Chapter 4, Problem 5PA

Complete accounting cycle

For the past several years, Steffy Lopez has operated a part-time consulting business from his home. As of July 1, 20Y2, 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 entered into the following transactions during July:

Record the following transactions on Page 2 of the journal:

Instructions

1. 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.)

1. 2. Post the journal to a ledger of four-column accounts.
2. 3. Prepare an unadjusted trial balance.
3. 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.
4. 5. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet.
5. 6. Journalize and post the adjusting entries. Record the adjusting entries on Page 3 of the journal.
6. 7. Prepare an adjusted trial balance.
7. 8. Prepare an income statement, a statement of stockholders’ equity, and a balance sheet.
8. 9. Prepare and post the closing entries. 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.
9. 10. Prepare a post-closing trial balance.

To determine

Journalize the transactions of July in a two column journal beginning on page 1 and the following in page 2.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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

Journal                                           Page 1
Date		Description	Post. Ref	Debit ($)	Credit ($)
20Y2		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 fees	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
		Cash	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 ($)	Credit ($)
20Y2		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 account in the appropriate balance column of a four-column account and post them to the ledger.

Explanation of Solution

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Account: Cash                                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
July	31	Adjusting	3		750		750

Table (9)

Account: Accounts Payable                                                               Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
July	31	Adjusting	3		175		175

Table (11)

Account: Unearned Fees                                                                    Account no. 23
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	4		1		5,500		5,500
	31	Adjusting	3	2,750			2,750

Table (12)

Account: Common Stock                                                                    Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	1		1		45,000		45,000

Table (13)

Account: Retained earnings                                                                Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	1						0
	31	Closing	4		33,475		33,475
	31	Closing	4	12,500			20,975

Table (14)

Account:  Dividends                                                                            Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	31		2	12,500		12,500
	31	Closing	4		12,500

Table (15)

Account: Income Summary                                                                Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	31	Closing	4		44,350		44,350
	31	Closing	4	10,875			33,475
	31	Closing	4	33,475

Table (16)

Account: Fees earned                                                                          Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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	44,350

Table (17)

Account: Salary expense                                                                     Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 (18)

Account: Rent expense                                                                        Account no. 52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	31	Adjusting	3	2,400		2,400
	31	Closing	4		2,400

Table (19)

Account: Supplies expense                                                                 Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	31	Adjusting	3	2,275		2,275
	31	Closing	4		2,275

Table (20)

Account: Depreciation expense                                                          Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	31	Adjusting	3	750		750
	31	Closing	4		750

Table (21)

Account: Insurance expense                                                               Account no. 54
Date		Item	Post. Ref		Debit  ($)	Credit ($)	Balance
							Debit ($)	Credit ($)
20Y2
July	31	Adjusting		3	375		375
	31	Closing		4		375

Table (22)

Account: Miscellaneous expense                                                        Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
July	10		1	400		400
	29		2	325		725
	31		2	675		1,400
	31	Closing	4		1,400

Table (23)

To determine

Prepare an unadjusted trial balance for Company.

Explanation of Solution

Unadjusted trial balance:

Unadjusted trial balance is that statement which contains complete list of accounts with their unadjusted balances. This statement is prepared at the end of every financial period.

Prepare an unadjusted trial balance for Company.

Company CD
Unadjusted Trial Balance
As of July 31, 20Y2
Account titles	Account No.	Debit balances ($)	Credit balances ($)
Cash	11	32,450
Accounts Receivable	12	16,450
Supplies	14	3,800
Prepaid Rent	15	4,800
Prepaid Insurance	16	4,500
Office Equipment	18	14,000
Accumulated Depreciation	19		0
Accounts Payable	21		1,300
Salaries Payable	22		0
Unearned Fees	23		5,500
Common Stock	31		45,000
Retained Earnings	32		0
Dividends	33	12,500
Fees Earned	41		41,600
Salary Expense	51	3,500
Rent Expense	52	0
Supplies Expense	53	0
Depreciation Expense	54	0
Insurance Expense	55	0
Miscellaneous Expense	59	1,400
Totals		$93,400	$93,400

Table (24)

To determine

Enter the unadjusted trial balance on an end of period spreadsheet and complete the spread sheet.

