Chapter 4, Problem 5COP

From Recording Transactions to Preparing Accrual and Deferral Adjustments and Reporting Results on the Balance Sheet and Income Statement (Chapters 2,3, and 4)

House of Tutors, Inc. (HTI) is a company that runs a tutoring service for high school and university students. The company reported the following amounts in its post-closing trial balance, prepared at the end of its first fiscal year, at August 31.

The company encountered the following events during September:

1. a. HTI provided 100 hours of regular hourly tutoring at the rate of $20 per hour, all of which was collected in cash.
2. b. HTI paid tutors at the hourly rate of $ 10 per hour. On September 28, HTI paid for 90 hours of tutor time and promised to pay the remaining hours worked.
3. c. HTI hosted an all-night review session on September 29 for people cramming for midterm exams, at a special price of $10 per attendee. Rather than collect cash at the time of the review session, HTI will send bills in October to the 75 people who attended the review session.
4. d. At the beginning of the night-long review session, HTI paid $200 cash to its tutors for wages. Nc additional salaries and wages will be paid for the review session.
5. e. HTI collected $200 cash on account from students who received tutoring during the summer.
6. f. HTI also collected $250 cash from a high school for a tutoring session to be held in October.
7. g. HTI determined that depreciation for September should be $100.
8. h. Although HTI adjusted its accounts on August 31, it has not yet paid the $40 monthly interest owed on the promissory note, for either August or September. The note is due in three years.
9. i. HTI has only $40 of supplies left at September 30.
10. j. HTI’s income taxes are approximately 30% of income before tax.

Required:

1. 1. Prepare HTI’s journal entries and adjusting journal entries.
2. 2. Prepare HTI’s income statement and statement of retained earnings for the month ended Sep­tember 30.
3. 3. Prepare HTI’s classified balance sheet at September 30.

To determine

To prepare: The journal entries and adjusting journal entries for Incorporation HT.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Adjusting journal entries:

Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

Prepare the journal entry and adjusting entries of Incorporation HT:

Date		Account Title and Explanation	Debit ($)	Credit ($)
	a.	Cash (A+)	2,000
		Service revenue (R+) (SE-)		2,000
		(To record the cash received for the service provided)
	b.	Salaries and wages expense (E+) (SE-)	1,000
		Cash (A-)		900
		Salaries and wages payable (L+)		100
		(To record the payment of salaries and wages payable )
	c.	Accounts receivable (A+)	750
		Service revenue (R+) (SE+)		750
		(To record the service provided on account)
	d.	Salaries and wages expense (E+) (SE-)	200
		Cash  (A–)		200
		(To record the payment of salaries and wages expense)
	e.	Cash (A+)	200
		Accounts receivable (A-)		200
		(To record the amount of cash received)
	f.	Cash  (A+)	250
		Unearned Revenue (L+)		250
		(To record the cash collected from the customers for the service yet to provide )
	g.	Depreciation expense (E+) (SE-)	100
		Accumulated depreciation-Equipment (xA+) (A-)		100
		(To record the accumulated depreciation on equipment)
	h.	Interest expense (E+) (SE-)	40
		Interest payable (L+)		40
		(To record the interest payable)
	i	Supplies expense (E+) (SE-)	60
		Supplies (A-)		60
		(To record the supplies expense incurred)
	j.	Income tax Expense (E+, SE–)(4)	405
		Income tax payable (L+)		405
		(To record the utilities expenses incurred)

Table (1)

To determine

To prepare: The income statement of Incorporation HT for the month ended 30^th September.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement of Incorporation HT:

Incorporation HT
Income Statement
For the month end 30th September
Particulars	Amount ($)	Amount($)
Revenues:
Service Revenue(1)	2,750
Total revenue		2,750
Expenses:
Salaries and Wages Expense(2)	1,200
Depreciation Expense	100
Supplies Expense	60
Interest Expense	40
Income Tax Expense(4)	405
Total Expenses		1,805
NET INCOME		945

Table (2)

Working note:

1. 1. Calculate the service revenue:

$\begin{array}{c}\text{Service revenue}=\$2,000+\$750\\ =\$2,750\end{array}$

The service revenue includes the amount earned from the (a) and (c) in the requirement 1.

(1)

1. 2. Calculate the salaries and wages expense:

$\begin{array}{c}\text{Salaries and wages expense}=\$1,000+\$200\\ =\$1,200\end{array}$

The salaries and wage expense includes the amount from the (b) and (d) in the requirement 1.

(2)

1. 3. Calculate the income before income tax:

$\begin{array}{c}\text{Income before income tax}=\text{Totalrevenue}-\text{Expenses}\left(\text{Excluding income tax expense}\right)\\ =\$2,750-\left(\$1,200+\$100+\$60+\$40\right)\\ =\$1,350\end{array}$

(3)

Calculate the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\text{Income before income tax}\times 15\%\\ =\$1,350\times 30\%\\ =\$405\end{array}$ (4)

1. 4. The amount for all other temporary account balances is derived from only one journal entry in the Requirement 1.

To determine

To prepare: the statement of retained earnings for the month ended 30^th September.

Explanation of Solution

Statement of retained earnings:

This is an equity statement which shows the changes in the stockholders’ equity over a period of time.

Prepare the statement of retained earnings of Incorporation HT:

Incorporation HT
Statement of Retained Earnings
For the month end 30th September
Particulars	Amount($)	Amount ($)
Retained Earnings, Beginning	820
Net Income	945
Dividends	(0)
Retained Earnings, Ending		1,765

Table (3)

Conclusion

Hence, the statement of retained earnings is prepared and the ending balance of the retained earnings is $1,765

To determine

To prepare: the classified balance sheet for Incorporation HT as on 30^th September.

Explanation of Solution

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Prepare the classified balance sheet:

Incorporation HT
Balance Sheet
As on 30th September
Particulars	Amount ($)	Amount($)
Assets
Current Assets:
Cash	2,050
Accounts Receivable	770
Supplies	40
Total Current Assets		2,860
Non-Current assets:
Equipment	12,000
Accumulated Depreciation–Equipment	(1,300)
Equipment, net of accumulated depreciation	10,700
Total Assets		$13,560
Liabilities and stockholders’ equity
Current Liabilities:
Accounts Payable	60
Salaries and Wages Payable	100
Unearned Revenue	250
Interest Payable	80
Income Tax Payable	405
Total Current Liabilities		895
Non-current liabilities:
Note Payable (long–term)	8,000
Total Liabilities		8,895
Stock holders’ equity:
Common Stock	2,900
Retained Earnings	1,765
Total Stockholders’ Equity		4,665
Total Liabilities and Stockholders’ Equity		13,560

Table (4)

Note:

• The amount for cash is derived from the journal entries a, b, d, e and f.in requirement 1.
• Accounts receivable includes the amount from the journal entries c and e in requirement 1.
• Other account balances are derived from the beginning balances which are in the journal entries from requirement 1.

Conclusion

Hence, the classified balance sheet for Incorporation HT is prepared and the total assets and total liabilities and stockholders’ equity is $13,560.