Chapter 4, Problem 5PA

For the past several years, Steffy Lopez has operated a part-time consulting business from his home. As of July 1, 2016, Steffy decided to move to rented quarters and to operate the business, which was to be known as Diamond Consulting, on a full-time basis. Diamond Consulting entered into the following transactions during July:

Instructions

1.    Journalize each transaction in a two-column journal starting on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (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 July, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6).

1. a. Insurance expired during July is $375.
2. b. Supplies on hand on July 31 are $1,525.
3. c. Depreciation of office equipment for July is $750.
4. d. Accrued receptionist salary on July 31 is $175.
5. e. Rent expired during July is $2,400.
6. f. Unearned fees on July 31 are $2,750.

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 3 of the journal.

7.    Prepare an adjusted trial balance.

8.    Prepare an income statement, a statement of owner’s equity, and a balance sheet.

9.    Prepare and post the closing entries. (Income Summary is account #33 in the chart of accounts.) Record the closing entries on Page 4 of the journal. Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry.

10.    Prepare a post-closing trial balance.

To determine

Journalize the transactions of July in a two column journal beginning on page 1.

Explanation of Solution

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.

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes, which led to ending owners’ equity. Additional capital, net income from income statement is added to and drawing is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

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.

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.

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes, which led to ending owners’ equity. Additional capital, net income from income statement is added to and drawing is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

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.

Journalize the transactions of July in a two column journal beginning on page 1.

Journal                                           Page 1
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016		Cash	11	13,500
July	1	Accounts receivable	12	20,800
		Supplies	14	3,200
		Office equipment	18	7,500
		Common stock	31		45,000
		(To record the receipt of assets)
	1	Prepaid Rent	15	4,800
		Cash	11		4,800
		(To record the payment of rent)
	2	Prepaid insurance	16	4,500
		Cash	11		4,500
		(To record the payment of insurance premium)
	4	Cash	11	5,500
		Unearned rent	23		5,500
		(To record the cash received for the service yet to be provide)
	5	Office equipment	18	6,500
		Accounts payable	21		6,500
		(To record the purchase of supplies of account)
	6	Cash	11	15,300
		Accounts receivable	12		15,300
		(To record the cash received from clients)
	10	Miscellaneous expense	59	400
		Cash	11		400
		(To record the payment made for Miscellaneous expense)
	12	Accounts payable	21	5,200
		Office supplies	11		5,200
		(To record the payment made to creditors on account)
	12	Accounts receivable	12	13,300
		Fees earned	41		13,300
		(To record the revenue earned and billed)
	14	Salary Expense	51	1,750
		Cash	11		1,750
		(To record the payment made for salary)

Table (1)

Journal                                           Page 2
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016		Cash	11	9,450
July	17	Fees earned	41		9,450
		(To record the receipt of cash)
	18	Supplies	14	600
		Cash	11		600
		(To record the payment made for automobile expense)
	20	Accounts receivable	12	6,650
		Fees earned	41		6,650
		(To record the payment of advertising expense)
	24	Cash	11	4,000
		Fees earned	41		4,000
		(To record the cash received from client for fees earned)
	26	Cash	11	12,000
		Accounts receivable	12		12,000
		(To record the cash received from clients)
	27	Salary expense	51	1,750
		Cash	11		1,750
		(To record the payment of salary)
	29	Miscellaneous Expense	59	325
		Cash	11		325
		(To record the payment of telephone charges)
	31	Miscellaneous Expense	59	675
		Cash	11		675
		(To record the payment of electricity charges)
	31	Cash	11	5,200
		Fees earned	41		5,200
		(To record the cash received from client for fees earned)
	31	Accounts receivable	12	3,000
		Fees earned	41		3,000
		(To record the revenue earned and billed)
	31	Dividends	33	12,500
		Cash	11		12,500
		(To record the dividends made for personal use)

Table (2)

To determine

Record the balance of each accounts in the appropriate balance column of a four-column account and post them to the ledger.

