Concept explainers
Recording Transactions (Including Adjusting and Closing Entries), Preparing Financial Statements, and Performing Ratio Analysis
Josh and Kelly McKay began operations of their furniture repair shop (Furniture Refinishers, Inc.) on January 1, 2016. The annual reporting period ends December 31. The
Account Titles | Debit | Credit |
Cash | 5,000 | |
4,000 | ||
Supplies | 2,000 | |
Small tools | 6,000 | |
Equipment | ||
Other assets (not detailed to simplify) | 9,000 | |
Accounts payable | 7,000 | |
Notes payable | ||
Wages payable | ||
Interest payable | ||
Income taxes payable | ||
Unearned revenue |
1, 2, 3 and 5
Prepare T-accounts for the accounts on the trial balance and enter beginning balances.
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:
(a)The title of the account
(b)The left or debit side
(c)The right or credit side
Prepare the T-account (amounts in thousands):
Cash (A) account | |||
Beginning Balance | 5 | b | 18 |
a | 20 | e | 28 |
c | 5 | f | 3 |
d | 56 | h | 11 |
g | 8 | ||
j | 3 | k | 10 |
Ending Balance | 27 |
Accounts Receivable (A) account | |||||||
Beginning Balance | 4 | ||||||
d | 14 | g | 8 | ||||
Ending Balance | 10 | ||||||
Supplies (A) account | |||||||
Beginning Balance | 2 | ||||||
i | 10 | l | 8 | ||||
Ending Balance | 4 | ||||||
Small tools (A) account | |||||||
Beginning Balance | 6 | ||||||
f | 3 | ||||||
Ending Balance | 8 |
Equipment (A) account | |||
Beginning Balance b |
0 18 | ||
Ending Balance | 18 |
Accumulated depreciation (xA) account | |||
Beginning Balance |
0 | ||
m | 2 | ||
Ending Balance | 2 | ||
Other assets (A) account | |||
Beginning Balance | 9 | ||
Ending Balance | 9 | ||
Accounts payable (L) account | |||
h | 11 | Beginning Balance | 7 |
e | 7 | ||
i | 10 | ||
Ending Balance | 13 | ||
Notes payable (L) account | |||
Beginning Balance | 0 | ||
a | 20 | ||
Ending Balance | 20 | ||
Wages payable (L) account | |||
Beginning Balance | 0 | ||
o | 3 | ||
Ending Balance | 3 |
Interest payable (L) account | |||
Beginning Balance | 0 | ||
n | 1 | ||
Ending Balance | 1 | ||
Income taxes payable (L) account | |||
Beginning Balance | 0 | ||
p | 4 | ||
Ending Balance | 4 |
Unearned revenue (L) account | |||
Beginning Balance | 0 | ||
j | 3 | ||
Ending Balance | 3 | ||
Common Stock (SE) account | |||
Beginning Balance |
6 | ||
c | 1 | ||
Ending Balance | 7 | ||
Additional paid-in capital account | |||
Beginning Balance |
9 | ||
c | 4 | ||
Ending Balance | 13 |
Retained earnings (SE) account | |||
Beginning Balance | 4 | ||
k | 10 | ||
Closing entry | 16 | ||
Ending Balance | 10 |
Service Revenue (R) account | |||
Balance | 0 | ||
Closing entry | 70 | d | 70 |
Ending Balance | 0 |
Depreciation expense (E) account | |||
Balance | 0 | ||
m | 2 | Closing entry | 2 |
Ending Balance | 0 |
Income Tax Expense ( E) account | |||
Balance | 0 | ||
p | 4 | Closing entry | 4 |
Ending Balance | 0 |
Interest Expense ( E) account | |||
Balance | 0 | ||
n | 1 | Closing entry | 1 |
Ending Balance | 0 | ||
Remaining Expense ( E) account | |||
Balance | 0 | ||
e | 35 | ||
l | 9 | Closing entry | 44 |
Ending Balance | 0 |
Wages Expense (E) account | |||
Balance | 0 | ||
o | 3 | Closing entry | 3 |
Ending Balance | 0 |
2.
