Chapter 4, Problem 4.3APR

T accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet

The unadjusted trial balance of Epicenter Laundry at June 30, 2016, the end of the fiscal year, follows:

Epicenter Laundry Unadjusted Trial Balance June 30, 2016
	Debit Balances	Credit Balances
Cash.............................................................	11,000
Laundry Supplies.................................................	21,500
Prepaid Insurance.................................................	9,600
Laundry Equipment...............................................	232,600
Accumulated Depreciation........................................		125,400
Accounts Payable.................................................		11,800
Common Stock...................................................		40,000
Retained Earnings................................................		65,600
Dividends.......................................................	10,000
Laundry Revenue.................................................		232,200
Wages Expense...................................................	125,200
Rent Expense.....................................................	40,000
Utilities Expense..................................................	19,700
Miscellaneous Expense............................................	5,400
	475,000	475,000

The data needed to determine year-end adjustments are as follows:

• a. Laundry supplies on hand at June 30 are $3,600.
• b. Insurance premiums expired during the year are $5,700.
• c. Depreciation of laundry equipment during the year is $6,500.
• d. Wages accrued but not paid at June 30 are $1,100.

Instructions

1. 1. For each account listed in the unadjusted trial balance, enter the balance in a T account. Identify the balance as “June 30 Bal." In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, Insurance Expense, and Income Summary.
2. 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. 3. Journalize and post the adjusting entries. Identify the adjustments by "Adj." and the new balances as “Adj. BAL.”
4. 4. Prepare an adjusted trial balance.
5. 5. Prepare an income statement, a retained earnings statement, and a balance sheet.
6. 6. Journalize and post the closing entries. Identify the closing entries by “Clos."
7. 7. Prepare a post-closing trial balance.

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.

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).

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.

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.

Spreadsheet:

A spreadsheet is a worksheet. It is used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Retained Earnings Statement:

It is one of the financial statements, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and pay its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.

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.

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

Balance sheet:

A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

To prepare: The T-accounts.

Explanation of Solution

Record the transactions directly in their respective T-accounts, and determine their balances.

Cash
June 30	Balance			11,000
Laundry Supplies
June 30	Balance			21,500		June 30	Adjusted			17,900
June 30	Adjusted balance			3,600
Prepaid Insurance
June 30	Balance			9,600		June 30	Adjusted			5,700
	Adjusted balance			3,900
Laundry Equipment
June 30	Balance			232,600
Accumulated Depreciation
						June 30	Balance			125,400
						June 30	Adjusted			6,500
						June 30	Adjusted balance			131,900
Accounts Payable
						June 30	Balance			11,800
Wages Payable
						June 30	Adjusted			1,100
Retained Earnings
June 30	Closing			10,000		June 30	Balance			65,600
						June 30	Closing			10,700
						June 30	Balance			66,300
Dividends
June 30	Balance			10,000		June 30	Closing			10,000
Laundry Revenue
June 30	Closing			232,200		June 30	Balance			232,200
Wages Expense
June 30	Balance			125,200		June 30	Closing			126,300
June 30	Adjusted			1,100
June 30	Adjusted balance			126,300
Rent Expense
June 30		Balance	40,000		June 30			Closing	40,000
Utilities Expense
June 30		Balance	19,700		June 30			Closing	19,700
Depreciation Expense
June 30		Adjusted	6,500		June 30			Closing	6,500
Laundry Supplies Expense
June 30		Adjusted	17,900		June 30			Closing	17,900
Insurance Expense
June 30		Adjusted	5,700		June 30			Closing	5,700
Miscellaneous Expense
June 30		Balance	5,400		June 30			Closing	5,400

Common Stock
			June 30	Closing	40,000
Income Summary
June 30	Closing	221,500	June 30	Closing	232,200
	Closing	10,700

Table (1)

To determine

To enter: The unadjusted trial balances on an end-of-period spreadsheet, and complete the spreadsheet.

Explanation of Solution

The unadjusted trial balance on an end-of-period spreadsheet is prepared as follows:

Table (2)

Conclusion

Hence, the unadjusted trial balance on an end-of-period spreadsheet is prepared and completed.

To determine

To Journalize and post: The adjusting entries.

Explanation of Solution

The adjusting entries are journalized as follows:

Date		Description	Debit ($)	Credit ($)
2016		Wages expense	1,100
June	30	Wages payable		1,100
		(To record the wages accrued)

Table (3)

• Wages expense is an expense account, and it is increased. Hence, debit the wages expense account by $1,100.
• Wages payable is a liability account, and it is increased. Hence, credit the wages payable account by $1,100.

Date		Description	Debit ($)	Credit ($)
2016		Depreciation expense	6,500
June	30	Accumulated depreciation		6,500
		(To record the equipment depreciation)

Table (4)

• Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $6,500.
• Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $6,500.

