Chapter 4, Problem 4.4BPR

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

 The unadjusted trill balance of Recessive Interior, at January 31, 20Y2, the end of the year, follows:

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

(a) Supplies on hand at January 31 are $2,850

(b) Insurance premium» expired during the year are $3,150.

(c) Depreciation of equipment during the year is $5,250

(d) Depreciation of trucks during the year is $4,000.

(e) Wages accrued but not paid at January 31 are $900.

  Instructions

1. For each account listed in the unadjusted trial balance, enter the balance in the appropriate Balance column of a four-column account and place a check mark (✓) in the Posting Reference column.

2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (3) as needed.

3. Journalize and post the adjusting entries, inserting balances in the accounts affected. Record the adjusting entries on Page 26 of the journal. The following additional accounts from Recessive Interiors’ chart if accounts should be used: Wages Payable, 22; Depreciation Expense—Equipment, 54; Supplies Expense. 55; Depreciation Expense—Trucks. 56; Insurance Expense, 57.

4. Prepare an adjusted trial balance.

5. Prepare an income statement, a statement of stockholders’ equity, and a balance sheet. During the year ended January 31, 20Y2, additional common stock of $7,500 was issued.

6. Journalize and post the dining entries. Record the closing entries on Page 27 of the journal. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry.

7. Prepare a post-closing trial balance.

To determine

To prepare: The T-accounts.

Explanation of Solution

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).

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

Account:         Cash                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			13,100

Account:   Supplies                                                            Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			8,000
	31	Adjusting	26		5,150	2,850

Account:    Prepaid Insurance                                                  Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			7,500
	31	Adjusting	26		3,150	4,350

Account:    Equipment                                                             Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			113,000

Account:  Accumulated Depreciation-Office equipment        Account no. 17
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓				12,000
	31	Adjusting	26		5,250		17,250

Account:    Trucks                                                                    Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			90,000

Account:  Accumulated Depreciation- Truck                      Account no. 19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓				27,100
	31	Adjusting	26		4,000		31,100

Account:     Accounts Payable                                                      Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓				4,500

Account:     Wages Payable                                                        Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Adjusting	26		900		900

Account:     Common Stock                                                        Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓		900		30,000

Account:          Retained Earnings                                                   Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓   1				96,400
	31	Closing	27		46,150		142,550
	31	Closing	27	3,000			139,550

Account:        Dividends                                                              Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			3,000
	31	Closing	27		3,000

Account:          Income Summary                                                   Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Closing	27		155,000		155,000
	31	Closing	27	108,850			46,150
	31	Closing	27	46,150

Account:          Service revenue                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓				155,000
	31	Closing	27	155,000

Account:  Wages expense                                                           Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	1	Balance	✓			72,000
	31	Adjusting	26	900		72,900
	31	Closing	27		72,900

Account:   Rent expense                                                               Account no. 52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			7,600
	31	Closing	27		7,600

Account:   Truck Expense                                                          Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			5,350
	31	Closing	27		5,350

Account:   Depreciation Expense- Equipment                                Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Adjusting	26	5,250		5,250
	31	Closing	27		5,250

Account:   Supplies Expenses                                                         Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Adjusting	26	5,150		5,150
	31	Closing	27		5,150

Account:   Depreciation Expense- Trucks                                      Account no. 56
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Adjusting	26	4,000		4,000
	31	Closing	27		4,000

Account:   Insurance expense                                                     Account no. 57
Date		Item	Post. Ref		Debit  ($)	Credit ($)	Balance
							Debit ($)	Credit ($)
20Y2
January	31	Adjusting		26	3,150		3,150
	31	Closing		27		3,150

Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	1	Balance	✓			5,450
	31	Closing	27		5,450

To determine

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

Explanation of Solution

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.

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

Table (1)

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

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.

