Chapter 5, Problem 5.2CACR

(b)

To determine

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

The following are the rules of debit and credit:

1. 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.
2. 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.

To Record: The journal entries in books of Incorporation I using perpetual inventory system during November.

Explanation of Solution

Prepare the journal entries for Incorporation I during November:

Date	Account Title and Description	Post Ref	Debit ($)	Credit ($)
November 08	Salaries and wages payable		1,700
	Salaries and wages expense		1,850
	Cash			3,550
	(To record accrued and current salaries and wages expenses)
November 10	Cash		1,900
	Accounts receivable			1,900
	(To record payment received from customers)
November 11	Inventory		8,000
	Accounts payable			8,000
	(To record purchase on account)
November 12	Accounts receivable		5,500
	Sales revenue			5,500
	(To record sales on account)
	Cost of goods sold		4,000
	Inventory			4,000
	(To record cost of goods sold)
November 15	Accounts payable		300
	Inventory			300
	(To record purchase returned)
November 19	Cash		5,390 (2)
	Sales discounts		110 (1)
	Accounts receivable			5,500
	(To record settlement of accounts receivable net of discounts)
November 20	Accounts payable		7,700 (3)
	Inventory			154 (4)
	Cash			7,546 (5)
	(To record settlement of accounts payable net of discounts)
November 22	Cash		2,300
	Service revenue			2,300
	(To record cash service revenue)
November 25	Equipment		5,000
	Accounts payable			5,000
	(To record purchase of equipment on account)
November 27	Supplies		1,700
	Accounts payable			1,700
	(To record purchase of supplies on account)
November 28	Accounts payable		3,000
	Cash			3,000
	(To record payment to creditors for accounts payable due)
November 29	Rent expense		375
	Cash			375
	(To record rent expense)
Date	Account Title and Description	Post Ref	Debit ($)	Credit ($)
November 29	Salaries and wages expense		1,300
	Cash			1,300
	(To record salaries and wages expense)
November 29	Accounts receivable		700
	Service revenue			700
	(To record service revenue on account)
November 29	Cash		675
	Unearned  service revenue			675
	(To record the collection of cash for unearned service revenue)

Table (1)

Working Notes:

Calculate the amount of sales discount.

Accounts receivable = $5,500

Discount percentage = 2%

$\begin{array}{c}\text{Sales discount = \$5,500 × }\frac{2}{\text{100}}\\ \text{= \$110}\end{array}$ (1)

Calculate the amount of cash received.

Net accounts receivable = $5,500

Sales discount = $110 (1)

$\begin{array}{c}\text{Cash received = Accounts receivable – Sales discount}\\ \text{= \$5,500 – \$110}\\ \text{= \$5,390}\end{array}$ (2)

Calculate the amount of net accounts payable.

Inventory = $8,000

Purchase returns = $300

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$8,000–\$300\\ =\$7,700\end{array}$ (3)

Calculate the amount of purchase discount.

Net accounts payable = $7,700 (3)

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$7,700 × }\frac{2}{\text{100}}\\ \text{= \$154}\end{array}$ (4)

Calculate the amount of cash paid.

Net accounts payable = $7,700 (3)

Purchase discount = $154 (4)

$\begin{array}{c}\text{Cash paid = Net accounts payable – Purchase discount}\\ \text{= \$7,700 – \$154}\\ \text{= \$7,546}\end{array}$ (5)

(d)

To determine

Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.

To Record: The adjusting entries of Incorporation I on November 30, 2017.

Explanation of Solution

Journalize the adjusting entries.

1.

The following is the adjusting entry for the supplies during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
November 30	Supplies Expense		960 (6)
	Supplies Payable			960
	(To adjust for supplies expense)

Table (2)

Description:

• Supplies expense is an expense and it is increased by $960. Therefore, debit supplies expense account with $960.
• Supplies payable is a liability and it is increased by $960. Therefore, credit supplies payable account with $960.

Working Note:

Calculate the amount of supplies expense.

Beginning balance = $860

Purchase = $1,700 (Refer Table 1)

Ending balance = $1,600

$\begin{array}{c}\text{Supplies expense = Begining balance + Purchase}–\text{Ending balance}\\ \text{= \$860 + \$1,700}–\text{ \$1,600 }\\ \text{= \$960}\end{array}$ (6)

2.

