Chapter 3, Problem 3.9BP

The general ledger of Jackrabbit Rentals at January 1, 2018, includes the following account balances:

Accounts	Debits	Credits
Cash	$ 41,500
Accounts Receivable	25,700
Land	110,800
Accounts Payable		$ 15,300
Notes Payable		30,000
Common Stock		100,000
Retained Earnings		32,700
Totals	$178,000	$178,000

 The following is a summary of the transactions for the year

 a.    January    12    Provide services to customers on account, $62,400.

 b.    February    25    Provide services to customers for cash, $75,300.

 c.    March    19    Collect on accounts receivable, S45,700.

 d.    April    30    Issue shares of common stock in exchange for $30,000 cash.

 e.    June    16    Purchase supplies on account, $12,100.

 f.    July    7    Pay on accounts payable, $11,300.

 g.    September    30    Pay salaries for employee work in the current war, $64,200.

h.    November    22    Pay advertising for the current year, $22,500.

 i.    December    30    Pay $2,900 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 also has accounts for Supplies, Salaries Payable, Interest Payable, Dividends, Service Revenue, Salaries Expense, Advertising Expense, Interest Expense, and Supplies 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. Accrued interest on the notes payable at year-end amounted to $2,500. Accrued salaries at year-end amounted to $1,500. Supplies remaining on hand at the end of the war equal $2,300.

  6.    Post adjusting entries.

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	$41,500
Bal.	$41,500

Land
Jan. 1	$110,800
Bal.	$110,800

Retained earnings
		Jan. 1	$32,700
		Bal.	$32,700

Accounts receivables
Jan. 1	$25,700
Bal.	$25,700

Accounts payable
		Jan.1	$15,300
		Bal.	$15,300

Notes payable
		Jan. 1	$30,000
		Bal.	$30,000

Common stock
		Jan. 1	$100,000
		Bal.	$100,000

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 J are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Accounts receivable	62,400
January, 12	Service revenue		62,400
	(To record the recognized service revenue on account )
2018	Cash	75,300
February, 25	Service revenue		75,300
	(To record cash collection from customer)
2018	Cash	45,700
March, 19	Accounts receivables		45,700
	(To record cash collection on account)
2018	Cash	30,000
April, 30	Common stock		30,000
	(To record the cash received from issuance of common stock)
2018	Supplies	12,100
June, 16	Accounts payable		12,100
	(To record the purchase of supplies on account)
2018	Accounts payable	11,300
July, 7	Cash		11,300
	(To record the payment of  cash on account)
2018	Salary expense	64,200
September 30	cash		10,000
	(To record payment of salaries for work in the current period)
2018	Advertising expense	22,500
November 22	cash		22,500
	To record payment of advertising)
2018	Dividends	2,900
December 30	Cash		2,900
	(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	$41,500	July.7	$11,300
Feb.25	$75,300	Sep.30	$64,200
Mar.19	$45,700	Nov.22	$22,500
Apr.30	$30,000	Dec.30	$2,900
Total	$192,500	Total	100,900
Bal.	$91,600

Land
Jan.1	$110,800
Bal.	$110,800

Retained earnings
		Jan.1	$32,700
		Bal.	$32,700

Salaries expenses
Jan.1	$0
Bal.	$64,200

Accounts receivable
Jan.1	$25,700
Jan.12	$62,400	Mar.19	$45,700

Accounts payable
		Jan.1	$15,300
Bal.	$11,300	Jun.16	$12,100

Notes payable
		Jan. 1	$30,000
		Bal.	$30,000

Dividends
Jan.1	$0
Dec.30	$2,900

Advertising expense
Jan. 1	$0
Nov.22	$22,500
Bal.	$22,500

Supplies
Jan.1	$0
Jun.16	$12,100
Bal.	$12,100

Salaries payable
		Jan. 1	$0
		Dec.31	$1,500

Common stock
		Jan. 1	$100,000
		Apr.30	$30,000
		Bal.	$130,000

Service revenue
		Jan.1	$0
		Jan.12	$62,400
		Feb.25	$75,300

To determine

To prepare: The unadjusted trial balance of Company J.