The adjusting entries are journalized as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y2		Wages expense	51	900
January	31	Wages payable	22		900
		(To record the wages accrued)

Table (2)

Description:

• • Wages expense is an expense account, and it is increased. Hence, debit the wages expense account by $900.
• • Wages payable is a liability account, and it is increased. Hence, credit the wages payable account by $900.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y2		Depreciation expense-Equipment	54	5,250
January	31	Accumulated depreciation- Equipment	17		5,250
		(To record the equipment depreciation)

Table (3)

Description:

• • Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $5,250.
• • Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $5,250.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y2		Depreciation expense-Truck	56	4,000
January	31	Accumulated depreciation- Truck	19		4,000
		(To record the truck depreciation)

Table (4)

Description:

• • Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $4,000.
• • Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $4,000.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y2		Supplies expense	55	5,150
January	31	Supplies $\left(\text{\$8,000}-\text{\$2,850}\right)$	13		5,150
		(To record the supplies used)

Table (5)

Description:

• • Supplies expense is an expense account, and it is increased. Hence, debit the supplies expense account by $5,150.
• • Supplies are the asset account, and it is increased. Hence, credit the supplies account by $5,150.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y2		Insurance expense	57	3,150
January	31	Prepaid insurance	14		3,150
		(To record the insurance expense)

Table (6)

Description:

• • Insurance expense is an expense account, and it is increased. Hence, debit the insurance expense account by $3,150.
• • Prepaid insurance is an asset account, and it is decreased. Hence, credit the prepaid insurance account by $3,150.

To determine

To prepare: An adjusted trial balance for R interiors, as of January 31, 20Y2.

Explanation of Solution

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.

Prepare an adjusted trial balance for Company L, as of January 31, 20Y2.

R interiors
Adjusted Trial Balance
January 31, 20Y2
Accounts	Account Number	Debit Balances	Credit Balances
Cash	11	13,100
Supplies	13	2,850
Prepaid Insurance	14	4,350
Equipment	16	113,000
Accumulated depreciation- Equipment	17		17,250
Trucks	18	90,000
Accumulated depreciation- Trucks	19		31,100
Accounts payable	21		4,500
Wages Payable	22		900
Common Stock	31		30,0 00
Retained earnings	32		96,400
Dividends	33	3,000
Service revenue	41		155,000
Wages expense	51	72,900
Rent expense	52	7,600
Truck Expense	53	5,350
Depreciation Expense- Equipment	54	5,250
Supplies expense	55	5,150
Depreciation Expense- Trucks	56	4,000
Insurance Expense	57	3,150
Miscellaneous Expense	59	5,450
		335,150	335,150

Table (7)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $335,150.

To determine

The net income or net loss of R interiors for the month of January and prepare the statement of retained earnings and balance sheet of R interiors.

Explanation of Solution

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.

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

R interiors
Income Statement
For the year ended January 31, 20Y2
Particulars	Amount ($)	Amount ($)
Revenue:
Laundry revenue		$155,000
Expenses:
Wages Expense	$72,900
Rent Expense	7,600
Truck Expense	5,350
Depreciation Expense-Equipment	5,250
Supplies Expense	5,150
Depreciation Expense-Trucks	4,000
Insurance Expense	3,150
Miscellaneous Expense	5,450
Total Expenses		108,850
Net Income		$46,150

Table (8)

Statement of retained earnings: This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends are deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

The statement of retained earnings for the year ended January 31, 20Y2 is as follows:

R interiors
Statement of Retained Earnings
For the Year Ended January 30, 20Y2
Particulars	Amount ($)	Amount ($)
Balance,, February1, 20Y1		$96,400
Net income	$46,150
Dividends	(3,000)
		43,150
Retained earnings, January 31, 20Y2		$139,550

Table (9)

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.

Prepare the balance sheet of R interiors at January 31, 20Y2.