The following is the adjusting entry for the accrued salaries during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
November 30	Salaries and Wages Expense		500
	Salaries and Wages Payable			500
	(To adjust for accrued salaries and wages expense)

Table (3)

Description:

• Salaries and wages expense is an expense and it is increased by $500. Therefore, debit salaries and wages expense account with $500.
• Salaries and wages payable is a liability and it is increased by $500. Therefore, credit salaries and wages payable account with $500.

3.

The following is the adjusting entry for the depreciation expired during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
November 30	Depreciation Expense		250
	Accumulated Depreciation - Equipment			250
	(To record the amount of depreciation for the year)

Table (4)

Description:

• Depreciation expense is an expense and it is increased by $250. Therefore, debit depreciation expense account with $250.
• Accumulated Depreciation-Equipment is a contra asset account and would have a credit balance. Therefore credit accumulated depreciation-equipment account with $250.

4.

The following is the adjusting entry for the unearned service revenue during the month:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
November 30	Unearned service revenue		4,025 (7)
	Service revenue			4,025
	(To record the unearned service revenue)

Table (5)

Description:

• Unearned service revenue is a liability and it is decreased by $4,025. Therefore, debit unearned service revenue with $4,025.
• Service revenue is revenue and it increases the value of equity by $4,025. Therefore, credit service revenue with $4,025.

Working Note:

Calculate the amount received in advance of service revenue earned.

Beginning unearned service revenue = $4,000

Unearned service revenue during the month = $675 (Refer Table 1)

Ending unearned service revenue = $650

$\begin{array}{c}\text{Service revenue earned = }\left(\begin{array}{l}\text{Beginning unearned service revenue }\\ \text{+ Unearned service revenue during the month}\\ –\text{ Ending unearned service revenue }\end{array}\right)\\ =\$4,000+\$675-\$650\\ =\$4,025\end{array}$ (7)

(a), (c), and (d)

To determine

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Post: The above journal entries and adjusting entries to T-accounts of Incorporation I.

Explanation of Solution

The following are the T-accounts.

Cash Account:

Cash Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 01	Beginning balance	9,000	November 08	Salaries and wages	3,550
November 10	Accounts receivable	1,900	November 20	Accounts payable	7,546
November 19	Accounts receivable	5,390	November 28	Accounts payable	3,000
November 22	Sales revenue	2,300	November 29	Rent	375
November 29	Unearned service revenue	675	November 29	Salaries and wages	1,300
			November 30	Ending Balance	3,494
	Total	19,265		Total	19,265

Table (6)

Accounts Receivable Account:

Accounts Receivable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 01	Beginning balance	2,240	November 10	Cash	1,900
November 12	Sales revenue	5,500	November 19	Sales discounts	110
November 29	Service revenue	700	November 19	Cash	5,390
			November 30	Ending Balance	1,040
	Total	8,440		Total	8,440

Table (7)

Inventory Account:

Inventory Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 01	Beginning balance	0	November 12	Cost of goods sold	4,000
November 11	Accounts payable	8,000	November 15	Accounts payable	300
			November 20	Accounts payable	154
			November 30	Ending Balance	3,546
	Total	8,000		Total	8,000

Table (8)

Supplies Account:

Supplies Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 01	Beginning balance	860	November 30	Adjustment	960
November 27	Accounts payable	1,700	November 30	Ending Balance	1,600
	Total	2,560		Total	2,560

Table (9)

Equipment Account:

Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 01	Beginning balance	25,000	November 30	Ending Balance	30,000
November 25	Accounts payable	5,000
	Total	30,000		Total	30,000

Table (10)

Accumulated Depreciation - Equipment Account:

Accumulated Depreciation - Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Ending Balance	1,250	November 01	Beginning balance	1,000
			November 30	Adjustment	250
	Total	1,250		Total	1,250

Table (11)

Accounts Payable Account:

Accounts Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 15	Inventory	300	November 01	Beginning balance	3,400
November 20	Cash and Inventory	7,700	November 11	Inventory	8,000
November 28	Cash	3,000	November 25	Equipment	5,000
November 30	Ending Balance	7,100	November 27	Supplies	1,700
	Total	18,100		Total	18,100

Table (12)

Unearned Service Revenue Account:

Unearned Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 29	Adjustment	4,025	November 01	Beginning balance	4,000
November 30	Ending Balance	650	November 30	Cash	675
	Total	4,675		Total	4,675

Table (13)

Salaries and Wages Payable Account:

