Chapter 4, Problem 4.4CACR

(a)

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 Enter: The beginning balances of July in the ledger accounts.

Explanation of Solution

Enter the beginning balances of July in the ledger accounts as follows:

Cash
July.   1	$ 5,230
Bal.	$ 5,230

Supplies
July.   1	$   690
Bal.	$   690

Equipment
July.   1	$ 24,000
Bal.	$ 24,000

Accounts Payable
		July.   1	$  400
		Bal.	$  400

Accounts Receivable
July.   1	$   1,200
Bal.	$   1,200

Unearned Service Revenue
		July.   1	$  1,120
		Bal.	$  1,120

Common Stock
		July.   1	$ 3,600
		Bal.	$ 3,600

Retained Earnings
		July.   1	$ 2,000
		Bal.	$ 2,000

Notes payable
		July.   1	$20,000
		Bal.	$20,000

(b)

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.

To Journalize: The transaction of Company G for the month of July.

Explanation of Solution

Journalize the transaction of Company G for the month of July.

Date	Account Title and Description	Debit ($)	Credit ($)
July. 1	Equipment	24,000
	Cash		4,000
	Accounts Payable		20,000
	(To record the purchase of equipment party on cash and party by signing a notes)
July. 2	Cash	50,000
	Common stock		50,000
	(To record the issuance of common stock)
July. 3	Prepaid insurance	3,600
	Cash		3,600
	(To record the payment of  insurance in advance)
July. 3	Prepaid rent	8,000
	Cash		8,000
	(To record the  payment of  rent in advance)
July. 6	Supplies	3,800
	Cash		3,800
	(To record the purchase of supplies)
July. 9	No entry required	0
July. 10	Cash	1,200
	Accounts receivable		1,200
	(To record the cash received on account)
July. 13	Unearned Service revenue	1,120
	Service Revenue		1,120
	(To record the service performed for the unearned service)
July. 14	Accounts Payable	400
	Cash		400
	(To record the payment of cash on utilities accrued)
July. 16	Cash	12,000
	Unearned Service revenue		12,000
	(To record the cash received for the service yet to provide)
July. 18	Salaries and wages expense	11,000
	Cash		11,000
	(To record the payment made for semi-monthly salaries)
July. 20	Accounts receivable	28,000
	Service Revenue		28,000
	(To record the services performed on account)
July. 20	Advertising expense	2,200
	Accounts payable		2,200
	(To record the amount due on advertising service received)
July. 23	Unearned Service revenue	10,000
	Service Revenue		10,000
	(To record the service performed for the unearned service on July 16)
July. 27	Cash	15,000
	Accounts receivable		15,000
	(To record the cash received from customers for the service rendered on July 20)

(c)

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).

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

Explanation of Solution

Explanation

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

Cash
July. 1	$   5,230	July.   1	$  4,000
2	$ 50,000	3	$  3,600
10	$   1,200	3	$  8,000
16	$ 12,000	6	$  3,800
27	$ 15,000	3	$     400
		25	$11,000
Total	$ 69,180	Total	$30,800
Bal.	$ 52,630

Accounts receivable
July.   1	$  1,200	July.  10	$  1,200
27	$ 28,000	27	$15,000
	$ 29,200		$16,200
Bal.	$ 13,000

Prepaid insurance
July.   3	$  3,600
Bal.	$  3,600

Prepaid rent
July.   3	$  8,000
Bal.	$  8,000

Supplies
July.   1	$     690
6	$  3,800
Bal.	$  4,490

Equipment
July.   1	$ 24,000
Bal.	$ 24,000

Accounts Payable
July.   14	$   400	July.   1	$     400
		20	$  2,200
Total	$   400	Total	$  2,600
		Bal.	$  2,200

Unearned Service Revenue
July.   13	$   1,120	July.   1	$  1,120
23	$ 10,000	16	$12,000
Total	$ 11,120	Total	$13,120
		Bal.	$  2,000

Notes Payable
		July.   1	$20,000
		Bal.	$20,000

Common Stock
		July.   1	$  3,600
		2	$50,000
		Bal.	$53,600

Salaries and Wages Expenses
July.   18	$ 11,000
Bal.	$ 11,000

Retained Earnings
		July. 1	$  2,000
		Bal.	$  2,000

Service Revenue
		July.  13	$  1,120
		20	$28,000
		27	$10,000
		Bal.	$39,120

Advertising expense
July.   20	$  2,200
Bal.	$  2,200

(d)

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 G at July, 31.

Explanation of Solution

Prepare a trial balance of Company G for the month ended July, 31 as follows:

Company G Trial Balance July 31, 2017
Particulars	Debit $	Credit $
Cash	52,630
Accounts receivable	13,000
Supplies	4,490
Prepaid insurance	3,600
Prepaid rent	8,000
Equipment	24,000
Notes payable		20,000
Accounts payable		2,200
Unearned service revenue		2,000
Common stock		53,600
Service revenue		39,120
Retained earnings		2,000
Salaries and wages expense	11,000
Advertising expense	2,200
Total	118,920	118,920

Table (1)

Conclusion

The debit column and credit column of the trial balance are agreed, both having balance of $118,920.

