Chapter 4, Problem 2BPSB

To determine

Requirement 1

Introduction: At the end of an accounting cycle it is required to close the temporary accounts and ultimately identify the change in net equity for the accounting period. In order to ease the process 10 column worksheet will be used.

: 10 column worksheet.

Answer to Problem 2BPSB

Solution:

No.	Account Title	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance		Income Statement		Balance Sheet and Statement of Owner’s Equity
		Dr	Cr	Dr	Cr	Dr	Cr	Dr	Cr	Dr	Cr
101	Cash	7,000				7,000				7,000
126	Supplies	16,000			(a)8,100	7,900				7,900
128	Prepaid Insurance	12,600			(b)10,600	2,000				2,000
167	Equipment	200,000				200,000				200,000
168	Accumulated Depreciation-Equipment		14,000		(c)7,000		21,000				21,000
201	Accounts Payable		6,800				6,800				6,800
203	Interest Payable		0		(h)300		300				300
208	Rent Payable		0		(f)3,000		3,000				3,000
210	Wages Payable		0		(e)2,000		2,000				2,000
213	Property Taxes Payable		0		(g)550		550				550
251	Long Term Notes Payable		30,000	(h)10,000			20,000				20,000
	Short Term Notes Payable				(h)10,000		10,000				10,000
301	J. Bonn, Capital		86,900				86,900				86,900
302	J. Bonn, Withdrawals	12,000				12,000				12,000
401	Demolition fees earned		187,000				187,000		187,000
612	Depreciation Expense-Equipment	0		(c)7,000		7,000		7,000
623	Wages Expense	41,400		(e)2,000		43,400		43,400
633	Interest Expense	3,300		(h)300		3,600		3,600
637	Insurance Expense	0		(b)10,600		10,600		10,600
640	Rent Expense	13,200		(f)3,000		16,200		16,200
652	Supplies Expense	0		(a)8,100		8,100		8,100
683	Property Taxes Expense	9,700		(g)550		10,250		10,250
684	Repairs Expense	4,700				4,700		4,700
690	Utilities Expense	4,800		(d)800		5,600		5,600
	Utilities Payable				(d)800		800				800
	Totals	$324,700	$324,700	$42,350	$42,350	$338,350	$338,350	$109,450	$187,000	$228,900	$151,350
	Net Income							$77,550			$77,550
	Totals							$187,000	$187,000	$228,900	$228,900

Explanation of Solution

:

Unadjusted trial balance column details were given in the question. Adjustments from (a) to (h) is made by considering the matching concept to the unadjusted trial balance columns. (By matching expenses and income accounts with relevant accrual accounts.)

Following adjustments being made;

a) Office Supplies available at year end, $7,900

Office supplies unadjusted balance is $16,000 and at the yearend there would be only $7,900 valued office supplies in the company, which means the company has used $8,100 valued supplies which were belonging to current accounting period. ($16,000-$7,900). Used supplies amount which is $8,100 credited from Supplies account and Debited to Supplies Expense Account.

b) Cost of expired Insurance is $10,600

Expired Insurance is an expense for the company so that Insurance expense account increases by $10,600 (Dr 10,600). Prepaid Insurance is credited from same amount. (Cr 10,600)

c) Annual Depreciation is $7,000.

Depreciation is an expense for the company so that depreciation expense account increases by $7,000 (Dr 7,000). Accumulated depreciation is credited from same amount. (Cr 7,000)

d) Utilities Expense unrecorded $800

Utilities expense is an expense for the company so that Utilities expense account increases by $800 (Dr 800). Utilities payable is credited from same amount. (Cr 800)

e) Employee wages earned by employees is $2,000

Employees wage is an expense for the company so that wage expense account increases by $2,000 (Dr 2,000). Wages payable is credited from same amount. (Cr 2,000)

f) Rent Expense of $3,000

Rent Expense is an expense for the company so that rent expense account increases by $3,000 (Dr 3,000). Rent payable is credited from same amount. (Cr 3,000)

g) Additional taxes not recorded is $550

Property Tax Expense is an expense for the company so that property tax expense account increases by $550 (Dr 550). Property Taxes Payable is credited from same amount. (Cr 550)

h) 1) Accrued total interest for April is $300

Total Interest Expense is an expense for the company so that interest expense account increases by $300 (Dr 300). Interest Payable is credited from same amount. (Cr 300)

2) $10,000 Notes payable in 2018

Long term notes payable amount decreases by $10,000 and it is transferred to short term payables account by same amount. In here short-term liability identified from long term note payables.