Salaries and Wages Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 08	Cash	1,700	November 01	Beginning balance	1,700
November 30	Ending Balance	500	November 30	Adjustment	500
	Total	2,200		Total	2,200

Table (14)

Common Stock Account:

Common Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Ending Balance	20,000	November 01	Beginning balance	20,000
	Total	20,000		Total	20,000

Table (15)

Retained Earnings Account:

Retained Earnings Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Ending Balance	7,000	November 01	Beginning balance	7,000
	Total	7,000		Total	7,000

Table (16)

Sales Revenue Account:

Sales Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Ending Balance	5,500	November 12	Accounts receivable	5,500
	Total	5,500		Total	5,500

Table (17)

Sales Discount Account:

Sales Discount Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 19	Accounts receivable	110	November 30	Ending Balance	110
	Total	110		Total	110

Table (18)

Service Revenue Account:

Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Ending Balance	7,025	November 22	Cash	2,300
			November 29	Accounts receivable	700
			November 30	Adjustment	4,025
	Total	7,025		Total	7,025

Table (19)

Cost of Goods Sold Account:

Cost of Goods Sold Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 12	Inventory	4,000	November 30	Ending Balance	4,000
	Total	4,000		Total	4,000

Table (20)

Depreciation Expense Account:

Depreciation Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 30	Adjustment	250	November 30	Ending Balance	250
	Total	250		Total	250

Table (21)

Rent Expense Account:

Rent Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 29	Cash	375	November 30	Ending Balance	375
	Total	375		Total	375

Table (22)

Salaries and Wages Expense Account:

Salaries and Wages Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 08	Cash	1,850	November 30	Ending Balance	3,650
November 29	Cash	1,300
November 30	Adjustment	500
	Total	3,650		Total	3,650

Table (23)

Supplies Expense Account:

Supplies Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
November 31	Adjustment	960	November 30	Ending Balance	960
	Total	960		Total	960

Table (24)

(e)

To determine

Trial balance: This is a statement prepared to show all the year-end account balances of a business. The balances are shown in separate columns as debit and credit. Trial balance is made to check whether books of accounts of the business are arithmetically accurate.

To determine: Prepare trial balance for Incorporation I as on November 30, 2017.

Answer to Problem 5.2CACR

The following is the adjusted trial balance of Incorporation I as on November 30, 2017.

Incorporation I
Adjusted Trial Balance
At November 30, 2017
Account Title	Balance ($)
	Debit	Credit
Cash	3,494
Accounts Receivable	1,040
Inventory	3,546
Supplies	1,600
Equipment	30,000
Accumulated Depreciation - Equipment		1,250
Accounts Payable		7,100
Unearned Service Revenue		650
Salaries and Wages Payable		500
Common Stock		20,000
Retained Earnings		7,000
Sales Revenue		5,500
Service Revenue		7,025
Sales Discounts	110
Cost of Goods Sold	4,000
Depreciation Expense	250
Rent Expense	375
Salaries and Wages Expense	3,650
Supplies Expense	960
Total	49,025	49,025

Table (25)

Explanation of Solution

The trial balance as shown in Table (25) is prepared after placing the journal entries and adjusting entries to the ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.

Conclusion

Therefore, the total debit balance and credit balance of Incorporation I is $49,025.

(f)

To determine

To Prepare: The multi-step income statement, retained earnings statement, and classified balance sheet of Incorporation I for the year ended November 30, 2017.

Explanation of Solution

Prepare the multi-step income statement of Incorporation I.

Multi step income statement: A multiple step income statement refers to the income statement that shows the operating and non-operating activities of the business under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.

Incorporation I
Income Statement
For the Year Ended November 30, 2017
Particulars	Amount($)	Amount($)
Service revenue		7,025
Sales revenue	5,500
Less: Sales discounts	(110)
Net sales	5,390
Less: Cost of goods sold	(4,000)	1,390
Gross profit		8,415
Less: Operating expenses:
Rent expense	375
Salaries and wages expenses	3,650
Depreciation expenses	250
Supplies expense	960
Total operating expenses		(5,235)
Net income		3,180

Table (26)

Prepare a retained earnings statement of Incorporation I for the year ended November 30, 2017.

Retained Earnings Statement is one of the financial statement, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and used to pay its debts and obligations. It shows the amount of earnings that is not paid as dividends to the shareholders.