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 J
Unadjusted Trial Balance
December 31, 2018
Accounts	Debit Amount($)	Credit Amount($)
Cash	91,600
Accounts Receivable	42,400
Supplies	12,100
Land	110,800
Accounts payable		16,100
Salaries payable		0
Interest  payable		0
Notes payable		30,000
Common stock		130,000
Retained earnings		32,700
Dividends	2,900
Service revenue		137,700
Salaries expense	64,200
Advertising  expense	22,500
Interest expense	0
Supplies expense	0
Totals	$346,500	$346,500

Table (2)

Therefore, the total of debit, and credit columns of unadjusted trial balance is $346,500 and agree.

To determine

To record: The given adjusting entries of Company J.

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	Interest Expense		2,500
	Interest payable			2,500
	(To record the amount of accrue interest on notes payable)

Table (3)

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

• Interest expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Interest payable is a liability. There is a increase in the value of liability. Therefore it is credited.

Office supplies expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Supplies expense		9,800
	Supplies (1)			9,800
	(To record the supplies expense incurred at the end of the accounting year)

Table (4)

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	Salaries expense		1,500
	Salaries payable			1,500
	(To record the salary payable for the current period)

Table (5)

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

• Salaries expense is an expense. There is a decrease in the value of stockholder’s equity. Therefore, it is debited.
• Salaries payable is a liability. There is a increase in the value of liability. Therefore it is credited

Working note:

1. Calculate the supplies used during the year

$\begin{array}{c}\text{Supplies}\text{used}\text{during}\text{the}\text{year}\}\text{=}\left\{\text{Opening}\text{balance+purchase-Closing}\text{balance}\right\}\\ \text{=\$0+\$12,100-\$2,300}\\ \text{=\$9,800}\end{array}$ (1)

To determine

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

Explanation of Solution

Cash
Jan.1	$41,500	July.7	$11,300
Feb.25	$75,300	Sep.30	$64,200
Mar.19	$45,700	Nov.22	$22,500
Apr.30	$30,000	Dec.30	$2,900
Total	$192,500	Total	100,900
Bal.	$91,600

Land
Jan.1	$110,800

Interest payable
		Jan.1	$0
		Dec.31	$2,500

Retained earnings
		Jan.1	$32,700
Dec.31	$100,500	Dec.31	$137,700
Dec.31	$2,900
		Bal.	$67,000

Salaries Expense
Jan.1	$0
Sep.30	$64,200
Dec.30	$1,500
		Bal.65,700

Supplies Expense
Jan.1	$0
Dec.31	$9,800	Bal.	$9,800
Total	$0

Accounts payable
		Jan.1	$15,300
Bal.	$11,300	Jun.16	$12,100

Notes payable
		Jan. 1	$30,000
		Bal.	$30,000

Dividends
Jan.1	$0
Dec.30	$2,900

Advertising expense
Jan. 1	$0
Nov.22	$22,500
Bal.	$22,500

Supplies
Jan.1	$0
Jun.16	$12,100
		Bal.	$9,800

Common stock
		Jan. 1	$100,000
		Apr.30	$30,000
		Bal.	$130,000

Service revenue
		Jan.1	$0
		Jan.12	$62,400
		Feb.25	$75,300
		Bal.	$137,700

Interest expense
Jan.1	$0
Dec.30	$2,500

To determine

To prepare: The adjusted trial balance of Company J.

