Chapter 3, Problem 3.9AP

The general ledger of Zips Storage at January 1, 2018, includes the following account balances:

Accounts	Debits	Credits
Cash	$ 24,600
Accounts Receivable	15,400
Prepaid Insurance	12,000
Land	148,000
Accounts Payable		$ 6,700
Deferred Revenue		5,800
Common Stock		143,000
Retained Earnings		44,500
Totals	$200,000	$200,000

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

     a.    January    9    Provide storage services for cash, $134,100, and on account, $52,200.

     b.    February    12    Collect on accounts receivable, $51,500.

     c.    April    25    Receive cash in advance from customers, $12,900.

     d.    May    6    Purchase supplies on account, $9,200.

     e.    July    15    Pay property taxes, $8,500.

     f.    September    10    Pay on accounts payable, $11,400.

     g.    October    31    Pay salaries, $123,600.

     h.    November    20    Issue shares of common stock in exchange for $27.000 cash.

     i.    December    30    Pay $2,800 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 Supplies, Dividends, Service Revenue, Salaries Expense, Property Tax Expense, Supplies Expense, and Insurance 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. Insurance expired during the year is $7,000. Supplies remaining on hand at the end of the year equal $2,900. Provide services of $11,800 related to cash paid in advance by customers.

  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	$24,600
Bal.	$20,000

Accounts payable
Jan. 1	$6,700
Bal.	$6,700

Common stock
		Jan. 1	$143,000
		Bal.	$143,000

Accounts receivables
Jan. 1	$15,400
Bal.	$15,400

Prepaid Insurance
Jan. 1	$12,000
Bal.	$12,000

Deferred revenue
		Jan. 1	$7,500
		Bal.	$7,500

Land
Jan. 1	148,000
Bal.	148,000

Retained earnings
		Jan. 1	$44,500
		Bal.	$44,500

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 Z  are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Accounts receivable	52,200
January 9	Cash	134,100
	Service revenue		186,300
	(To record the recognized service revenue on account and cash)
2018	Cash	51,500
February,  12	Accounts receivable		51,500
	(To record cash collection from customer)
2018	Cash	12,900
April 25	Deferred revenue		12,900
	(To record the cash received in advance from customers)
2018	Supplies	9,200
May 6	Accounts payable		9,200
	(To record the purchase of supplies on account)
2018	Property tax expense	8,500
July 15	Cash		8,500
	(To record the payment of repairs and maintenance expense)
2018	Accounts payable	11,400
September 10	Cash		11,400
	(To record the payables on account )
2018	Salaries expense	123,600
October 31	Cash		123,600
	(To record the payment of salaries for the current year)
2018	Cash	27,000
‘November 20	Common stock		27,000
	(To record the payment of issuing shares of common stock)
2018	Dividends	2,800
December 30	Cash		2,800
	(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	$24,600	July. 15	$8,500
Jan.9	$134,100	Sep. 25	$11,400
Feb. 12	$51,500	Oct. 19	$123,600
April.25	$12,900	Dec. 30	$2,800
Nov.20	$27,000
Total	$250,100	Total	$146,300
Bal.	$103,800

Supplies
Jan. 1	$0
May.6	$9,200
	$9,200

Deferred revenue
			$5,800
			$12,900
			$18,700

Dividends
	$0
	$2,800
	$2,800

Salaries expense
	$0
	$123,600
	$123,600

Accounts receivable
	$15,400
	$52,200		$51,500

Land
Jan. 1	$148,000
Bal.	$148,000

Common stock
		Jan. 1	$143,300
		Bal.	$27,000

Service revenue
		Jan. 1	$0
		Bal.	$186,300

Insurance expense
Jan. 1	$0
	$0

Prepaid Insurance
	$12,000
	$12,000

Accounts payable
			$6.700
	$11,400		$9.200
			$4,500

Retained earnings
		Jan. 1	44,500
		Bal.	$44,500

Property Tax Expense
	$0
	$8,500

Supplies expense
	$0
	$0

To determine

To prepare: The unadjusted trial balance of Company Z.

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 Z
Unadjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	$103,800
Accounts Receivable	16,100
Prepaid Insurance	12,000
Supplies	9,200
Land	148,000
Accounts Payable		4,500
Deferred Revenue		18,700
Common stock		170,000
Retained earnings		44,500
Dividends	2,800	60,000
Service Revenue		186,300
Property Tax expense	8,500
Salaries expense	123,600
Insurance expense	0
Supplies Expense	0
Totals	$424,000	$424,000

Table (2)

Therefore, the total of debit, and credit columns of unadjusted trial balance is $424,000 and agree.

To determine

To record: The given adjusting entries of Company Z.

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 R are as follows:

Accrued salaries:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Deferred Revenue		11,800
	Service revenue			11,800
	(To record the salaries expense incurred at the end of the accounting year)

Table (3)

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

• Deferred revenue is a liability, and it decreases the value of stockholder’s equity. Therefore, it is debited.
• Service revenue is a component of stockholders’ equity. There is an Increase in stockholders’ equity, therefore it is credited.

Depreciation expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Insurance Expense		7,000
	Prepaid Insurance			7,000
	(To record the amount of Reduced prepaid insurance due to passage of time)

Table (4)

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

• Insurance expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Prepaid Insurance 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		6,300
	Supplies			6,300
	(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.