Incorporation I
Retained Earnings Statement
For the Year Ended November 30, 2017
Details	Amount ($)
Beginning Balance of Retained earnings	7,000
Add: Net Income for the year	3,180
Total Retained Earnings	10,180
Less: Dividends	0
Ending balance of Retained Earnings	10,180

Table (27)

Prepare the classified balance sheet of Incorporation I for the year ended November 30, 2017.

Classified Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are organized and reported as different groups, and sub-groups on the basis of the nature of the classification made of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

Incorporation I
Balance Sheet
As of November 30, 2017
Particulars	Amount ($)	Amount ($)
Assets
Current assets:
Cash		3,494
Accounts receivable		1,040
Inventory		3,546
Supplies		1,600
Total current assets		9,680
Plant assets:
Equipment	30,000
Less: Accumulated depreciation	(1,250)	28,750
Total assets		38,430
Liabilities and Stockholders’ equity
Current liabilities:
Accounts payable		7,100
Unearned service revenue		650
Salaries and wages payable		500
Total current liabilities		8,250
Long-term liabilities		-
Total liabilities		8,250
Stockholders’ Equity:
Common stock	20,000
Retained earnings	10,180
Total stockholders’ equity		30,180
Total liabilities and stockholders’ equity		38,430

Table (28)

Conclusion

Therefore, the net income of Incorporation I for the year ended November 30, 2017 is $3,180.

Therefore, the retained earnings statement of Incorporation I for the year ended November 30, is $10,180.

(g)

To determine

Closing entries: These refers to the journal entries that are recorded at the end of an each accounting period. It closes all revenue accounts earned, and all expenses account incurred during the current accounting year to the income summary account.

To Record: The closing entries of Incorporation I for the month November.

To Post: The above closing entries to their respective T-accounts of Incorporation I.

Explanation of Solution

Solution:

Record the closing entry of revenue.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
November 30	Sales Revenue		5,500
	Service Revenue		7,025
	Income Summary			12,525
	(To close the revenues.)

Table (29)

Description:

• Sales and service revenue is revenue and it increases the value of equity. To close the revenue account it should be debited. Therefore, debit sales revenue account by $5,500, and service revenue account by $7,025.
• Income Summary is a component of equity and it increases by $12,525. Therefore, credit income summary account by $12,525.

Record the closing entries of expenses and other debit accounts.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
November 30	Income Summary		9,345
	Sales Discounts			110
	Cost of Goods Sold			4,000
	Rent Expense			375
	Salaries and Wages Expense			3,650
	Depreciation Expense			250
	Supplies Expense			960
	(To close expenses and other debit accounts)

Table (30)

Description:

• Income summary is a component of equity and it decreases by $9,345. Therefore, debit income summary account by $9,345.
• Sales discount is a contra revenue account and it increases by $110. Therefore, credit sales discount by $110.
• Cost of goods sold is an expense and it decreases by $4,000. Therefore, credit cost of goods sold account by $4,000.
• Rent expense is an expense and it decreases by $375. Therefore, credit rent expense account by $375.
• Salaries and wages expense is an expense and it decreases by $3,650. Therefore, credit salaries and wages expense account by $3,650.
• Depreciation expense is an expense and it decreases by $250. Therefore, credit depreciation expense account by $250.
• Supplies expense is an expense and it decreases by $960. Therefore, credit supplies expense account by $960.

Record the closing entry of income summary account.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
November 30	Income Summary (E-)		3,180
	Retained Earnings (E+)			3,180
	(To close income summary account)

Table (31)

Description:

• Income summary is a component of equity and it decreases by $3,180. Therefore, debit income summary account by $3,180.
• Retained earnings are component of equity and it increases by $3,180. Therefore, credit retained earnings account by $3,180.

The following are the T-accounts.

Income Summary Account:

Income Summary Account
Details	Debit ($)	Details	Credit ($)
Sales Discounts	110	Sales Revenue	5,500
Cost of Goods Sold	4,000	Service Revenue	7,025
Rent Expense	375
Salaries and Wages Expense	3,650
Depreciation Expense	250
Supplies Expense	960
Retained Earnings	3,180
Total	12,525	Total	12,525

Table (32)

Effects:

All the respective expenses and revenues closing balances are recorded in the Income summary. The difference of revenues and expenses, that is, net income is transferred to the retained earnings.

Retained Earnings account:

Retained Earnings Account
Details	Debit ($)	Details	Credit ($)
Closing Balance	3,180	Income Summary	3,180
Total	3,180	Total	3,180

Table (33)

Effects:

The net income is transferred from income summary to retained earnings