Once the above adjustments have being made total of unadjusted trial balance columns and adjustment values are added together to get adjusted trial balance values. Those values will be divided between income statement columns and balance sheet columns based on the concept of identifying which main account the account balance is belonging to.

• If the account balances are belonging to Revenue account it is recorded in Credit side of Income statement. (ex: Demolition fees earned)

• If the account balances are belonging to Expense account it is recorded in Debit side of Income statement. (ex: Depreciation expense)

• If the account balances are belonging to Assets /Withdrawal account it is recorded in Debit side of Balance sheet column. (ex: Cash, withdrawal)

• If the account balances are belonging to Liability account it is recorded in Credit side of Balance sheet column. (ex: Accounts Payable)

Once the above classification is done, total of income statement columns is taken to identify the net gain or loss for the period. In this case it is a net revenue of $77,550.

Conclusion

after recording the adjustments in above stated manner in the work sheet, there is a net gain of $77,550 in income statement.

To determine

Requirement 2

Introduction:

Adjusting entries will be used to adjust the unadjusted trial balance when there are accounting entries which belongs to the accounting year and have not have being recorded so far in the accounts.

Closing Entries are used to close out temporary accounts such as Income/Expense/Withdrawals and Income Summary Account at the end of each accounting cycle for preparation of year-end financial statements.

To state: Journal entries of adjusting entries and closing entries.

Answer to Problem 2BPSB

Solution:

Adjusting entries

a)

	Dr	Cr
Supplies Expense	$8,100
Supplies		$8,100

(Supplies used in year is $8,100)

b)

	Dr	Cr
Insurance Expense	$10,600
Prepaid Insurance		$10,600

(Cost of expired insurance is $10,600)

c)

	Dr	Cr
Depreciation Expense - Equipment	$7,000
Accumulated Depreciation-Equipment		$7,000

(Depreciation expense for year is $7,000)

d)	Dr	Cr
Utilities Expense	$800
Utilities Payable		$800

(Utilities expense for April is $800)

e)

	Dr	Cr
Wages Expense	$2,000
Wages Payable		$2,000

(Accrued Wages expense is $2,000)

f)

	Dr	Cr
Rent Expense	$3000
Rent Payable		$3000

(Accrued Rent expense for year is $3000)

g)

	Dr	Cr
Property Taxes Expense	$550
Property Taxes Payable		$550

(Additional Property taxes for the year is $550)

h)

	Dr	Cr
Interest Expense	$300
Interest Payable		$300

(Interest expense for April is $300)

	Dr	Cr
Long term notes payable	$10,000
Short term notes payable		$10,000

(notes payables within 2018 is $10,000)

Closing Entries

	Dr	Cr
Demolition Fees Earned	$187,000
Income Summary Account		$187,000

(Closing Entry for Demolition fees earned)

	Dr	Cr
Income Summary Account	$7,000
Depreciation Expense - Equipment		$7,000

(Closing entry for Depreciation expense)

	Dr	Cr
Income Summary Account	$43,400
Wages Expense		$43,400

(Closing entry for Wages expense)

	Dr	Cr
Income Summary Account	$3,600
Interest Expense		$3,600

(Closing entry for interest expense)

	Dr	Cr
Income Summary Account	$10,600
Insurance Expense		$10,600

(Closing entry for insurance expense)

	Dr	Cr
Income Summary Account	$16,200
Rent Expense		$16,200

(Closing entry for rent expense)

	Dr	Cr
Income Summary Account	$8,100
Supplies Expense		$8,100

(Closing entry for supplies expense)

	Dr	Cr
Income Summary Account	$10,250
Property Tax Expense		$10,250

(Closing entry for property tax expense)

	Dr	Cr
Income Summary Account	$4,700
Repairs Expense		$4,700

(Closing entry for repairs expense)

	Dr	Cr
Income Summary Account	$5,600
Utilities Expense		$5,600

(Closing entry for utilities expense)

	Dr	Cr
J. Bonn Capital Account	$12,000
J. Bonn Withdrawals Account		$12,000

(Closing entry for Withdrawals account)

	Dr	Cr
Net Gain	$77,550
Capital Account		$77,550

(Closing entry of Income Summary Account)

Explanation of Solution

Adjusting Entries

(a-h) adjusting entries are explained in the requirement 1 explanation.

Closing entries:

In the above scenario 4 types of closing entries need to be made. Which are income account’s closing entries, expense account’s closing entries, withdrawal account closing entry and Income summary account closing entry.

