Chapter 4, Problem 4.2CACR

(a)

To determine

Journal:

Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Income statement:

An income statement is one of the financial statements which shows the revenues, and expenses of the company. The income statement is prepared to ascertain the net income/loss of the company, by deducting the expenses from the revenues.

$\boxed{\text{Net}\text{income = Total revenues – Total expenses}}$

Statement of retained earnings:

This is an equity statement which shows the changes in the stockholders’ equity 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.

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 income summary account. These are passed at the end of the accounting period to transfer the final balances of the temporary accounts. In other words, the closing entries transfer the net income, or net loss, and dividends to the retained earnings account.

Post-closing trial balance:

Once the closing entries are journalized, and posted by the company, then the next step is to prepare another trial balance known as post-closing trial balance. The post-closing trial balance contains a list of all the permanent accounts, and its balances.

To Journalize: The transaction of Company L for the month of March.

Explanation of Solution

Journalize the transaction of Company L for the month of March.

Date	Account Title and Description		Debit ($)	Credit ($)
March. 1	Cash		15,000
	Common stock			15,000
	(To record the issuance of common stock)
March.1	Cash		6,000
	Notes payable			6,000
	(To record the amount borrowed by signing a note)
March. 1	Equipment		8,000
	Cash			8,000
	(To record the purchase of equipment)
March. 3	Prepaid rent		1,500
	Cash			1,500
	(To record the payment of rent in advance)
March. 3	Prepaid insurance		2,400
	Cash			2,400
	(To record the payment of insurance in advance for 6 months)
March. 6	Supplies		2,000
	Accounts payable			2,000
	(To record the purchase of supplies on account)
March. 14	Accounts receivable		3,700
	Service revenue			3,700
	(To record the services performed on account)
March. 18		Accounts payable	500
		Cash		500
		(To record the payment of cash owed for cleaning supplies)
March. 20		Salaries and Wages expense	1,750
		Cash		1,750
		(To record the payment of salaries for  employees)
March. 21		Cash	1,600
		Accounts receivable		1,600
		(To record the cash received for the service performed on March 14)
March. 28		Accounts receivable	4,200
		Service Revenue		4,200
		(To record the services performed on account)
March. 31		Maintenance and repairs expenses	350
		Cash		350
		(To record the payment made for  maintenance and repair expenses)
March. 31		Cash	900
		Dividends		900
		(To record the payment of dividends)

(b)

To determine

T-Accounts:

T-accounts are referred as T-account because its format represents the letter “T”. The T-accounts consists of the following:

• The title of accounts.
• The debit side (Dr) and,
• The credit side (Cr).

To Post: The journal entries to the respective general ledger accounts.

Explanation of Solution

The posting of the journal entries to the general ledger accounts are as follows:

Cash
Mar. 1	$ 15,000	Mar.   1	$  8,000
1	$  6,000	2	$  1,500
21	$  1,600	3	$  2,400
		18	$     500
		20	$  1,750
		31	$     350
		31	$     900
Total	$ 22,600	Total	$15,400
Bal.	$  7,200

Table (1)

Accounts receivable
Mar. 14	$  3,700	Mar.   21	$  1,600
28	$  4,200
	$  7,900		$  1,600
Bal.	$  6,300

Table (2)

Supplies
Mar. 6	$  2,000
Bal.	$  2,000

Table (3)

Prepaid Rent
Mar. 2	$  1,500
Bal.	$  1,500

Table (4)

Prepaid Insurance
Mar. 3	$  2,400
Bal.	$  2,400

Table (5)

Equipment
Mar. 1	$  8,000
Bal.	$  8,000

Table (6)

Notes Payable
		Mar. 1	$  6,000
		Bal.	$  6,000

Table (7)

Accounts Payable
Mar. 18	$    500	Mar. 6	$  2,000
		Bal.	$  1,500

Table (8)

Common Stock
		Mar. 1	$15,000
		Bal.	$15,000

Table (9)

Dividends
Mar. 1	$   900
Bal.	$   900

Table (10)

Service Revenue
		Mar.  14	$  3,700
		28	$  4,200
		Bal.	$ 7,900

Table (11)

Salaries and Wages Expenses
Mar.   20	$  1,750
Bal.	$  1,750

Table (12)

Maintenance and repairs expenses
Mar.   31	$     350
Bal.	$     350

Table (13)

(c)

To determine

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger balances, and before the preparation of financial statements.