To determine

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

Explanation of Solution

Cash
Jan. 1	$24,600	July. 15	$8,500
Jan.9	$134,100	Sep. 25	$11,400
Feb. 12	$51,500	Oct. 19	$123,600
April.25	$12,900	Dec. 30	$2,800
Nov.20	$27,000
Total	$250,100	Total	$146,300
Bal.	$103,800

Supplies
Jan. 1	$0
May.6	$9,200		$6,300
	$2,900

Deferred revenue
			$5,800
	11,800		$12,900
			$6,900

Dividends
	$0
	$2,800
	$2,800

Salaries expense
	$0
	$123,600
	$123,600

Accounts receivable
	$15,400
	$52,200		$51,500

Land
Jan. 1	$148,000
Bal.	$148,000

Common stock
		Jan. 1	$143,300
		Bal.	$27,000
		Total	$170,000

Service revenue
		Jan. 1	$0
		Bal.	$186,300
			$11,800
		Total	$198,100

Insurance expense
Jan. 1	$0
	$7,000
Total	$7,000

Prepaid Insurance
	$12,000
			$7,000
	$5,000

Accounts payable
			$6.700
	$11,400		$9.200
			$4,500

Retained earnings
		Jan. 1	44,500
		Bal.	$44,500

Property Tax Expense
	$0
	$8,500

Supplies expense
	$0
	$6,300

To determine

To prepare: The adjusted trial balance of Company Z.

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 Z
Adjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	103,800
Accounts Receivable	16,100
Prepaid insurance	5,000
Supplies	2,900
Land	148,000
Accounts payable		4,500
Deferred revenue		6,900
Common stock		170,000
Retained earnings		44,500
Dividends	2,800
Service revenue		198,100
Property tax expense	8,500
Salaries expense	123,600
Insurance expense	7,000
Supplies expense	6,300
Totals	$424,000	$424,000

Table (6)

Therefore, the total of debit, and credit columns of adjusted trial balance is $424,000 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 Z is as follows:

Company Z
Income statement
For the year ended December 31, 2018
	$	$
Service revenue (A)		$198,100
Expenses:
Property tax	8,500
Salaries	123,600
Insurance	7,000
Supplies	6,300
Total expense (B)		145,400
Net income $\left(\text{A}-\text{B}\right)$		52,700

Table (7)

Therefore, the net income of Company Z is $52,700.

Classified balance sheet:

Classified balance sheet of Company Z is as follows:

Figure (1)

Therefore, the total assets of Company Z are $275,800, and the total liabilities and stockholders’ equity are $275,800.

Working note:

Calculation of ending balance retained earnings

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings + }\\ \text{Net income }-\text{Dividends}\end{array}\right)\\ =\$44,500+\$52,700-\$2,800\\ =\$94,400\end{array}$

To determine

To record: The necessary 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 ($)	Credit ($)
2018	Service revenue		198,100
December 31	Retained earnings			198,100
	(To close all revenue account)
2018	Retained earnings		145,400
December 31	Property tax expense			8,500
	Salaries expense			123,600
	Insurance expense			7,000
0	Supplies expense			6,300
	(To close all the expenses account)
2018	Retained earnings		2,800
December 31	Dividends			2,800
	(To close the dividends account)

Table (8)

To determine

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

Explanation of Solution

Cash
Jan. 1	$24,600	July. 15	$8,500
Jan.9	$134,100	Sep. 25	$11,400
Feb. 12	$51,500	Oct. 19	$123,600
April.25	$12,900	Dec. 30	$2,800
Nov.20	$27,000
Total	$250,100	Total	$146,300
Bal.	$103,800

Supplies
Jan. 1	$0
May.6	$9,200		$6,300
	$2,900

Deferred revenue
			$5,800
	11,800		$12,900
			$6,900

Dividends
	$0
	$2,800		$2,800
	$0

Salaries expense
	$0
	$123,600		$123,600
	$0

Accounts receivable
	$15,400
	$52,200		$51,500

Land
Jan. 1	$148,000
Bal.	$148,000

Common stock
		Jan. 1	$143,300
		Bal.	$27,000
		Total	$170,000

Service revenue
		Jan. 1	$0
		Bal.	$186,300
			$11,800
		Total	$198,100

Insurance expense
Jan. 1	$0
	$7,000		$7,000
	$0

Prepaid Insurance
	$12,000
			$7,000
	$5,000

Accounts payable
			$6.700
	$11,400		$9.200
			$4,500

Retained earnings
		Jan. 1	44,500
		Bal.	$44,500

Property Tax Expense
	$0
	$8,500	$8,500
	$0

Supplies expense
	$0
	$6,300		$6,300
	$0

To determine

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

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 R is as follows:

Company Z
Post-closing trial balance
December 31, 2018
Accounts	Debit Amount($)	Credit Amount($)
Cash	$103,800
Accounts Receivable	16,100
Prepaid Insurance	5,000
Supplies	2,900
Land	148,000
Accounts payable		4,500
Deferred revenue		6,900
Common stock		170,000
Retained Earnings		94,400
Totals	$275,800	$275,800

Table (9)

Therefore, the total of debit, and credit columns of post-closing trial balance is $275,800 and agree.