	$ 4,500
Accounts Receivable	9,500
Supplies	3,500
Equipment	36,000
Accumulated Depreciation		$ 8,000
Accounts Payable		6,000
Utilities Payable		7,000
Deferred Revenue		-0-
Common Stock		23,000
Retained Earnings		9,500
Totals	$53,500	$53,500

The following is a summary of the transactions for the year:

a.    January 24    Provide plumbing services for cash, $20,000, and on account, $65,000.

b.    March 13    Collect on accounts receivable, $53,000.

c.    May 6    Issue shares of common stock in exchange for $11,000 cash.

d.    June    30    Pay salaries for the current year, $33,000.

     e.    September 15    Pay for utilities expenses, $13,000, of which $7,000 represents costs for 2017.

     f.    November 24    Receive cash in advance from customers, $10,000.

g.    December 30    Pay $3,000 cash dividends to stockholders.

Required:

  1.    Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company has accounts for Dividends, Service Revenue, Salaries Expense, Utilities Expense, Supplies Expense, and Depreciation Expense.

  2.    Record each of the summary transactions listed above.

  3.    Post the transactions to the accounts.

  4.    Prepare an unadjusted trial balance.

  5.    Record adjusting entries. Depreciation for the war on the machinery is $8,000. Plumbing supplies remaining on hand at the end of the year equal $1,100. Of the $10,000 paid in advance by customers, $7,000 of the work has been completed by the end of the war.

  6.    Post adjusting entries.

  7.    Prepare an adjusted trial balance.

  8.    Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018.

  9.    Record closing entries.

  10.    Post closing entries

  11.    Prepare a post-closing trial balance.

To determine

To prepare: The T-accounts and enter the beginning balance from the trial balance.

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.

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

The T-accounts of given item in trial balance are as follows:

Cash
Jan. 1	$4,500
Bal.	$4,500

Equipment
Jan. 1	$36,000
Bal.	$36,000

Common stock
		Jan. 1	$23,000
		Bal.	$23,000

Utilities payable
		Jan. 1	$7,000
		Bal.	$7,000

Accounts receivables
Jan. 1	$9,500
Bal.	$9,500

Supplies
Jan. 1	$4,000
Bal.	$4,000

Accounts payable
		Jan. 1	$6,000
		Bal.	$6,000

Accumulated Depreciation
		Jan. 1	$8,000
		Bal.	$8,000

Retained earnings
		Jan. 1	$9,500
		Bal.	$9,500

To determine

To record: The journal entries for given transactions.

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 P are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Accounts receivable	65,000
January 24	Cash	20,000
	Service revenue		85,000
	(To record the recognized service revenue on account and cash)
2018	Cash	53,000
March, 13	Accounts receivable		53,000
	(To record cash collection from customer)
2018	Cash	11,000
May, 6	Common stock		11,000
	(To record the cash received from issuance of common stock)
2018	Salaries expense	33,000
June 30	Cash		33,000
	(To record the payment of salaries expense)
2018	Utilities payable	7,000
September 15	Utilities expense	6,000
	Cash		13,000
	(To record the payment of  current and post utilities expense)
2018	Cash	10,000
November 24	Deferred revenue		10,000
	(To record advance cash received from customer)
2018	Dividends	3,000
December 30	Cash		3,000
	(To record the payment of dividends)

Table (1)

To determine

To post: The transactions to T-accounts.

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.

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

T-accounts of above transactions are as follows:

Cash
Jan. 1	$4,500	Jun. 30	$33,000
Jan. 24	$20,000	Sep. 15	$13,000
Mar. 23	$53,000	Dec. 30	$3,000
May 6	$11,000
Nov. 24	$10,000
Total	$98,500	Total	$49,000
Bal.	$49,500

Common stock
		Jan. 1	$23,000
		May, 6	$11,000
		Bal.	$34,000

Dividends
Jan. 1	$0
Dec. 30	$3,000
Bal.	$3,000

Accounts receivables
Jan. 1	$9,500
Jan. 24	$65,000	Jun. 30	$53,000
Total	$74,500	Total	$53,000
Bal.	$21,500

Accumulated Depreciation
		Jan. 1	$5,000
		Bal.	$5,000

Supplies
Jan. 1	$3,500
Bal.	$3,500

Utilities payable
Sep. 15	$7,000	Jan. 1	$7,000
		Bal.	$0

Retained earnings
		Jan. 1	$9,500
		Bal.	$9,500

Utilities expense
Jan. 1	$0
Sep. 15	$6,000
Bal.	$6,000

Service revenue
		Jan. 1	$0
		Jan. 24	$85,000
		Bal.	$60,000

Deferred revenue
		Jan. 1	$0
		Jan. 24	$10,000
		Bal.	$100,000

Salaries expense
Jan. 1	$0
Jun. 30	$33,000
Bal.	$33,000

To determine

To prepare: The unadjusted trial balance of Company P.

Explanation of Solution

Unadjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts before making adjusting journal entries at the end of the period.

Company P
Unadjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	49,500
Accounts Receivable	21,500
Supplies	3,500
Equipment	36,000
Accumulated depreciation		8,000
Accounts payable		6,000
Utilities payable		0
Deferred revenue		10,000
Common stock		34,000
Retained earnings		9,500
Dividends	3,000
Service revenue		85,000
Salaries expense	33,000
Utilities expense	6,000
Depreciation expense	0
Supplies expense	0
Totals	$152,500	$152,500

Table (2)

Therefore, the total of debit, and credit columns of unadjusted trial balance is $152,500 and agree.