To prepare: The trial balance of Company L at March, 31.

Explanation of Solution

Prepare a trial balance of Company L for the month ended March, 31 as follows:

Company L Trial Balance March, 31, 2017
Particulars	Debit $	Credit $
Cash	7,200
Accounts receivable	6,300
Supplies	2,000
Equipment	8,000
Prepaid rent	1,500
Prepaid insurance	2,400
Accounts payable		1,500
Notes payable		6,000
Common stock		15,000
Service revenue		7,900
Maintenance and repairs expenses	350
Salaries and wages expense	1,750
Dividends	900
Total	30,400	30,400

Table (14)

Conclusion

The debit column and credit column of the trial balance are agreed, both having balance of $30,400.

(d)

To determine

Adjusting entries:

An adjusting entry is prepared when the trial balance is not up-to-date, and complete, and they are usually prepared at the end of the accounting period. This adjusting entry is essential for preparing the financial statements of the business

To Journalize: Theadjusting entries of Company L for March, 31.

Explanation of Solution

The adjusting entries of Company L for March, 31, 2017 are as follows:

(1)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Accounts receivable	200
	Service revenue		200
	(To record the service performed which is not recorded and not collected)

Description:

• Accounts receivable is an asset account. There is an increase in the asset, and hence it is debited. Service revenue is a component of stockholder’s equity account. There is an increase in service revenue, and hence, it is credited.

 (2)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Depreciation expense	250
	Accumulated depreciation –Equipment		250
	(To record the depreciation and the accumulated depreciation)

Description:

• Depreciation expense is an expense account. There is an increase in the expenses, and hence it is debited. Accumulated Depreciation is a contra-asset account. There is a decrease in assets, and hence, it is credited.

(3)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Insurance Expense                         (1)	400
	Prepaid Insurance		400
	(To record the insurance expenses for December)

Working notes:

$\begin{array}{c}\text{Insurance expenses =}\left[\begin{array}{l}\text{Amount of insurance paid in advance ×}\\ \frac{\text{Insurance}\text{expense expired}}{\text{Total term of the policy}}\end{array}\right]\\ \text{=\$ 2,400 ×}\frac{\text{1 Month}}{\text{6 Months}}\\ \text{=\$ 400}\end{array}$ (1)

Description:

• Insurance expense is an expense account. There is an increase in the expenses, and hence it is debited. (Increase in insurance expense decreases stockholders’ equity account). Prepaid insurance is an asset account. There is a decrease in asset, and hence, it is credited.

(4)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Supplies expense                             (2)	1,720
	Supplies		1,720
	(To record the supplies expenses)

Working notes:

$\begin{array}{c}\text{Supplies expenses =}\left(\begin{array}{l}\text{Amount of supplies on beginning }\\ \text{of november - Supplies on hand}\end{array}\right)\\ \text{=\$}\text{2,000-\$}\text{280}\\ \text{=\$}\text{1,720}\end{array}$ (2)

Description:

• Supplies expense is an expense account. There is an increase in the expenses, and hence it is debited. (Increase in Supplies expense decreases stockholders’ equity account). Supply is an asset account. There is a decrease in asset, and hence, it is credited.

(5)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Salaries and wages expense	1,080
	Salaries and wages payable		1,080
	(To record the accrued salaries payable)

Description:

• Salaries and wages expense is an expense account. There is an increase in the salaries and wages expenses, and hence it is debited. (Increase in salaries and wages expense decreases stockholders’ equity account). Salaries and wages payable is a liability account. There is an increase in liability, and hence, it is credited.

