Chapter 5, Problem 4PB

Sam Nix owns Nix Estate Planning and Investments. The trial balance of the firm for June 30, 2019, the first month of operations, is shown below.

INSTRUCTIONS

1. 1. Complete the worksheet for the month.
2. 2. Prepare an income statement, statement of owner’s equity, and balance sheet. No additional investments were made by the owner during the month.
3. 3. Journalize and post the adjusting entries. Use 3 for the journal page number. Use the account numbers provided in Problem 5.4A.

End-of-month adjustments must account for the following:

1. a. The supplies were purchased on June 1, 2019; inventory of supplies on June 30, 2019, showed a value of $6,000.
2. b. The prepaid advertising contract was signed on June 1, 2019, and covers a four-month period.
3. c. Rent of $6,000 expired during the month.
4. d. Depreciation is computed using the straight-line method. The equipment has an estimated useful life of five years with no salvage value.

Analyze: Why are the costs that reduce the value of equipment not directly posted to the asset account Equipment?

To determine

Complete the worksheet for NE Planning and Investment for the month ended June 30, 2019.

Explanation of Solution

Worksheet: Worksheet is an accounting tool that helps accountants to record adjustments and up-date balances required to prepare financial statements. Worksheet is a central place where trial balance, adjustments, adjusted trial balance, income statement, and balance sheet are presented.

Complete the worksheet for NE Planning and Investment for the month ended June 30, 2019.

Table (1)

To determine

Prepare income statement, statement of owners’ equity, and balance sheet NE Planning and Investment for the month of June 30, 2019.

Explanation of Solution

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

Prepare an income statement for NE Planning and Investment for the month ended June 30, 2019.

NE Planning and Investment
Income Statement
For the Month Ended June 30, 2019
Revenues:
Fees Income		147,600
Expenses:
Advertising Expense	$7,200
Depreciation Expense, Equipment	1,600
Rent Expense	6,000
Salaries Expense	15,200
Supplies Expense	9,200
Utilities Expense	2,600
Total expenses		41,800
Net income		$105,800

Table (2)

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 drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement for NE Planning and Investment for the month ended June 30, 2019.

NE Planning and Investment
Statement of Owners’ Equity
For the Month Ended June 30, 2019
SN, Capital, June 1, 2019		$120,200
Net income for January	105,800
Less: Withdrawals for January	8,000
Increase in capital		97,800
SN, Capital, June 30, 2019		$218,000

Table (3)

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

Prepare the balance sheet NE Planning and Investment as at June 30, 2019.

NE Planning and Investment
Balance Sheet
June 30, 2019
Assets
Cash		$39,400
Accounts Receivable		12,200
Supplies		6,000
Prepaid Advertising		21,600
Prepaid Rent		66,000
Equipment	$96,000
Less: Accumulated Depreciation	1,600	94,400
Total Assets		$239,600
Liabilities and owner’s equity
Liabilities
Accounts Payable		21,600
Owners’ Equity
SN, Capital		218,000
Total Liabilities and Owners’ Equity		$239,600

Table (4)

To determine

Prepare adjusting entry and post the transactions in general ledger.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and owners’ or stockholders’ equity) to maintain the records according to accrual basis principle and matching concept.

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

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare adjusting entry for supplies.

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Supplies expense	517	9,200
	Supplies	121		9,200
	(to record supplies used)

Table (5)

Description:

• Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Supplies is an asset account. Since amount of supplies is used, asset account decreased, and a decrease in asset is credited.

Prepare adjusting entry for advertising expense:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Advertising expense	519	7,200
	Prepaid Advertising	130		7,200
	(to record part of prepaid advertising expired)

Table (6)

Description:

• Advertising Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Advertising is an asset account. Since amount of advertising is expired, asset account decreased, and a decrease in asset is credited.

Prepare adjusting entry for rent expense:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Rent expense	520	6,000
	Prepaid Rent	131		6,000
	(to record part of prepaid rent expired)

Table (7)

Description:

• Rent Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Rent is an asset account. Since amount of rent is expired, asset account decreased, and a decrease in asset is credited.

Prepare adjusting entry for depreciation expense-equipment:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Depreciation expense-Equipment	523	1,600
	Accumulated depreciation-Equipment	142		1,600
	(to record depreciation expense)

Table (8)

Description:

• Depreciation Expense, Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation, Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Post the above transactions in the general ledger.

ACCOUNT   Supplies                                                            ACCOUNT NO. 121
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		15,200		15,200
	31	Adjusting	3		9,200	6,000

Table (9)

ACCOUNT   Prepaid Advertising                                        ACCOUNT NO. 130
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		28,800		28,800
	31	Adjusting	3		7,200	21,600

Table (10)

ACCOUNT   Prepaid Rent                                        ACCOUNT NO. 131
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		72,000		72,000
	31	Adjusting	3		6,000	66,000

Table (11)

ACCOUNT   Accumulated Depreciation - Equipment         ACCOUNT NO. 142
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance			0		0
	31	Adjusting	3		1,600		1,600

Table (12)

ACCOUNT   Supplies Expense                                                       ACCOUNT NO. 517
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	9,200		9,200

Table (13)

ACCOUNT   Advertising Expense                                                  ACCOUNT NO. 519
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	7,200		7,200

Table (14)

ACCOUNT   Rent Expense                                                                 ACCOUNT NO. 520
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	6,000		6,000

Table (15)

ACCOUNT   Depreciation Expense - Equipment              ACCOUNT NO. 523
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	1,600		1,600

Table (16)

Analyze: The costs that reduce the value of the equipment is called as depreciation costs. Depreciation cost is not directly posted to the asset account; it is recorded separately as contra asset account. This is because as per GAAP (Generally Accepted Accounting Principle) the asset (equipment) is recorded at its original cost in the asset account until it is disposed.