To determine

To record: The given adjusting entries of Company P.

Explanation of Solution

Adjusting entries:

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 P are as follows:

Depreciation expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Depreciation Expense		8,000
	Accumulated Depreciation			8,000
	(To record the amount of depreciation for the year)

Table (4)

Following is the rule of debit and credit of above transaction:

• Depreciation expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Accumulated depreciation is a contra-asset account. There is a decrease in assets, therefore it is credited.

Office supplies expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Supplies expense		4,400
	Supplies			2,400
	(To record the supplies expense incurred at the end of the accounting year)

Table (5)

Following is the rule of debit and credit of above transaction:

• Supplies expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Supplies are an asset account. There is a decrease in assets, therefore it is credited.

Deferred revenue:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Deferred revenue		7,000
	Service revenue			7,000
	(To record the service revenue recognized at the end of the accounting year)

Table (4)

Following is the rules of debit and credit of above transaction:

• Deferred revenue is a liability account. There is a decrease in liability, therefore it is debited.
• Service revenue is revenue, and it increased the value of stockholder’s equity. Therefore, it is credited

To determine

To post: The adjusting entries to appropriate T-accounts.

Explanation of Solution

Depreciation expense
Jan. 1	$0
Dec. 31	$8,000
Bal.	$8,000

Accumulated Depreciation
		Jan. 1	$8,000
		Dec. 31	$8,000
		Bal.	$16,000

Supplies
Jan. 1	$3,500	Dec. 31	$2,400
Bal.	$1,100

Supplies expense
Jan. 1	$0
Dec. 31	$2,400
Bal.	$2,400

Service revenue
		Jan. 1	$0
		Jan. 24	$85,000
		Dec. 31	$7,000
		Bal.	$92,000

Deferred revenue
		Jan. 1	$0
Dec. 31	$7,000	Jan. 24	$10,000
		Bal.	$3,000

To determine

To prepare: The adjusted trial balance of Company P.

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 P is as follows:

Company P
Adjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	49,500
Accounts Receivable	21,500
Supplies	3,500
Equipment	36,000
Accumulated depreciation		16,000
Accounts payable		6,000
Utilities payable		0
Deferred revenue		3,000
Common stock		34,000
Retained earnings		9,500
Dividends	3,000
Service revenue		92,000
Salaries expense	33,000
Utilities expense	6,000
Depreciation expense	8,000
Supplies expense	2,400
Totals	$160,500	$160,500

Table (6)

Therefore, the total of debit, and credit columns of adjusted trial balance is $160,500 and agree.

To determine

To prepare: An income statement for 2018 and classified balance sheet as on December 31, 2018.

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.

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 P is as follows:

Company P
Income statement
For the year ended December 31, 2018
	$	$
Service revenue (A)		92,000
Expenses:
Salaries expense	33,000
Utilities expense	6,000
Depreciation expense	2,400
Supplies expense	8,000
Total expense (B)		49,400
Net income $\left(\text{A}-\text{B}\right)$		42,600

Table (7)

Therefore, the net income of Company P is $42,600.

Classified balance sheet:

Classified balance sheet of Company P is as follows:

Figure (1)

Therefore, the total assets of Company P are $92,100, and the total liabilities and stockholders’ equity are $92,100.

Working note:

Calculation of ending balance retained earnings

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings + }\\ \text{Net income }-\text{Dividends}\end{array}\right)\\ =\$9,500+\$42,600-\$3,000\\ =\$49,100\end{array}$

To determine

To record: The necessary closing entries of Company P.

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 P is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Service revenue		92,000
December 31	Retained earnings			92,000
	(To close all revenue account)
2018	Retained earnings		49,400
December 31	Salaries expense			33,000
	Utilities expense			6,000
	Depreciation expense			8,000
	Supplies expense			2,400
	(To close all the expenses account)
2018	Retained earnings		3,000
December 31	Dividends			3,000
	(To close the dividends account)

Table (8)

To determine

To post: The closing entries to the T-accounts.

Explanation of Solution

Service revenue
		Jan. 1	$0
		Jan. 24	$85,000
Dec. 31	$92,000	Dec. 31	$7,000
		Bal.	$0

Supplies expense
Jan. 1	$0
Dec. 31	$2,400	Dec. 31	$2,400
Bal.	$0

Depreciation expense
Jan. 1	$0
Dec. 31	$8,000	Dec. 31	$8,000
Bal.	$0

Utilities expense
Jan. 1	$0
Sep. 15	$6,000	Dec. 31	$6,000
Bal.	$0

Salaries expense
Jan. 1	$0
Jun. 30	$33,000	Dec. 31	$33,000
Bal.	$0

Retained earnings
Dec. 31	$49,400	Jan. 1	$9,500
Dec. 31	$3,000	Dec. 31	$92,00
		Bal.	$49,100

To determine

To prepare: A post-closing trial balance of Company P.

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted. The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Post-closing trial balance of Company P is as follows:

Company P
Adjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	49,500
Accounts Receivable	21,500
Supplies	3,500
Equipment	36,000
Accumulated depreciation		16,000
Accounts payable		6,000
Utilities payable		0
Deferred revenue		3,000
Common stock		34,000
Retained earnings		49,100
Total	$108,100	$108,100

Table (9)

Therefore, the total of debit, and credit columns of post-closing trial balance is $108,100 and agree.