(6)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Rent Expense                         (3 )	400
	Prepaid Rent		400
	(To record the rent expenses for March)

Working notes:

$\begin{array}{c}\text{Insurance expenses =}\left[\begin{array}{l}\text{Amount of rent paid in advance ×}\\ \frac{\text{rent}\text{expense expired}}{\text{Total term of the policy}}\end{array}\right]\\ \text{=\$ 1,500 ×}\frac{\text{1 Month}}{\text{3 Months}}\\ \text{=\$}\text{500}\end{array}$ (3)

Description:

• Rent expense is an expense account. There is an increase in the expenses, and hence it is debited. (Increase in rent expense decreases stockholders’ equity account). Prepaid rent is an asset account. There is a decrease in asset, and hence, it is credited.

(7)

Date	Accounts title and Description	Debit ($)	Credit ($)
March, 31	Interest expense                             (4)	30
	Interest payable		30
	(To record the interest accrued on notes payable)

Working notes:

$\begin{array}{c}\text{Interest expenses = }\left\{\begin{array}{c}\text{amount borrowed × interest rate per annum }\\ \text{ × }\frac{\text{number of months accrued}}{\text{total number of months in a year}}\end{array}\right\}\\ \text{= \$ 6,000× 6/100 × 1/12}\\ \text{= \$ 30}\end{array}$ (4)

Description:

• Interest expense is an expense account. There is an increase in the expenses, and hence it is debited. (Increase in interest expense decreases stockholders’ equity account). Interest payable is a liability account. There is an increase in liability, and hence, it is credited.

(e)

To determine

To post: The adjusting entries to the ledger accounts.

Explanation of Solution

Post the adjusting entries to the respective ledger accounts as follows:

Service revenue
		Mar.  31	$  7,900
		31	$     200
		Bal.	$  8,100

Table (15)

Accounts receivable
		Mar.  31	$  6,300
		31	$     200
		Bal.	$  6,500

Table (16)

Accumulated Depreciation – Equipment
		Mar.   31	$      250
		Bal.	$      250

Table (17)

Depreciation Expense
Mar.   31	$      250
Bal.	$      250

Table (18)

Insurance Expense
Mar.   31	$      400
Bal.	$      400

Table (19)

Prepaid Insurance
Mar. 3	$  2,400	Mar.   31	$    400
Bal.	$  2,000

Table (20)

Supplies Expense
Mar.   31	$   1,720
Bal.	$   1,720

Table (21)

Supplies
Mar. 6	$  2,000	Mar.   31	$  1,720
Bal.	$     280

Table (22)

Salaries and Wages Payable
		Mar.   31	$ 1,080
		Bal.	$ 1,080

Table (23)

Salaries and Wages Expense
Mar.   20	$  1,750
31	$  1,080
Bal.	$  2,830

Table (24)

Rent Expense
Mar.   31	$     500
Bal.	$     500

Table (25)

Prepaid Rent
Mar. 2	$  1,500	Mar.   31	$     500
Bal.	$  1,000

Table (26)

Interest Expense
Mar.   31	$      30
Bal.	$      30

Table (27)

Maintenance and Repairs  Expense
Mar.   31	$      350
Bal.	$      350

Table (28)

Interest Payable
		Mar.   31	$      30
		Bal.	$      30

Table (29)

(f)

To determine

Adjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.

To prepare: An adjusted trial balance of Company L at March, 31.