R interiors
Balance Sheet
For the year ended January 31, 20Y2
Assets
Current Assets:
Cash		$13,100
Supplies		2,850
Prepaid Insurance		4,350
Total Current Assets			$20,300
Property, plant and equipment:
Equipment	$113,000
Less: Accumulated Depreciation- Equipment	17,250	95,750
Trucks	90,000
Less: Accumulated Depreciation- Trucks	31,100	58,900
Total property, plant, and equipment			154,650
Total Assets			$174,950
Liabilities
Current Liabilities:
Accounts Payable		$4,500
Wages Payable		900
Total Liabilities			$5,400
Stock holder’s Equity
Common Stock		30,000
Retained earnings		139,550
Total Stock holder’s Equity			169,550
Total Liabilities and Owners’ Equity			$174,950

Table (10)

It is one of the financial statements, which shows the assets, liabilities, and stockholders’ equity of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

Conclusion

Therefore, the net income for the year ended is $46,150, retained earnings for the year ended are $139,550, and the total assets and total liabilities plus stockholders’ equity at January 31, 20Y2 is $174,950 of R interiors.

To determine

To Journalize: The closing entries for R interiors.

Answer to Problem 4.4BPR

Closing entry for revenue and expense accounts:

Journal                                            Page 27
Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 20Y2	Service Revenue	41	155,000
	Wages Expense	51		72,900
	Rent Expense	52		7,600
	Truck Expense	53		5,350
	Depreciation Expense-Equipment	54		5,250
	Supplies Expense	55		5,150
	Depreciation Expense-Truck	56		4,000
	Insurance Expense	57		3,150
	Miscellaneous Expense	59		5,450
	Retained Earnings	34		46,150
	(To close the revenues and expenses account. Then  the balance amount are  transferred to retained earnings  account)	32
January 31, 20Y2	Retained earnings	32	3,000
	Dividends	33		3,000
	(To record the closure of dividend to retained earnings)

Table (11)

Explanation of Solution

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 such as retained earnings. It is passed at the end of the accounting period, to transfer the final balance.

Process of closing:

• • The balance of revenue and expense are transferred to retrained earnings account.
• • The balance of dividend account is transferred to retained earnings account to close the temporary accounts.

Rules of Debit and Credit:

• • Debit, the revenue account and retained earnings account balance. In addition debit retained earnings  account if it suffer loss (net loss)
• • Credit, the expense account, retained earnings  if it earn income (net income) and dividend account.
• • Fees earned are a revenue account. Since the amount of revenue is closed and transferred to retained earnings account. Here, AS Company earned an income of $46,150. Therefore, it is debited.
• • Wages Expense, Rent Expense, Insurance Expense, Utilities Expese, Supplies Expense, Depreciation Expense and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.

Working Note:

Calculate net income on income summary account:

$\begin{array}{c}\begin{array}{l}\text{Net Income or Net Loss on}\\ \text{ Income Summary account}\end{array}\}=\left(\begin{array}{l}\text{Total Revenues}-\\ \text{Total Expenses}\end{array}\right)\\ =\text{\$155,000}-\$108,850\\ =\$46,150\left(\text{ Net income}\right)\end{array}$

• • The Dividend is paid to the shareholders out of the Retained Earnings. Thus, Retained Earnings is debited since the earnings are decreased on payment of dividend.
• • Dividends is a component of stockholders’ equity account. It is credited because dividends are transferred to Retained Earnings account.

To determine

To prepare: The post–closing trial balance of R interiors for the month ended January 31, 20Y2.

Explanation of Solution

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.

Prepare a post–closing trial balance of R interiors for the month ended January 31, 20Y2 as follows:

R interiors Post-closing Trial Balance January 31, 20Y2
Particulars	Account Number	Debit $	Credit $
Cash	11	13,100
Supplies	13	2,850
Prepaid insurance	14	4,350
Equipment	16	113,000
Accumulated depreciation- Equipment	17		17,250
Trucks	18	90,000
Accumulated depreciation- Trucks	19		31,100
Accounts payable	21		4,500
Wages payable	22		900
Common Stock	31		30,000
Retained earnings	32		139,550
Total		223,300	223,300

Table (12)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $223,300