Record Journal entries for transactions (a) to (k).
Explanation of Solution
Journal entries for the transactions (a) to (k) as follows:
Date | Account Title and Explanation | Debit ($) | Credit ($) |
a) | Cash (+A) | 20,000 | |
Notes payable (Short-term) (+L) | 20,000 | ||
(To record borrowed cash on note) | |||
b) | Equipment (+A) | 18,000 | |
Cash (-A) | 18,000 | ||
(To record purchase of equipment) | |||
c) | Cash (+A) | 5,000 | |
Common Stock (+SE) | 1,000 | ||
Additional paid-in capital (+SE) | 4,000 | ||
(To record issued common stock for cash and additional paid in capital) | |||
d) | Cash (+A) | 56,000 | |
Accounts Receivable (+A) | 14,000 | ||
Service Revenue (+R, +SE) | 70,000 | ||
(To record service revenue earned during the year 2017) | |||
e) | Remaining expenses (+A) | 35,000 | |
Accounts payable (+L) | 7,000 | ||
Cash (-A) | 28,000 | ||
(To record Purchase of remaining expenses) | |||
f) | Small tools (+A) | 3,000 | |
Cash (-A) | 3,000 | ||
(To record other assets) | |||
g) | Cash (+A) | 8,000 | |
Accounts Receivable (-A) | 8,000 | ||
(To record cash collected on customer’s account) | |||
h) | Accounts payable (-L) | 11,000 | |
Cash (-A) | 11,000 | ||
(To record cash paid to creditors) | |||
i) | Supplies (+A) | 10,000 | |
Accounts payable (+L) | 10,000 | ||
(To record supplies purchased for future use) | |||
j) | Cash (+A) | 3,000 | |
Unearned revenue (+L) | 3,000 | ||
(To record unearned revenue) | |||
k) | Retained earnings (-SE) | 10,000 | |
Cash (-A) | 10,000 | ||
(To record retained earnings) |
Table (1)
3.
Record Adjusting journal entries (l) to (p).
Explanation of Solution
Prepare adjusting journal entries (l) to (p):
Date | Account Title and Explanation | Debit ($) | Credit ($) |
l. | Remaining expense (+E, -SE) | 9,000 | |
Supplies(-A) | 8,000 | ||
Small tools (-A) | 1,000 | ||
(To record the use of supplies and small tools) | |||
m. | Depreciation expense (+E, -SE) | 2,000 | |
Accumulated depreciation – (+xA, -A) | 2,000 | ||
(To record adjusting entry for depreciation expense) | |||
n. | Interest expense (+E, -SE) | 1,000 | |
Interest payable(+L) | 1,000 | ||
(To record the adjusting entry for interest expense) | |||
o. | Wages expense (+E, -SE) | 3,000 | |
Wages payable (+L) | 3,000 | ||
(To record the adjusting entry for wages expenses) | |||
p. | Income tax expense(+E, -SE) | 4,000 | |
Income tax payable(+L) | 4,000 | ||
(To record the adjusting entry for income tax expense) |
Table (2)
l.
- Remaining expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit remaining expense with $9,000.
- Supplies are asset. There is a decrease in the asset. Hence, credit asset with $8,000.
- Small tools are asset. There is a decrease in the asset. Hence, credit asset with $1,000.
m.
- Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $2,000.
- Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $2,000.
n.
- Interest expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $1,000.
- Interest payable is a liability. There is an increase in the liability. Hence, credit wages with $1,000.
o.
- Wages expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit wages expense with $3,000.
- Wages payable is a liability. There is an increase in the liability. Hence, credit wages payable with $3,000.
p.
- Income tax expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $4,000.
- Income tax payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $4,000.
4.
Prepare an income statement, Statement of stockholders’ equity and balance sheet.