Explanation of Solution

Account:         Cash                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1	13,500		13,500
	1		1		4,800	8,700
	2		1		4,500	4,200
	4		1	5,500		9,700
	6		1	15,300		25,000
	10		1		400	24,600
	12		1		5,200	19,400
	14		1		1,750	17,650
	17		2	9,450		27,100
	18		2		600	26,500
	24		2	4,000		30,500
	26		2	12,000		42,500
	27		2		1,750	40,750
	29		2		325	40,425
	31		2		675	39,750
	31		2	5,200		44,950
	31		2		12,500	32,450

Table (3)

Account:    Accounts Receivable                                             Account no. 12
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1	20,800		20,800
	6		1		15,300	5,500
	12		1	13,300		18,800
	20		2	6,650		25,450
	26		2		12,000	13,450
	31		2	3,000		16,450

Table (4)

Account:   Supplies                                                            Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1	3,200		3,200
	18		2	600		3,800
	31	Adjusting	3		2,275	1,525

Table (5)    

Account:    Prepaid Rent                                             Account no. 15
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1	4,800		4,800
	31	Adjusting	3		2,400	2,400

Table (6)

Account:    Prepaid Insurance                                             Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	2		1	4,500		4,500
	31	Adjusting	3		375	4,125

Table (7)

Account:    Office equipment                                             Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1	7,500		7,500
	5		1	6,500		14,000

Table (8)

Account:  Accumulated Depreciation-Office equipment        Account no. 19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Adjusting	3		750		750

Table (9)

Account:     Accounts Payable                                                      Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	5		1		6,500		6,500
	12		1	5,200			1,300

Table (10)

Account:     Salaries Payable                                                        Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Adjusting	3		175		175

Table (11)

Account:   Unearned Fees                                                       Account no. 23
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	4		1		5,500		5,500
	31	Adjusting	3	2,750			2,750

Table (12)

Account:           SL Capital                                                         Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	1		1		45,000		45,000
	31	Closing	4		33,475		33,475
	31	Closing	4	12,500			20,975

Table (13)

Account:          Drawings                                                         Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31		2	12,500		12,500
	31	Closing	4		12,500

Table (14)

Account:          Income Summary                                                      Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Closing	4		44,350		44,350
	31	Closing	4	10,875			33,475
	31	Closing	4	33,475

Table (15)

Account:          Fees earned                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	12		1		13,300		13,300
	17		2		9,450		22,750
	20		2		6,650		29,400
	24		2		4,000		33,400
	31		2		5,200		38,600
	31		2		3,000		41,600
	31	Adjusting	3		2,750		44,350
	31	Closing	4	59,700

Table (16)

Account:   Salary expense                                                        Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	14		1	1,750		1,750
	27		2	1,750		3,500
	31	Adjusting	3	175		3,675
	31	Closing	4		3,675

Table (17)

Account:   Rent expense                                                              Account no. 52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Adjusting	3	2,400		2,400
	31	Closing	4		2,400

Table (18)

Account:   Supplies expense                                                     Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Adjusting	3	2,275		2,275
	31	Closing	4		2,275

Table (19)

Account:   Depreciation expense                                                     Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	31	Adjusting	3	750		750
	31	Closing	4		750

Table (20)

Account:   Insurance expense                                                     Account no. 54
Date		Item	Post. Ref		Debit  ($)	Credit ($)	Balance
							Debit ($)	Credit ($)
2016
July	31	Adjusting		3	375		375
	31	Closing		4		375

Table (21)

Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
July	10		1	400		400
	29		2	325		725
	31		2	675		1,400
	31	Closing	4		1,400

Table (22)

To determine

Prepare unadjusted trial balance of Consulting D at July, 31.