(e)

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 G for July 31.

To post: The adjusting entries to the ledger accounts.

Explanation of Solution

The adjusting entries of Company G for July 31, 2017 are as follows:

(1)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Insurance expense                          (1)	300
	Prepaid insurance		300
	(To record the insurance expense for July)

Working notes:

$\begin{array}{c}\text{Prepaid expenses =}\left(\frac{\text{Total amount of insurance paid}}{\text{insuarnce expense for july}}\right)\\ \text{=\$ 3,600 / 1}\times \text{12}\\ \text{=\$ 300}\end{array}$ (1)

(2)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Rent expense	4,000
	Prepaid rent		4,000
	(To record the rent expense for July)

(3)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Supplies expense	1,250
	Supplies		1,250
	(To record the supplies expenses)

(4)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Depreciation expense                      (2)	500
	Accumulated depreciation –Equipment		500
	(To record the depreciation and the accumulated depreciation)

Working notes:

$\begin{array}{c}\text{Depreciation expenses =}\left(\frac{\text{Cost of equipment }}{\text{Useful years of equipment}}\text{ × depreciation expenses for July}\right)\\ \text{=\$ 24,000 / 4 }\times \text{ 1/12}\\ \text{=\$ 500}\end{array}$ (2)

(5)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Interest expense                            (3)	100
	Interest payable		100
	(To record the interest expense on note payable)

Working notes:

$\begin{array}{c}\text{Interest expenses =}\left(\frac{\text{Total amount borrowed }}{\text{Interest rate}}\text{ ×interest expenses for July}\right)\\ \text{=\$ 20,000 / 6/100 × 1/12}\\ \text{=\$ 100}\end{array}$ (3)

(6)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Salaries and wages expense	11,000
	Salaries and wages payable		11,000
	(To record the accrued salaries payable)

(7)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Utilities expense	800
	Accounts payable		800
	(To record the accrued utilities)

(8)

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Income tax expense	1,200
	Income tax payable		1,200
	(To record the income tax accrued)

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

Supplies
July.   31	$   4,490	July    31	$  1,250
Bal.	$   3,240

Prepaid insurance
July.   31	$  3,600	July    31	$    300
Bal.	$  3,300

Prepaid rent
July.   31	$  8,000	July    31	$  4,000
Bal.	$  4,000

Accumulated Depreciation-Equipment
		July    31	$    500
		Bal.	$    500

Accounts payable
		July   31	$  2,200
		31	$     800
		Bal.	$  3,000

Interest payable
		July    31	$  100
		Bal.	$  100

Salaries and Wages payable
		July    31	$11,000
		Bal.	$11,000
Interest payable
		July    31	$  1,200
		Bal.	$  1,200
Salaries and Wages Expenses
July.   31	$ 11,000
31	$ 11,000
Bal.	$ 22,000

Rent Expense
July.   31	$  4,000
Bal.	$  4,000

Supplies Expense
July.   31	$  1,250
Bal.	$  1,250
Utilities Expense
July.   31	$     800
Bal.	$     800

Depreciation Expense
July.   31	$     500
Bal.	$     500

Insurance expense
July.   31	$     300
Bal.	$     300

Interest expense
July.   31	$     100
Bal.	$     100

Income tax expense
July.   31	$   1,200
Bal.	$   1,200

(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 G at July 31.

Explanation of Solution

Prepare an adjusted trial balance of Company G for the month ended July 31 as follows:

Company G Trial Balance July 31, 2017
Particulars	Debit $	Credit $
Cash	52,630
Accounts receivable	13,000
Supplies	3,240
Prepaid insurance	3,300
Prepaid rent	4,000
Equipment	24,000
Accumulated Depreciation-Equipment		500
Notes payable		20,000
Interest payable		100
Accounts payable		3,000
Salaries and wages payable		11,000
Income tax payable		1,200
Unearned service revenue		2,000
Common stock		53,600
Service revenue		39,120
Retained earnings		2,000
Salaries and wages expense	22,000
Rent Expense	4,000
Supplies Expense	1,250
Advertising expense	2,200
Utilities expense	800
Depreciation expense	500
Insurance expense	300
Interest expense	100
Income tax expense	1,200
Total	132,520	132,520

Table (2)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $132,520.

(g)

To determine

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.

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

The retained earnings statement for the month of July.

The classified balance sheet of Company G as on July 31, 2017.

Explanation of Solution

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

S Company
Income Statement
As on July 31, 2017
Particulars	$	$
Revenue:
Service Revenue		39,120
Less:  Expenses
Salaries and Wages Expenses	22,000
Supplies Expenses	1,250
Rent Expenses	4,000
Depreciation Expenses	500
Advertising Expenses	2,200
Insurance Expenses	300
Utilities  Expenses	800
Interest  Expenses	100
Income tax Expenses	1,200
Total Expenses		32,350
Net income		6,770

Table (3)

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

G Company
Retained earnings statement
For the month ended July 31, 2017
Particulars		$
Retained earnings at July, 1		2,000
Add:  Net income		6,770
Retained earnings at July, 31		8,770

Table (4)

Prepare a classified balance sheet of Company G for the month ended July 31, 2017.

