Chapter 3, Problem 8PB

Requirement – 1

To determine

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

Prepare the T-accounts and enter the beginning balance from the trial balance.

Requirement – 2

To determine

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.

Record the journal entries for given transactions.

Date	Account Title and Explanation	Debit($)	Credit($)
2021	Accounts receivable	65,000
January 24	Cash	20,000
	Service revenue		85,000
	(To record the recognized service revenue on account and cash)
2021	Cash	53,000
March, 13	Accounts receivable		53,000
	(To record cash collection from customer)
2021	Cash	11,000
May, 6	Common stock		11,000
	(To record the cash received from issuance of common stock)
2021	Salaries expense	33,000
June 30	Cash		33,000
	(To record the payment of salaries expense)
2021	Utilities payable	7,000
September 15	Cash		7,000
	(To record the payment of  current and post utilities expense)
2021	Cash	10,000
November 24	Deferred revenue		10,000
	(To record advance cash received from customer)
2021	Dividends	3,000
December 30	Cash		3,000
	(To record the payment of dividends)

Table (1)

Requirement – 3

To determine

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:

Requirement – 4

To determine

Prepare an 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, 2021
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.

Requirement – 5

To determine

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, 2021	Depreciation Expense		8,000
	Accumulated Depreciation			8,000
	(To record the amount of depreciation for the year)

Table (3)

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, 2021	Supplies expense $\left(\$3,500-\$1,100\right)$		2,400
	Supplies			2,400
	(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, 2021	Deferred revenue		7,000
	Service revenue			7,000
	(To record the service revenue recognized at the end of the accounting year)

Table (5)

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

Utilities expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Utilities expense		6,000
	Utilities payable			6,000
	(To record the utilities expense)

Table (6)

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

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

Requirement – 6

To determine

Post the adjusting entries to appropriate T-accounts.

Explanation of Solution

Post the adjusting entries to appropriate T-accounts.

Requirement – 7

To determine

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.

Prepare the adjusted trial balance of Company P.

Company P
Adjusted Trial Balance
December 31, 2021
Accounts	Debit ($)	Credit ($)
Cash	55,500
Accounts Receivable	21,500
Supplies	1,100
Equipment	36,000
Accumulated depreciation		16,000
Accounts payable		6,000
Utilities payable		6,000
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	166,500	166,500

Table (6)

Therefore, the total of debit, and credit columns of adjusted trial balance is $166,500 and agree.

Requirement – 8

To determine

Prepare an income statement for 2021 and classified balance sheet as on December 31, 2021.

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.

Prepare an income statement for 2021 for the year ended December 31, 2021.

Company P
Income statement
For the year ended December 31, 2021
Particulars	Amount ($)	Amount ($)
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: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare a classified balance sheet as of 31^st December 2021:

Figure (1)

Therefore, the total assets of Company P are $98,100, and the total liabilities and stockholders’ equity are $98,100.

Working note:

Calculation of ending balance retained earnings:

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

Requirement – 9

To determine

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 ($)	Credit ($)
2021	Service revenue		92,000
December 31	Retained earnings			92,000
	(To close all revenue account)
2021	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)
2021	Retained earnings		3,000
December 31	Dividends			3,000
	(To close the dividends account)

Table (8)

Requirement – 10

To determine

Post the closing entries to the T-accounts.

Explanation of Solution

Post the closing entries to the T-accounts.

Requirement – 11

To determine

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, 2021
Accounts	Debit ($)	Credit ($)
Cash	55,500
Accounts Receivable	21,500
Supplies	1,100
Equipment	36,000
Accumulated depreciation		16,000
Accounts payable		6,000
Utilities payable		6,000
Deferred revenue		3,000
Common stock		34,000
Retained earnings		49,100
Total	114,100	114,100

Table (9)

Therefore, the total of debit, and credit columns of post-closing trial balance is $114,100 and agree.