Problem 3-70B Comprehensive Problem: Reviewing the Accounting Cycle
Wilburton Riding Stables provides stables, care for animals, and grounds for riding and showing horses. The account balances at the beginning of 2019 were:
During 2019, the following transactions occurred:
The following data are available for adjusting entries:
• Supplies (feed and straw) in the amount of $30,400 remained at year end.
• Annual depreciation on the buildings is $6,000.
• Annual depreciation on the equipment is
• Wages of $4,000 were unrecorded and unpaid at year end.
• Interest for 6 months at 9% per year on the note is unpaid and unrecorded at year end.
• Income taxes of $16,500 were unpaid and unrecorded at year end.
Required:
1.
To record:Journal entries and prepare T accounts to post those entries.
Introduction: Journal entries provide a record of the financial activities undertaken within an organization. Journal entries helps in preparation of financial statements of a company.
Journalizing:
Journalizing is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts.
Accounting rules for journal entries:
Recording service revenue:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Cash | 686,838 | |||
Accounts receivables | 2,256,700 | |||
Service revenue | 2,943,538 | |||
(to recordservice revenue) |
   Table (1)
Recording receipt from accounts receivables:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Cash | 286,172 | |||
Accounts receivable | 286,172 | |||
(to record receipt of accounts receivables) |
   Table (2)
Recording prepaid advertising:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Prepaid advertising | 138,100 | |||
Cash | 138,100 | |||
(to record unearned income) |
   Table (3)
Recording purchase of supplies:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Supplies | 27,200 | |||
Accounts payable | 27,200 | |||
(to record purchase of supplies) |
   Table (4)
Recording repayment of accounts payable:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Accounts payable
| 12,000 | |||
Cash | 12,000 | |||
(to record repayment of accounts payable) |
   Table (5)
Recording cash paid for wages:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Wages payable | 30,200 | |||
Wages expense | 666,142 | |||
Cash | 696,342 | |||
(to record payment of wages) |
   Table (6)
Recording withdrawal of cash for personal purposes:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Drawings | 42,000 | |||
Cash | 42,000 | |||
(to record drawing) |
   Table (7)
Recording interest expense:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Interest expense | 30,000 | |||
Cash | 30,000 | |||
(to record interest expense) |
   Table (8)
Recording property taxes:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Property taxes | 170,000 | |||
Cash | 170,000 | |||
(to record property taxes) |
   Table (9)
Recording dividend payment:
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
Dividend | 25,000 | |||
Cash | 25,000 | |||
(to record dividend payment) |
   Table (10)
Working Notes:
Computation of interest payable:
Preparation of cash account in general ledger:
Cash | |||||
Date | Particular | Post Ref. | Debit($) | Credit($) | Balance($) |
 | Balance |  | 92,100 |  | 92,100 |
 | Service revenue |  | 686,838 |  | 778,938 |
 | Accounts receivable |  | 286,172 |  | 1,065,110 |
 | Prepaid advertisement |  |  | 138,100 | 927,010 |
 | Accounts payable |  |  | 12,000 | 915,010 |
 | Wages payable |  |  | 30,200 | 884,810 |
 | Wages expenses |  |  | 666,142 | 218,668 |
 | Drawings |  |  | 42,000 | 176,668 |
 | Interest expense |  |  | 30,000 | 146,668 |
 | Property tax |  |  | 1,70,000 | (23332) |
 | Dividend |  |  | 25,000 | (48,332) |
   Table (11)
Preparation of accounts receivable account in general ledger:
Accounts receivable | |||||
Date | Particular | Post Ref. | Debit($) | Credit($) | Balance($) |
Balance | 361,500 | 361,500 | |||
Service revenue | 2,256,700 | 2,618,200 | |||
Cash | 286,172 | 2,332,028 |
   Table (12)
Preparation of supplies account in general ledger:
Supplies | |||||
Date | Particular | Post Ref |
2.
To record:Adjusting entries. Also, post the adjustment entries in the respective T accounts.
Introduction: Adjusting entries are made at the end of reporting period at the time of preparation of financial statements. Adjusting entries are recorded to reflect the correct picture of financial position of the organization in the financial statements.
3.
To prepare:Income statement.
Introduction: Income statement is prepared to ascertain net income of a company for a period. Net income shows operating efficiency of a company.
4.
To prepare:Statement of retained earnings.
Introduction: Statement of retained earnings shows the net impact on retained earnings of the company, in a given period.
5.
To prepare:Balance sheet of the company at the end of the accounting period.
Introduction: Balance sheet shows the status of assets and liabilities of the company, in which total assets equates with total liabilities and equity.
6.
To record:closing journal entries.
Introduction: Closing entries are posted to close all the temporary accounts of the accounting books. Closing entries zeros the balances of income statement items, drawings, and dividends.
7.
Whether the given transaction relating to personal expense should be recorded in the books or not.
Introduction:Personal expenses are incurred by the owners for their personal useby utilizing the cash held within the company.
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