Explanation of Solution
Prepare an income statement for the year ended December 31, 2017:
Incorporation FR | |
Income statement | |
For the year ended December 31, 2017 | |
Particulars | Amount ($) |
Revenues: | |
Service revenue | 70,000 |
Total revenues | 70,000 |
Less: Expenses | |
Depreciation expense | 2,000 |
Wages expense | 3,000 |
Remaining expense | 44,000 |
Total operating expenses | 21,000 |
Operating income | 53,000 |
Less: Other item | |
Interest expense | 1,000 |
Pretax income | 20,000 |
Less: Income tax expense | 4,000 |
Net income | 16,000 |
Earnings per share | $0.23 |
Table (3)
Incorporation FR net income is $16,000.
Prepare a statement of Stockholders’ equity:
Incorporation FR | ||||
Statement of stockholders’ equity | ||||
For the year ended December 31, 2017 | ||||
Particulars | Common Stock | Additional Paid-in Capital | Retained earnings | Total Stockholders' Equity |
Balance, January 1, 2017 | $6,000 | $9,000 | $4,000 | $19,000 |
Additional stock issuance | 1,000 | 4,000 | 5,000 | |
Net income | 16,000 | 16,000 | ||
Dividends declared | (10,000) | (10,000) | ||
Balance, December 31, 2017 | $7,000 | $13,000 | $10,000 | $30,000 |
Table (4)
Prepare a balance sheet for the year December 31, 2017:
Incorporation FR | |||
Balance Sheet | |||
At December 31, 2017 | |||
Assets | Amount ($) | Liabilities and Stockholders’ Equity | Amount ($) |
Current Assets: | Current Liabilities: | ||
Cash | 27,000 | Accounts payable | 13,000 |
Accounts receivable | 10,000 | Notes payable | 20,000 |
Supplies | 4,000 | Interest payable | 1,000 |
Small tools | 8,000 | Wages payable | 3,000 |
Income taxes payable | 4,000 | ||
Unearned revenue | 3,000 | ||
Total current assets | 49,000 | Total current liabilities | 44,000 |
Land | 13,000 | Stockholders' Equity: | |
Equipment | 18,000 | Common stock | 7,000 |
Less: Accumulated depreciation | (2,000) | Additional paid-in capital | 13,000 |
Net book value | 16,000 | Retained earnings | 10,000 |
Other assets | 9,000 | Total stockholders' equity | 30,000 |
Total assets | 74,000 | Total liabilities and stockholders' equity | 74,000 |
Table (5)
The balance sheet agrees with the $74,000 of both assets and liabilities columns.
5.
Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect.
Explanation of Solution
Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect:
Transaction | Type of Effect on Cash Flows | Direction and Amount of Effect |
a. | F | +20,000 |
b. | I | -18,000 |
c. | F | +5,000 |
d. | O | +56,000 |
e. | O | -28,000 |
f. | O | -3,000 |
g. | O | +8,000 |
h. | O | -11,000 |
i. | NE | NE |
j. | O | +3,000 |
k. | F | -10,000 |
Table (6)
Statement of cash flow:
A statement that shows the inflows and outflows of cash or cash equivalents is known as a cash flow statement. A cash flow statement includes the following three components.
- 1. Cash flows from operating activities:
These are the cash produced by the normal business operations.
The following amounts are to be adjusted from the Net Income to calculate the cash flows from the operating activities.
- Deduct increase in current assets.
- Deduct decrease in current liabilities.
- Add decrease in current assets.
- Add the increase in current liability.
- Add depreciation expense.
- Add loss on sale of plant assets.
- Less gain on sale of plant assets.
- 2. Cash flows from investing activities:
These are the amount of cash used for the purchase of any fixed assets, and any cash receives from the sale of fixed assets.
- Deduct the amount of cash used to purchase any fixed assets from cash flows from investing activities to calculate the net cash provided or used for investing activities.
- Add the amount of cash received from the sale of any fixed assets to cash flows from investing activities to calculate the net cash provided or used from investing activities.
- 3. Cash flows from financing activities:
These are the sources of finance of the business.
- Add the amount of cash received from any source of finance like amount from stockholders, debenture holders, or from any fixed liability to the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
- Deduct the payment of dividend and interest from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
- Deduct the amount of cash paid to purchase the treasury stocks from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
Note:
I refer to investing activity.