S Company
Classified Balance sheet Statement
As  at November 30, 2017
Assets	$	$
Current assets:
Cash	52,630
Accounts receivable	13,000
Prepaid rent	4,000
Prepaid insurance	3,300
Supplies	3,240
Total of current assets		76,170
Other assets:
Equipment	24,000
Less: Accumulated depreciation -Equipment	500
Total of other assets		23,500
Total assets		$99,670
Liabilities and Stockholders' equity	$	$
Liabilities:
Accounts payable	3,000
Unearned service revenue	2000
Interest payable	100
Income tax payable	1,200
Salaries and wages payable	11,000
Total current liabilities		17,300
Long-term Liabilities:
Notes payable		20,000
Total liabilities		37,300
Stockholders' equity:
Common stock	53,600
Retained earnings	8,770
Total stockholders' equity		62,370
Total liabilities and stockholders' equity		99,670

Table (5)

Conclusion

The net income for the month of July, 2017 is $6,770.

The retained earnings for the month of July, 2017 are $8,770.

The classified balance sheet for the month ended July, 31 2017 are agreed, both the assets account and the liabilities account shows a balance of $99,670.

(h)

To determine

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.

To prepare: The closing entries of Company G.

To post: The closing entries of Company G to the respective ledger account.

Explanation of Solution

The closing entries of Company G for July 31, 2017 are as follows:

1. 1. Closing entry for revenue account.

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Service revenue	39,120
	Income summary		39,120
	(To record the closure of revenues account )

Description:

Service revenue account has a normal credit balance of $39,120, now to close this account, the service revenue account must be debited with $39,120 and, income summary account must be credited with $39,120.

• In this closing entry, the service 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 $39,120 and, the revenue account balance gets decreased by $39,120.

1. 2. Closing entry for expenses account.

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Income summary	32,350
	Salaries and wages Expense		22,000
	Rent Expense		4,000
	Advertising Expense		2,200
	Depreciation Expense		500
	Utilities Expense		800
	Supplies Expense		1,250
	Insurance Expense		300
	Income tax Expense		1,200
	Interest Expense		100
	(To record the closure of expense account to income summary)

Description:

All expenses accounts have a normal debit balance, the total of expenses are $32,350 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 $32,350.

• 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 $32,350.

1. 3. Closing entry for income summary account.

Date	Accounts title and Description	Debit ($)	Credit ($)
July 31	Income summary                  (1)	6,770
	Retained earnings		6,770
	(To record the closure of net income from income summary to retained earnings)

Working note:

Determine the balance amount in the income summary.

$$ $\begin{array}{c}\text{Balance of income summary =}\left[\begin{array}{l}\text{Income summary credited to close revenue account-}\\ \text{Income summary debited to close expense account}\end{array}\right]\\ \text{=\$ 39,120 – \$ 32,350}\\ \text{=\$ 6,770}\end{array}$ (1)

Description:

Determined amount balance of income summary is $6,770, which has to be closed by debiting the income summary account with $6,770, and crediting the retained earnings account with $6,770.

• 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 $6,770.
• Post the closing entries to the respective ledger accounts as follows:

Service revenue
July    31	$39,120	July    31	$39,120
		Bal.	$         0
Retained earnings
		July    31	$ 6,770
			$ 2,000
		Bal.	$ 8,770
Income Summary
July    31	$ 32,350	July    31	$39,120
31	$   6,770
		Bal.	$        0

Salaries and Wages Expenses
July.   31	$ 22,000	July.   31	$22,000
Bal.	$          0

Rent Expense
July.   31	$  4,000	July.   31	$  4,000
Bal.	$        0

Supplies Expense
July.   31	$  1,250	July.   31	$  1,250
Bal.	$        0
Utilities Expense
July.   31	$     800	July.   31	$     800
Bal.	$        0

Depreciation Expense
July.   31	$     500	July.   31	$     500
Bal.	$        0

Insurance expense
July.   31	$     300	July.   31	$     300
Bal.	$        0

Interest expense
July.   31	$     100	July.   31	$     100
Bal.	$        0

Income tax expense
July.   31	$   1,200	July.   31	$  1,200
Bal.	$         0

Advertising expense
July.   20	$  2,200	July.   31	$  2,200
Bal.	$         0

(i)

To determine

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 prepare: A post–closing trial balance of Company G at July 31.

Explanation of Solution

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

Company G Post-closing Trial Balance July, 31, 2017
Particulars	Debit $	Credit $
Cash	52,630
Accounts receivable	13,000
Supplies	3,240
Prepaid insurance	3,300
Prepaid rent	4,000
Equipment	24,000
Accumulated depreciation  – Equipment		500
Accounts payable		3,000
Notes payable		20,000
Salaries and wages payable		11,000
Income tax payable		1,200
Unearned service revenue		2,000
Interest payable		100
Common stock		53,600
Retained earnings		8,770
Total	100,170	100,170

Table (6)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $100,170.