Date		Description	Debit ($)	Credit ($)
2016		Laundry supplies expense	17,900
June	30	Laundry supplies $\left(\text{\$21,500}-\text{\$3,600}\right)$		17,900
		(To record the supplies expense)

Table (5)

• Laundry supplies expense is an expense account, and it is increased. Hence, debit the laundry supplies expense account by $17,900.
• Laundry supplies are the asset account, and it is increased. Hence, credit the laundry supplies account by $17,900.

Date		Description	Debit ($)	Credit ($)
2016		Insurance expense	5,700
August	31	Prepaid insurance		5,700
		(To record the insurance expense)

Table (6)

• Insurance expense is an expense account, and it is increased. Hence, debit the insurance expense account by $5,700.
• Prepaid insurance is an asset account, and it is decreased. Hence, credit the prepaid insurance account by $5,700.

To determine

To prepare: An adjusted trial balance for Laundry E, as of June 30, 2016.

Explanation of Solution

Prepare an adjusted trial balance for Laundry E, as of June 30, 2016.

Laundry E
Adjusted Trial Balance
June 30, 2016
Accounts	Debit Balances	Credit Balances
Cash	11,000
Laundry Supplies	3,600
Prepaid Insurance	3,900
Laundry Equipment	232,600
Accumulated depreciation		131,900
Accounts payable		11,800
Wages Payable		1,100
Common Stock		40,000
Retained earnings		65,600
Dividends	10,000
Laundry revenue		232,200
Wages expense	126,300
Rent expense	40,000
Utilities Expense	19,700
Depreciation Expense	17,900
Laundry supplies expense	6,500
Insurance Expense	5,700
Miscellaneous Expense	5,400
	482,600	482,600

Table (7)

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $482,600.

To determine

The net income or net loss of Laundry E for the month of June.

Explanation of Solution

The net income of Laundry E for the month of June is $10,700.

E Laundry
Income Statement
For the year ended June 30, 2016
Particulars	Amount ($)	Amount ($)
Revenue:
Laundry revenue		$248,000
Expenses:
Wages Expense	$126,300
Rent Expense	40,000
Utilities Expense	19,700
Depreciation Expense	17,900
Laundry supplies Expense	6,500
Insurance Expense	5,700
Miscellaneous Expense	5,400
Total Expenses		221,500
Net Income		$10,700

Table (8)

Conclusion

Hence, the net income of Laundry E for the year ended June 30, 2016 is $10,700.

To determine

To Journalize: The closing entries for E Laundry.

Explanation of Solution

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 30, 2016	Laundry Revenue		232,200
	Income Summary			232,200
	(To record the closure of revenues account )
June 30	Income Summary		221,500
	Wages Expense			126,300
	Rent Expense			40,000
	Utilities Expense			19,700
	Depreciation Expense			6,500
	Laundry supplies Expense			17,900
	Insurance Expense			5,700
	Miscellaneous Expense			5,400
	(To close the revenues and expenses account. Then  the balance amount are  transferred to income summary account)
June 30	Income Summary		10,700
	Retained earnings			10,700
	(To record the closure of net income from income summary to retained earnings)
	Retained earnings		10,000
	Dividends			10,000
	(To record the closure of dividend to retained earnings)

Table (11)

Laundry revenue account has a normal credit balance of $232,200 in total, now to close this account, the laundry revenue account must be debited with $232,200 and, income summary account must be credited with $232,200.

• In this closing entry, the laundry 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 $232,200 and, the revenue account balance gets decreased by $232,200.

All expenses accounts have a normal debit balance, the total of expenses are $221,500 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 $ 221,500.

• 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 $221,500.

Determined amount balance of income summary is $10,700, which has to be closed by debiting the income summary account with $10,700, and crediting the retained earnings account with $10,700.

• 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 $10,700.

Dividends account has a normal debit balance of $10,000, now to close this account, retained earnings account must be debited with $10,000 and, dividend account must be credited with $10,000.

• 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 $10,000 and, the dividend account balance gets decreased by $10,000.

To determine

To prepare: The post–closing trial balance of E Laundry for the month ended June 30, 2016.

Explanation of Solution

Prepare a post–closing trial balance of E Laundry for the month ended June 30, 2016 as follows:

Laundry E Post-closing Trial Balance June 30, 2016
Particulars	Debit $	Credit $
Cash	11,000
Laundry Supplies	3,600
Prepaid insurance	3,900
Laundry Equipment	232,600
Accumulated depreciation		131,900
Accounts payable		11,800
Wages payable		1,100
Common stock		40,000
Retained earnings		66,300
Total	$251,100	$251,100

Table (12)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $251,100.