Explanation of Solution

Prepare an adjusted trial balance of Company L for the month ended March, 31 as follows:

Company L Adjusted Trial Balance March, 31, 2017
Particulars	Debit $	Credit $
Cash	7,200
Accounts receivable	6,500
Supplies	280
Equipment	8,000
Prepaid rent	1,000
Prepaid insurance	2,000
Accumulated depreciation  – Equipment		250
Accounts payable		1,500
Notes payable		6,000
Salaries and wages payable		1,080
Interest payable		30
Common stock		15,000
Service revenue		8,100
Maintenance and repairs expenses	350
Salaries and wages expense	2,830
Depreciation expense	250
Rent expenses	500
Insurance expense	400
Supplies expense	1,720
Interest expense	30
Dividends	900
Total	31,960	31,960

Table (30)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $31,960.

(g)

To determine

To Prepare: The income statement for the month of March.

The retained earnings statement for the month of March.

The classified balance sheet of Company L as on March 31, 2017.

Explanation of Solution

The income statement for the month of March, 31 2017 is computed in the table below:

L Company
Income Statement
As on  March 31 , 2017
Particulars	$	$
Revenue:
Service Revenue		8,100
Less:  Expenses
Salaries Expenses	2,830
Supplies Expenses	1,720
Rent Expenses	500
Insurance Expenses	400
Maintenance and  repairs Expenses	350
Depreciation Expenses	250
Interest  Expenses	30
Total Expenses		6,080
Net income		2,020

Table (31)

The retained earnings statement for the month of March, 2017 is computed in the table below:

L Company
Retained earnings statement
For the month ended March 31, 2017
Particulars		$
Retained earnings at March, 1		0
Add:  Net income		2,020
		2,020
Less: Dividends		900
Retained earnings at March, 31		1,120

Table (32)

Prepare a classified balance sheet of Company L for the month ended March 31, 2017.

L Company
Classified Balance sheet Statement
As  at March 31, 2017
Assets	$	$
Current assets:
Cash	7,200
Accounts receivable	6,500
Supplies	280
Prepaid rent	1,000
Prepaid insurance	2,000
Total of current assets		16,980
Other assets:
Equipment	8,000
Less: Accumulated depreciation -Equipment	250
Total of other assets		7,750
Total assets		$24,730
Liabilities and Stockholders' equity	$	$
Liabilities:
Accounts payable	6,000
Notes payable	1,500
Interest payable	30
Salaries and wages payable	1,080
Total liabilities		8,610
Stockholders' equity:
Common stock	15,000
Retained earnings	1,120
Total stockholders' equity		16,120
Total liabilities and stockholders' equity		24,730

Table (33)

Conclusion

The net income for the month of March, 2017 is $2,020.

The retained earnings for the month of March, 2017 are $1,120.

The classified balance sheet for the month ended November, 30 2017 are agreed, both the assets account and the liabilities account shows a balance of $24,730

 (h)

To determine

To prepare: The closing entries of Company L, post the closing entries of Company L to the respective ledger account.

Explanation of Solution

The closing entries of Company L for March 31, 2017 are as follows:

1. 1. Closing entry for revenue account.

Date	Accounts title and Description	Debit ($)	Credit ($)
March 31	Service revenue	8,100
	Income summary		8,100
	(To record the closure of revenues account )

Description:

Service revenue account has a normal credit balance of $8,100 in total, now to close this account, the service revenue account, and the rent revenue account must be debited with $8,100 and, income summary account must be credited with $8,100.

• In this closing entry, the service revenue account, and the rent revenue account balance is being transferred to the income summary account, to bring the revenues account balance to zero.
• Thereby, the income summary account balance gets increased by $8,100 and, the revenue account balance gets decreased by $8,100.

1. 2. Closing entry for expenses account.

Date	Accounts title and Description	Debit ($)	Credit ($)
March 31	Income summary	6,080
	Salaries and wages Expense		2,830
	Rent Expense		500
	Depreciation Expense		250
	Supplies Expense		1,720
	Insurance Expense		400
	Maintenance and repairs Expense		350
	Interest Expense		30
	(To record the closure of expense account to income summary)

Description:

All expenses accounts have a normal debit balance, the total of expenses are $6,080 have to be closed by transferring these account balances to the income summary account. All expenses account must be credited, and the income summary account must be debited with $ 6,080.