• Income accounts are closed out by debiting income account and crediting the Income Summary Account (Demolition Fees Earned) by $187,000.

• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,

(Depreciation Expense - $7000

Wages Expense -$43,400

Interest Expense $3,600

Insurance Expense -$10,600

Rent Expense-Trucks $16,200

Supplies Expense-$8,100

Property Taxes Expense - $10,250

Repairs Expense - $4,700

Utilities Expense - $5,600

• Withdrawals account is closed out by crediting the withdrawals account and debiting the Capital Account by $12,000

• Net value of the total Income and total Expenses is considered as net gain or net loss for the period, in the above case it is a net gain of $77,550. This is recorded in capital gain by Debiting Income Summary Account and crediting Capital Account by $77,550.

Conclusion

Above mentioned adjusting entries should be made to prepare the final trial balance before closing accounts at a year end.

4 main types of closing entries should be prepared for Power Demolition. Income account, Expense Accounts, withdrawals account and Income summary account should be closed respectively using the above-mentioned closing entries.

To determine

Requirement 3

Introduction: There are four main types of financial statements namely income statement, Statement of owners’ equity, Balance Sheet and Statement of cash flow. Income statement is used to identify Net revenue per given period, Statement of owners’ equity is used to identify changes of net equity from net revenue and withdrawals. Balance sheet is prepared to identify the financial position as at a yearend date

: Income statement, Statement of owners’ equity, Balance Sheet.

Answer to Problem 2BPSB

Solution:

1) Income statement

Power Demolition Company

Income statement

For the year ended 30^th April, 2017 ($)

Revenues
Demolition fees earned	187,000
Total revenues		187,000
Expenses
Depreciation Expense-Equipment	7,000
Wages Expense	43,400
Interest Expense	3,600
Insurance expense	10,600
Rent Expense	16,200
Supplies Expense	8,100
Property Taxes Expenses	10,250
Repairs Expense	4,700
Utilities Expense	5,600
Total Expenses		109,450
Net Income		77,550

2) Statement of owners’ equity

Power Demolition Company

Statement of owners’ equity

For the year ended 30^th April, 2017 ($)

J. Bonn, Capital as at May 01, 2016		86,900
Plus:
Net Income	77,550	77,550
		164,450
Less:
Withdrawals by owner	12,000	12,000
J. Bonn, Capital as at April 30,2017		152,450

3) Balance Sheet

Power Demolition Company

Balance Sheet

April 30, 2017 ($)

Assets
Current Assets
Cash	7,000
Supplies	7,900
Prepaid Insurance	2,000
Total Current Assets		16,900
Plant Assets
Equipment	200,000
Less: Accumulated Depreciation-Equipment	(21,000)
Total Plant Assets		179,000
Total Assets		195,900
Liabilities
Current Liabilities
Accounts Payable	6,800
Interest Payable	300
Rent Payable	3,000
Wages Payable	2,000
Property Taxes Payable	550
Utilities Payable	800
Short Term Notes Payable	10,000
Total Current Liabilities		23,450
Long Term Liabilities
Long Term Notes Payable	20,000	20,000
Total Liabilities		43,450
Equity
J. Bonn Capital		152,450
Total Liabilities and Accounts		195,900

Explanation of Solution

:

Income Statement

• Income accounts are closed out by debiting income account and crediting the Income Summary Account (Demolition Fees Earned) by $187,000

• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,

(Depreciation Expense - $7,000

Wages Expense -$43,400

Interest Expense $3,600

Insurance Expense -$10,600

Rent Expense-Trucks $16,200

Supplies Expense-$8,100

Property Taxes Expense - $10,250

Repairs Expense - $4,700

Utilities Expense - $5,600

• Net value of the total Income and total Expenses is considered as net gain or net loss for the period, in the above case it is a net gain of $ 77,550.

Total Income : $187,000

Total Expense: ($109,450)

Difference : $77,550

Statement of owners’ equity

Net gain ($77,550) identified from income statement and the withdrawals amount ($12,000) is extended to statement of owner’s equity as in solution.

Net income increases equity and withdrawals reduces company equity.

Accordingly, year end capital for 2017 results with $86,550 value. Net change in equity for the year is $65,550 ($152,450 -$86,900). It is an increase in equity.