Explanation of Solution

Prepare an unadjusted trial balance of Consulting D for the month ended July, 31 as follows:

D Consulting Unadjusted Trial Balance July 31, 2016
Particulars	Account No.	Debit $	Credit $
Cash	11	32,450
Accounts receivable	12	16,450
Supplies	14	3,800
Prepaid insurance	16	4,500
Prepaid rent	15	4,800
Office Equipment	18	14,000
Accounts payable	21		1,300
Unearned fees	23		5,500
SL Capital	31		45,000
Dividends	33	12,500
Fees earned	41		41,600
Salary expense	51	3,500
Miscellaneous expense	59	1,500
Total		$93,400	$93,400

Table (23)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $93,400.

To determine

Enter the unadjusted trial balance on an end-of-period spreadsheet.

Explanation of Solution

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

Table (24)

Conclusion

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

To determine

Journalize the adjusting entries of Consulting D for July 31.

Explanation of Solution

The adjusting entries of Consulting D for July 31, 2016 are as follows:

Date		Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2016		Insurance expense	55	375
July	31	Prepaid insurance	16		375
		(To record the insurance expense for July)
	31	Supplies expense	53	2,275
		Supplies	14		2,275
		(To record the supplies expense)
	31	Depreciation expense	54	750
		Accumulated Depreciation	19		750
		(To record the depreciation and the accumulated depreciation)
	31	Salaries expense	51	175
		Salaries payable	22		175
		(To record the accrued salaries payable)
	31	Rent expense	52	2,400
		Prepaid rent	15		2,400
		(To record the rent expense for July)
	31	Unearned fees	23	2,750
		Fees earned	41		2,750
		(To record the receipt of unearned fees)

Table (25)

Working notes:

$\begin{array}{c}\text{Supplies expense=}\left[\begin{array}{l}\text{The amount of supplies at }\\ \text{the beginning of the year }\end{array}\right]-\left[\begin{array}{l}\text{The amount of supplies }\\ \text{at the end of the year }\end{array}\right]\\ \text{=}\left[\text{\$3,200+\$600}\right]-\text{\$1,525}\\ \text{=\$2,275}\end{array}$

$\begin{array}{c}\text{Unearned fees =}\left[\begin{array}{l}\text{The amount of unearned fees }\\ \text{at the beginning of the year }\end{array}\right]-\left[\begin{array}{l}\text{The amount of unearned }\\ \text{fees at the end of the year }\end{array}\right]\\ \text{=}\left[\text{\$5,500}\right]-\text{\$2,750}\\ \text{=\$2,750}\end{array}$

To determine

Prepare adjusted trial balance of Consulting D for July 31, 2016.

Explanation of Solution

An adjusted trial balance of Consulting D for July 31, 2016 is prepared as follows:

D Consulting Adjusted Trial Balance July 31, 2016
Particulars	Account No.	Debit $	Credit $
Cash	11	32,450
Accounts receivable	12	16,450
Supplies	14	1,525
Prepaid insurance	16	4,125
Prepaid rent	15	2,400
Office Equipment	18	14,000
Accumulated Depreciation-Office equipment	19		750
Accounts payable	21		1,300
Salaries payable	22		175
Unearned fees	23		2,750
Common stock	31		45,000
Dividends	33	12,500
Fees earned	41		44,350
Salary expense	51	3,675
Rent expense	52	2,400
Supplies Expense	53	2,275
Depreciation expense	54	750
Insurance expense	55	375
Miscellaneous expense	59	1,400
Total		$94,325	$94,325

Table (26)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $94,325.

To determine

Prepare an income statement for the year ended July 31, 2016.

Explanation of Solution

An income statement for the year ended July 31, 2016 is as follows:

D Consulting
Income Statement
For the year ended July 31, 2016
Particulars	Amount ($)	Amount ($)
Revenues:
Fees Earned		44,350
Expenses:
Salaries Expense	3,675
Rent Expense	2,400
Supplies Expense	2,275
Depreciation Expense- Building	750
Insurance Expense	375
Miscellaneous Expense	1,400
Total Expenses		10,875
Net Income		$33,475

Table (28)

Conclusion

Hence, the net income of D Consulting for the year ended July 31, 2016 is $33,475.