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.

Prepare the end of period spreadsheet and enter the unadjusted trial balance:

Table (25)

To determine

Journalize the adjusting entries of Company CD for July 31.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Prepare the adjusting entries:

Date		Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
20Y2		Insurance expense	55	375
July	31	Prepaid insurance	16		375
		(To record the insurance expense for July)
	31	Supplies expense $\left(\$3,800-\$1,525\right)$	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 $\left(\$5,500-\$2,750\right)$	23	2,750
		Fees earned	41		2,750
		(To record the receipt of unearned fees)

Table (26)

To determine

Prepare an adjusted trial balance of Company CD for July 31, 20Y2.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Prepare the adjusted trial balance:

Company CD
Adjusted Trial Balance
As of July 31, 20Y2
Account title	Account	Debit balances	Credit balances
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	19		$750
Accounts Payable	21		$1,300
Salaries Payable	22		$175
Unearned Fees	23		$2,750
Common Stock	31		$45,000
Retained Earnings	32		$0
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
Totals		$94,325	$94,325

Table (27)

To determine

Prepare an income statement for the year ended July 31, 20Y2.

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.

Company CD
Income Statement
For the year ended July 31, 20Y2
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)

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Prepare the statement of stockholders equity for the year ended July 31, 20Y2.

Company CD
Statement of Stockholders’ Equity
For the Month Ended July 31, 20Y2
Particulars	Common stock	Retained earnings	Total
Beginning balances, July 1, 20Y2	$0	$0	$0
Issued common stock	$45,000		$45,000
Net income	$0	$33,475	$33,475
Dividends	$0	($12,500)	($12,500)
Ending balances, July 31, 20Y2	$45,000	$20,975	$65,975

Table (29)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet as of July 31, 20Y2:

Company CD
Balance Sheet
As of July 31, 20Y2
Particulars	Amount ($)	Amount ($)
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
Accumulated depreciation	($750)
Total property, plant, and equipment		$13,250
Total assets		$70,200
Liabilities
Current liabilities:
Accounts payable	$1,300
Salaries payable	$175
Unearned fees	$2,750
Total liabilities		$4,225
Stockholders’ Equity
Common stock	$45,000
Retained earnings	$20,975
Total stockholders’ equity		$65,975
Total liabilities and stockholders’ equity		$70,200

Table (30)

To determine

Journalize the closing entries for Company CD.

Explanation of Solution

Closing entry for revenue and expense accounts:

Date		Account title and explanation	Post. Ref.	Debit ($)	Credit ($)
20Y2
July	31	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
		Retained Earnings (1)	32		33,475
		(To record the closing entry for revenue and expense account to retained earnings account)
20Y2	31	Retained Earnings	32	12,500
July		Dividends	33		12,500
		(To record the closing entry for dividends account)

Table (31)

Working note (1):

Calculate the amount of retained earnings account:

$\begin{array}{c}\text{Retained earnings}=\left(\text{Total revenues}-\text{Total expenses}\right)\\ =\left(\$44,350-\$10,875\right)\\ =\$33,475\end{array}$

To determine

Prepare a post–closing trial balance of D Consulting for the month ended July 31, 20Y2.

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare a post–closing trial balance for the year ended July 31, 20Y2:

Company CD
Post-Closing Trial Balance
As of July 31, 20Y2
Account title	Account No.	Debit Balances	Credit Balances
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	19		750
Accounts Payable	21		1,300
Salaries Payable	22		175
Unearned Fees	23		2,750
Common Stock	31		45,000
Retained Earnings	32		20,975
Totals		$70,950	$70,950

Table (32)