Balance Sheet

Current assets and Plant assets were identified by the nature of realizing the assets within the operating cycle of company. Accordingly, cash, supplies, Prepaid Insurance accounts were categorized under current assets with a total of $16,900. (Assets which take one year to realize) Equipment identified under Plant assets with a total of $179,000. (Assets which take more than one year to realize)

Current Liabilities and non-current liabilities also identified based on the operating cycle which the liabilities are due to fulfill. Accordingly Accounts Payable, Interest Payable, Rent Payable, Wages Payable, Property Taxes Payable, Short Term Notes Payable were categorized under current liabilities with a total of $23,450. (Liabilities due within one year) Long Term Notes payable identified as non-current liability of $20,000. (Liabilities doesn’t need to fulfill within one year)

Power Demolition Company’s capital account balance identified under Equity with $152,450. This was identified after making closing entries to income, expense and withdrawal accounts. (Refer Statement of Owner’s Equity)

Conclusion

Income statement: Income statement is prepared to identify net gain or loss for a given accounting period. Power Demolition company has a net gain of $77,550 according to its income statement for 2017-year end.

Statement of owners’ equity

Statement of owners’ equity is prepared on above manner considering effects from net income and withdrawals. End capital results with a value of $152,450 with a net change of $65,550 value throughout the year 2017.

Balance Sheet.

Balance sheet prepared for Power Demolition Company with the main categories of Assets, Liabilities and Equity. It is further classified into to current and non-current assets/liabilities based on company operating cycle

To determine

Requirement 4

Introduction:

Accounting errors could occur by an error of omission, error of commission or by an error of principle.

These errors are considered to be non-fraudulent and need to be corrected.

Determine:

• How an error could affect 10 columns worksheet?

• Whether error is likely to be discovered in completing work sheet?

• If not discovered, what would be the impact on financial statements?

Answer to Problem 2BPSB

Solution:

a) Insurance Expense for year is recognized as $2,000 instead of $10,600.

1) 10 Column Worksheet:

Supplies Expense account gets debited and Supplies account gets credited with a discrepancy of $8,600. So that the adjusted trial balance will be having a discrepancy of $8,600 value in its both debit and credit columns.

2) It is not likely to get discovered.

3) Income statement: Revenue overstates by $8,600.

Balance Sheet: Prepaid Insurance overstates by $8,600.

Yearend capital: Overstates by $8,600.

b) $4700 repair expense being extended to the debit side of the balance sheet column.

1) 10 Column Worksheet:

Totals of Debit and Credit sides of the balance sheet items in the 10 Column Worksheet will not tally. Debit side will be $4700 higher than the Credit side. .

2) Likely to get discovered.

Explanation of Solution

a) Insurance expense for the year recognized as $2,000 instead of $10,600.

• Insurance expense is understated by $8,600(10,600-2,000) This is affecting the adjustment made on unadjusted balance sheet. This leads to recording an expense in account with $2,000 value where it should be $10,600. Thus, it leads to an understatement of debit and credit columns in adjusted trial balance by $2,000.

• Error is not likely to be discovered as the adjusted trial balance gets tallied. It gets tallied because the impact on two accounts is nullifying due to recording an equal amount, even though the amount entered is incorrect. (Double entry has a same value for both the accounts.)

• It is having an impact on financial statements:

Income statement: Profit will be overstated by $8,600 due to Total expense (Insurance expense) being understated by $8,600.

Balance Sheet: Supplies in the current assets will be overstated by $8,600, due to non-recognition of total usage of supplies for the year of $10,600.

Statement of changes in Equity: Yearend capital will be overstated as the net income extracting from income statement is overstated by $8,600

c) $4700 repair expense being extended to the debit side of the balance sheet column.

• Repair expense is an expense account and hence the balance of the repair expense account should only be included in the debit side of the trial balance and the items in the income statement. It shouldn’t be included in either side of the balance sheet.

• This error is visible in worksheet as the totals credit and debit sides in balance sheet items do not tally with an overstated debit column and understated credit column.

Conclusion

a) Insurance expense for the year recognized as $2,000 instead of $10,600.

Insurance expense for the year is recognized as $2,000 instead of $10,600 – The error cannot be identified from the 10-column work sheet. This error will be having an impact on 3 financial statements. Where it will reflect a better position in company by understating the real expense.

a) $4700 repair expense being extended to the debit side of the balance sheet column.

This will result in an overstatement of the debit side of the balance sheet items. This error can easily be recognized since it will result in a difference between credit and debit sides of the balance sheet unless an event of offsetting occurs due to another error of the same value incurs. If Financial Statements to be prepared with this error ignored, the balance sheet will not tally and will display an overestimate of assets if $4700 were recorded in assets.