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:

1. Wilburton provided animal care services, all on credit, for $210,300. Wilburton rented stables to customers for $20,500 cash. Wilburton rented its grounds to individual riders, groups, and show organizations for $41,800 cash.
2. There remains $15,600 of accounts receivable to be collected at December 31, 2019.
3. Feed in the amount of $62,900 was purchased on credit and debited to the supplies
4. Straw was purchased for $7,400 cash and debited to the supplies account.
5. Wages payable at the beginning of 2019 were paid early in 2019. Wages were earned and paid during 2019 in the amount of $12,000.
6. The income taxes payable at the beginning of 2019 were paid early in 2019.
7. Payments of $73,000 were made to creditors for supplies previously purchased on credit.
8. One year’s interest at 9% was paid on the note payable on July 1, 2019.
9. During 2019, Jon Wilburton, a principal stockholder, purchased a horse for his Wife, Jennifer, to ride. The horse cost $7,000, and Wilburton used his personal credit to purchase it. The horse is stabled at the Wilburton home rather than at the riding stables.
10. Property taxes were paid on the land and buildings in the amount of S17,000.
11. Dividends were declared and paid in the amount Of

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. Post the 2019 beginning balances to T-accounts. Prepare journal entries for Transactions a through j and post the journal entries to T-accounts, adding any new T-accounts you need.
2. Prepare the adjustments and post the adjustments to the T-accounts, adding any new T-accounts you need.
3. Prepare an income statement.
4. Prepare a retained earnings statement.
5. Prepare a classified balance sheet
6. Prepare closing entries.
7. CONCEPTUAL CONNECTION Did you include Transaction g among Tarkington’s 2019 journal entries? Why or why not?

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:

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

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)

• Since cash is an asset, asset is increased. Hence, cashaccount is debited.
• Since accounts receivables is anasset, asset is increased. Hence, accounts receivablesaccount is debited.
• Since service revenue is an income, income is increased. Hence, service revenue account is credited.

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)

• Since cash is an asset, asset is increased. Hence, cashaccount is debited.
• Since accounts receivables is anasset and it decreased. Hence, accounts receivablesaccount is credited.

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)

• Since prepaid advertising is an asset, asset is increased. Hence, prepaid advertisingaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

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)

• Since supplies is an asset, asset is increased. Hence, suppliesaccount is debited.
• Since accounts payable is aliability, liability is increased. Hence, accounts payable account is credited.

Recording repayment of accounts payable:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Accounts payable ($17,600−$5,600)		12,000
	Cash			12,000
	(to record repayment of accounts payable)

   Table (5)

• Since accounts payable is aliability, liability is decreased. Hence, accounts payableaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

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)

• Since wages payable is aliability, liability is decreased. Hence, wages payableaccount is debited.
• Since wages expense is an expense, expense is increased. Hence, wages expenseaccount is credited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

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)

• Since drawing is capital, capital is decreased. Hence, drawingaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

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)

• Since interest expense is an expense, expense is decreased. Hence, interest expenseaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

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)

• Since property taxes is an expense, expense is increased. Hence, property taxes account is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording dividend payment:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Dividend		25,000
	Cash			25,000
	(to record dividend payment)

   Table (10)

• Since dividend is an expense, expense is increased. Hence, dividend account is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Working Notes:

Computation of interest payable:

Interest payable=Note payable×Interest rate×Period=$1,000,000×6%×612=$30,000

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

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.

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.

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.

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.

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.

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.