F refers to financing activity.
O refers to operating activity.
NE refers to no effect.
6.
Prepare the closing entry for Incorporation FR on December 31, 2017.
Explanation of Solution
Prepare closing entries for Incorporation FR on December 31, 2017:
Date | Account Title and Explanation | Debit ($) | Credit ($) |
December 31, 2017 | Service revenue(-R) | 70,000 | |
Retained earnings(+SE) | 16,000 | ||
Depreciation expense(-E) | 2,000 | ||
Interest expense (-E) | 1,000 | ||
Income tax expense(-E) | 4,000 | ||
Wages expense(-E) | 3,000 | ||
Remaining expense(-E) | 44,000 | ||
(To record the closing entries for Incorporation FR) |
Table (7)
For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts will be transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.
7.
Compute Current ratio, Total asset turnover and net profit margin and explain the results to suggest about the Company FR.
Explanation of Solution
- (a) Calculation of current ratio:
The current ratio is 1.11:1.
For Incorporation FR, suggests that their current ratio is having sufficient current assets to pay current liabilities.
- (b) Calculation of total asset turnover:
For Incorporation FR, suggests that the total asset turnover ratio has generated $1.40 for every dollar of assets.
- (c) Calculation of net profit margin:
For Incorporation FR, suggests that the net profit margin earns $0.23 for every dollar in sales that it generates.
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Chapter 4 Solutions
FIN.ACCTG.: ACC 101: CUSTOM TEXT+CONNEC
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In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3.Paid 250 to creditors on account. 4.Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5.Purchased office equipment on account from Office Mart, 7,500. 8.Paid for a newspaper advertisement, 200. 11.Received 1,000 for serving as a disc jockey for a party. 13.Paid 700 to a local audio electronics store for rental of digital recording equipment. 14.Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on Page 2 of the two-column journal: 16.Received 2,000 for serving as a disc jockey for a wedding reception. 18.Purchased supplies on account, 850. July 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22.Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23.Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 2019. 27.Paid electric bill, 915. 28.Paid wages of 1,200 to receptionist and part-time assistant. 29.Paid miscellaneous expenses, 540. 30.Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 2019. 31.Received 3,000 for serving as a disc jockey for a party. 31.Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists music during July. 31.Withdrew 1,250 cash from PS Music for personal use. PS Musics chart of accounts and the balance of accounts as of July 1, 2019 (all normal balances), are as follows: Instructions 1. Enter the July 1, 2019, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 2019.arrow_forwardThe transactions completed by PS Music during June 2019 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the business's operations: July 1. Peyton Smith made an additional investment in PS Music by depositing 5,000 in PS Music's checking account. 1. Instead of continuing to share office space with a local real estate agency, Peyton decided to rent office space near a local music: store. Paid rent for July, 1,750. 1. Paid a premium of 2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one-year period. 2. Received 1,000 cash from customers on account. 3. On behalf of PS Music, Peyton signed a contract with a local radio station, KXMD, to provide guest spots for the next three months. The contract requires PS Music to provide a guest disc jockey for SO hours per month for a monthly fee of 3,600. Any additional hours beyond SO will be billed to KXMD at 40 per hour. In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3. Paid 250 to creditors on account. 4. Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from Office Mart, 7,500. 8. Paid for a newspaper advertisement, 200. 11. Received 1,000 for serving as a disc jockey for a party. 13. Paid 700 to a local audio electronics store for rental of digital recording equipment. 11. Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on Page 2 of the two-column journal: 16. Received 2,000 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, 850. July 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22. Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23. Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 2019. 27. Paid electric bill, 915. 28. Paid wages of 1,200 to receptionist and part-time assistant. 29. Paid miscellaneous expenses, 540. 30. Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 2019. 31. Received 3,000 for serving as a disc jockey for a party. 31. Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists' music during July. 31. Withdrew l,250 cash from PS Music for personal use. PS Music's chart of accounts and the balance of accounts as of July 1, 2019 (all normal balances), are as follows: 11 Cash 3,920 12 Accounts receivable 1,000 14 Supplies 170 15 Prepaid insurance 17 Office Equipment 21 Accounts payable 250 23 Unearned Revenue 31 Peyton smith, Drawing 4,000 32 Fees Earned 500 41 Wages Expense 6,200 50 Office Rent Expense 400 51 Equipment Rent Expense 800 52 Utilities Expense 675 53 Supplies Expense 300 54 music Expense 1,590 55 Advertising Expense 500 56 Supplies Expense 180 59 Miscellaneous Expense 415 Instructions 1.Enter the July 1, 2019, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2.Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3.Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4.Prepare an unadjusted trial balance as of July 31, 2019.arrow_forwardThe unadjusted trial balance of La Mesa Laundry at August 31, 2016, the end of the fiscal year, follows: The data needed to determine year-end adjustments are as follows: a. Wages accrued but not paid at August 31 are 2,200. b. Depreciation of equipment during the year is 8,150. c. Laundry supplies on hand at August 31 are 2,000. d. Insurance premiums expired during the year are 5,300. Instructions 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as Aug. 31 Bal. In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, Insurance Expense, and Income Summary. 2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed. 3. Journalize and post the adjusting entries. Identify the adjustments by Adj. and the new balances as Adj. Bal. 4. Prepare an adjusted trial balance. 5. Prepare an income statement, a statement of owners equity (no additional investments were made during the year), and a balance sheet. 6. Journalize and post the closing entries. Identify the closing entries by Clos. 7. Prepare a post-closing trial balance.arrow_forward
- Selected accounts and related amounts for Clairemont Co. for the fiscal year ended May 31, 2016, are presented in Problem 6-5A. Instructions 1. Prepare a single-step income statement in the format shown in Exhibit 11. 2. Prepare a statement of owners equity. 3. Prepare an account form of balance sheet, assuming that the current portion of the note payable is 50,000. 4. Prepare closing entries as of May 31, 2016.arrow_forwardKelly Pitney began her consulting business, Kelly Consulting, on April 1, 2016. The accounting cycle for Kelly Consulting for April, including financial statements, was illustrated in this chapter. During May, Kelly Consulting entered into the following transactions: Instructions 1. The chart of accounts for Kelly Consulting is shown in Exhibit 9, and the post-closing trial balance as of April 30, 2016, is shown in Exhibit 17. For each account in the post-closing trial balance, enter the balance in the appropriate Balance column of a four-column account. Date the balances May 1, 2016, and place a check mark () in the Posting Reference column. Journalize each of the May transactions in a two column journal starting on Page 5 of the journal and using Kelly Consultings chart of accounts. (Do not insert the account numbers in the journal at this time.) 2. Post the journal to a ledger of four-column accounts. 3. Prepare an unadjusted trial balance. 4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6) a. Insurance expired during May is 275. b. Supplies on hand on May 31 are 715. c. Depreciation of office equipment for May is 330. d. Accrued receptionist salary on May 31 is 325. e. Rent expired during May is 1,600. f. Unearned fees on May 31 are 3,210. 5.(Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. 6.Journalize and post the adjusting entries. Record the adjusting entries on Page 7 of the journal. 7.Prepare an adjusted trial balance. 8.Prepare an income statement, a statement of owners equity, and a balance sheet. 9.Prepare and post the closing entries. Record the closing entries on Page 8 of the journal. (Income Summary is account #33 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. 10.Prepare a post-closing trial balance.arrow_forwardWilliams Mechanic Services prepared the following work sheet for the year ended March 31,20--. Required 1. Complete the work sheet. (Skip this step if using CLGL.) 2. Prepare an income statement. 3. Prepare a statement of owners equity. Assume that there was an additional investment of 5,000 on March 13. 4. Prepare a balance sheet. 5. Journalize the closing entries using the four steps in the correct sequence. 6. Prepare a post-dosing trial balance. Check Figure Post-closing trial balance total, 31,765arrow_forward
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