• In this closing entry, all the expenses account balances are transferred to the income summary account, to bring the expenses account balances to zero.
• Thereby, both the income summary account, and the expenses account balances get decreased by $6,080.

1. 3. Closing entry for income summary account.

Date	Accounts title and Description	Debit ($)	Credit ($)
March 31	Income summary                  (1)	2,020
	Retained earnings		2,020
	(To record the closure of net income from income summary to retained earnings)

Working note:

Determine the balance amount in the income summary.

$$ $\begin{array}{c}\text{Balance of income summary =}\left[\begin{array}{l}\text{Income summary credited to close revenue account-}\\ \text{Income summary debited to close expense account}\end{array}\right]\\ \text{=\$ 8,100 – \$ 6,080}\\ \text{=\$ 2,020}\end{array}$ (1)

Description:

Determined amount balance of income summary is $2,020, which has to be closed by debiting the income summary account with $2,020, and crediting the retained earnings account with $2,020.

• In this closing entry, the income summary account balance is being transferred to the retained earnings account, to bring the income summary account balance to zero.
• Thereby, the income summary account gets decreased, and the retained earnings account balance gets increased by $2,020.

1. 4. Closing entry for dividend account.

Date	Accounts title and Description	Debit ($)	Credit ($)
March 31	Retained earnings	900
	Dividends		900
	(To record the closure of dividend to retained earnings)

Description:

Dividends account has a normal debit balance of $900, now to close this account, retained earnings account must be debited with $900 and, dividend account must be credited with $900.

• In this closing entry, the dividend account balance is being transferred to the retained earnings account, to bring the dividend account balance to zero.
• Thereby, the retained earnings account balance gets increased by $900 and, the dividend account balance gets decreased by $900.
• Post the closing entries to the respective ledger accounts as follows:

Service revenue
Mar.  31	$  8,100	Mar.  31	$  7,900
		31	$     200
		Bal.	$         0

Table (34)

Depreciation Expense
Mar.   31	$      250	Mar.   31	$    250
Bal.	$          0

Table (35)

Insurance Expense
Mar.   31	$      400	Mar.   31	$     400
Bal.	$          0

Table (36)

Supplies Expense
Mar.   31	$   1,720	Mar.   31	$  1,720
Bal.	$          0

Table (37)

Salaries and Wages Expense
Mar.  20	$  1,750	Mar.   31	$  2,830
31	$  1,080
Bal.	$         0

Table (38)

Rent Expense
Mar.   31	$     500	Mar.   31	$     500
Bal.	$         0

Table (39)

Interest Expense
Mar.   31	$      30	Mar.   31	$      30
Bal.	$       0

Table (40)

Maintenance and Repairs  Expense
Mar.   31	$      350	Mar.   31	$     350
Bal.	$          0

Table (41)

Dividends
Mar.   31	$      900	Mar.   31	$    900
Bal.	$          0

Table (42)

Retained earnings
Mar.   31	$      900	Mar.   31	$  2,020
		Bal.	$  1,120

Table (43)

Income Summary
Mar.   31	$  6,080	Mar.   31	$  8,100
31	$  2,020
		Bal.	$        0

Table (44)

(i)

To determine

To prepare: A post–closing trial balance of Company L at March 31.

Explanation of Solution

Prepare a post–closing trial balance of Company L for the month ended March, 31 as follows:

Company L Post–closing Trial Balance March, 31, 2017
Particulars	Debit $	Credit $
Cash	7,200
Accounts receivable	6,500
Supplies	280
Equipment	8,000
Prepaid rent	1,000
Prepaid insurance	2,000
Accumulated depreciation  – Equipment		250
Accounts payable		1,500
Notes payable		6,000
Salaries and wages payable		1,080
Interest payable		30
Common stock		15,000
Retained earnings		1,120
Total	24,980	24,980

Table (45)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $24,980.