To determine

Prepare the statement of owner’s equity for the year ended July 31, 2016.

Explanation of Solution

The statement of owner’s equity for the year ended July 31, 2016 is as follows:

D Consulting
Statement of Owner’s Equity
For the Year Ended July 31, 2016
Particulars	Amount ($)	Amount ($)
SL, Capital, July 1, 2016		0
Add: Net income	$33,475
Add: Investment made during the period	45,000
Less: Withdrawals	(12,500)
Increase in owner’s equity		65,975
SL,, Capital, July 31, 2016		$65,975

Table (29)

Conclusion

Hence, owner’s equity for the year ended July 31, 2016 is 65,975.

To determine

Prepare the balance sheet of D Consulting at July 31, 2016.

Explanation of Solution

The balance sheet of D Consulting at July 31, 2016 is prepared as follows:

D Consulting
Balance Sheet
At July 31, 2016
Assets
Current Assets:	$	$
Cash	32,450
Accounts Receivable	16,450
Supplies	1,525
Prepaid Rent	2,400
Prepaid Insurance	4,125
Total Current Assets		56,950
Property, plant and equipment:
Office Equipment	14,000
Less: Accumulated Depreciation	750
Total Plant Assets		13,250
Total Assets		$70,200
Liabilities
Current Liabilities:	1,300
Accounts Payable	175
Salaries Payable	2,750
Unearned Rent		4,225
Total Liabilities
Owners’ Equity
SL Capital	65975
Total Owners’ Equity		65,975
Total Liabilities and Owners’ Equity		$70,200

Table (30)

Conclusion

Therefore, the total assets and total liabilities plus retained earnings of Company D at July 31, 2016 are $70,200.

To determine

Journalize the closing entries for D Consulting.

Answer to Problem 5PA

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 31, 2016	Fees Earned	41	44,350
	Income Summary	34		44,350
	(To record the closure of revenues account )
	Income Summary	34	10,875
	Salary Expense	51		3,675
	Rent Expense	52		2,400
	Supplies Expense	53		2,275
	Depreciation Expense- Office Equipment	54		750
	Insurance Expense	55		375
	Miscellaneous Expense	59		1,400
	(To close the expenses account. Then  the balance amount are  transferred to income summary account)
	Income Summary	34	33,475
	SL Capital	32		33,475
	(To close balance of income summary are  transferred to owners’ capital account)
	SL’s Capital	32	12,500
	SL Drawing	33		12,500
	(To Close the capital and drawings account)

Table (31)

Explanation of Solution

• Service revenue is revenue account. Since the amount of revenue is closed, and transferred to SL’s capital account. Here, Company D earned an income of $160,000. Therefore, it is debited.
• Wages Expense, Rent Expense, Insurance Expense, Utilities Expense, Laundry Supplies Expense, Depreciation Expense, SL Capital, and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.
• Owner’s capital is a component of owner’s equity. Thus, owners ‘equity is debited since the capital is decreased on owners’ drawings.
• Owner’s drawings are a component of owner’s equity. It is credited because the balance of owners’ drawing account is transferred to owners ‘capital account

To determine

Prepare post–closing trial balance of D Consulting for the month ended July 31, 2016.

Explanation of Solution

Prepare a post–closing trial balance of D Consulting for the month ended July 31, 2016 as follows:

Company D Post-closing Trial Balance July, 31, 2016
Particulars	Account Number	Debit $	Credit $
Cash	11	32,450
Accounts receivable	12	16,450
Supplies	14	1,525
Prepaid rent	15	2,400
Prepaid insurance	16	4,125
Office Equipment	18	14,000
Accumulated depreciation  –Office Equipment	19		750
Accounts payable	21		1,300
Salaries payable	22		175
Unearned rent	23		2,750
S’s Capital	31		45,000
Retained earnings	32		20,975
Total		$70,950	$70,950

Table (32)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $70,950.