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 J is as follows:

Company J
Adjusted Trial Balance
December 31, 2018
Accounts	Debit Amount($)	Credit Amount($)
Cash	91,600
Accounts Receivable	42,400
Supplies	12,100
Land	110,800
Accounts payable		16,100
Salaries payable		1,500
Interest  payable		2,200
Notes payable		30,000
Common stock		130,000
Retained earnings		32,700
Dividends	2,900
Service revenue		137,700
Salaries expense	64,200
Advertising  expense	22,500
Interest expense	2,500
Supplies expense	9,800
Totals	$350,500	$350,500

Table (6)

Therefore, the total of debit, and credit columns of adjusted trial balance is $350,500 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 J is as follows:

Company J
Income statement
For the year ended December 31, 2018
	$	$
Service revenue (A)		137,700
Expenses:
Salaries expense	65,700
Utilities expense	22,500
Depreciation expense	2,500
Supplies expense	9,800
Total expense (B)		100,500
Net income $\left(\text{A}-\text{B}\right)$		37,200

Table (7)

Therefore, the net income of Company J is $37,200.

Classified balance sheet:

Classified balance sheet of Company J is as follows:

Figure (1)

Therefore, the total assets of Company P are $247,100, and the total liabilities and stockholders’ equity are $247,100.

Working note:

Calculation of ending balance retained earnings

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings + }\\ \text{Net income }-\text{Dividends}\end{array}\right)\\ =\$32,700+\$37,200-\$2,900\\ =\$67,00\end{array}$

To determine

To record: The necessary closing entries of Company J.

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 J is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Service revenue		137,700
December 31	Retained earnings			137,700
	(To close all revenue account)
2018	Retained earnings		100,500
December 31	Salaries expense			65,700
	Advertising  expense			22,500
	Interest expense			2,500
	Supplies expense			9,800
	(To close all the expenses account)
2018	Retained earnings		2,900
December 31	Dividends			2,900
	(To close the dividends account)

Table (8)

To determine

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

Explanation of Solution

Cash
Jan.1	$41,500	July.7	$11,300
Feb.25	$75,300	Sep.30	$64,200
Mar.19	$45,700	Nov.22	$22,500
Apr.30	$30,000	Dec.30	$2,900
Total	$192,500	Total	100,900
Bal.	$91,600

Land
Jan.1	$110,800
Bal.	$110,800

Interest payable
		Jan.1	$0
		Dec.31	$2,500

Retained earnings
		Jan.1	$32,700
		Bal.	$32,700

Salaries Expense
Jan.1	$0
Sep.30	$64,200
Dec.30	$1,500
Bal.	$65,700

Supplies Expense
Jan.1	$0
Dec.31	$9,800

Accounts receivable
Jan.1	$25,700
Jan.12	$62,400	Mar.19	$45,700

Accounts payable
		Jan.1	$15,300
Bal.	$11,300	Jun.16	$12,100
		Total	$16,100
Notes payable
		Jan. 1	$30,000
		Bal.	$30,000

Dividends
Jan.1	$0
Dec.30	$2,900	Bal.	$2,900

Advertising expense
Jan. 1	$0
Nov.22	$22,500	Bal.	$22,500
Total	$0

Supplies
Jan.1	$0
Jun.16	$12,100
		Bal.	$9,800
Total	$2,300

Salaries payable
		Jan. 1	$0
		Dec.31	$1,500

Common stock
		Jan. 1	$100,000
		Apr.30	$30,000
		Total	$130,000
Service revenue
		Jan.1	$0
		Jan.12	$62,400
Bal.	137,700	Feb.25	$75,300
		Total.	$0

Interest expense
Jan.1	$0
Dec.30	$2,500	Bal	$2,500
Total	$0

To determine

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

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 J is as follows:

Company J
Adjusted Trial Balance
December 31, 2018
Accounts	Debit Amount($)	Credit Amount($)
Cash	91,600
Accounts Receivable	42,400
Supplies	2,300
Land	110,800
Account payable		16,000
Salaries payable		1,500
Interest  payable		2,500
Notes payable		30,000
Common stock		130,000
Retained earnings		67,000
Total	$247,100	$247,100

Table (9)

Therefore, the total of debit, and credit columns of post-closing trial balance is $247,100 and agree.