Chapter 6, Problem 1CP

a.

To determine

Record the given transaction in general journal.

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.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Record the given transaction in general journal as follows:

Company P
General Journal, 2016
Date		Account title	Debit ($)	Credit ($)
	1	Salaries Payable	1,000
		Cash		1,000
		(To record paid the salaries payable)
	2	Petty Cash	100
		Cash		100
		(To record paid the salaries payable)
	3. 3/1	Prepaid Rent (Van)	4,800
		Cash		4,800
		(To create petty cash fund)
	4. 5/2	Prepaid Rent (Office)	7,200
		Cash		7,200
		(To record one year office rent paid in advance)
	5	Supplies	400
		Accounts Payable		400
		(To record supplies purchased on account)
	6	Merchandise Inventory	28,000
		Cash		28,000
		(To record inventory purchased in cash)
	7a.	Accounts Receivable	57,120
		Alarm Sales Revenue		57,120
		(To record sales made on account)
	7b.	Cost of Goods Sold (1)	28,180
		Merchandise Inventory		28,180
		(To record inventory used to production)
	8	Accounts Payable	2,100
		Cash		2,100
		(To record cash paid to creditors)
	9	Office Supplies Expense	23
		Maintenance Expense	55
		Miscellaneous Expense	14
		Cash Short/Over	1
		Cash		93
		(To record petty cash fund used to paid expenses)
	10	Accounts Receivable	52,000
		Monitoring Service Revenue		52,000
		(To record service revenue performed on account)
	11	Salaries Expense	25,000
		Cash		25,000
		(To record salaries expense paid)
	12	Cash	89,300
		Accounts Receivable		89,300
		(To record cash received from credit customer)
	13	Advertising Expense	3,600
		Cash		3,600
		(To record advertising expense paid)
	14	Utilities Expense	2,500
		Cash		2,500
		(To record utilities expense incurred in cash)
	15	Dividends	10,000
		Cash		10,000
		(To record cash dividends paid to stockholder)
	16	Supplies Expense (2)	440
		Supplies		440
		(To record supplies expense incurred at the end of the accounting year)
	17	Rent Expense (5)	12,000
		Prepaid Rent		12,000
		(To record rent expense incurred at the end of the accounting year)
	18	Unearned Revenue	900
		Monitoring Service Revenue		900
		(To record service revenue recognized for future performance
	19	Salaries Expense	1,400
		Salaries Payable		1,400
		(To record salaries expense incurred)

Table (1)

Working note:

Calculate the cost of goods sold

Cost of goods sold
Unit (A)	Cost per unit ($) (B)	Total $\left(\text{A×B}\right)$
24	265	6,360
1	260	260
77	280	21,560
Total		28,180

Table (2)

(1)

Calculate the value of supplies expense

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Opening balance of supplies + }\\ \text{Purchase of supplies}-\\ \text{Closing balance of supplies}\end{array}\right)\\ =\$200+\$400-\$160\\ =\$440\end{array}$ (2)

Calculate the value of rent expense for van

$\begin{array}{c}\text{Rent expense for Van = }\left(\begin{array}{l}\text{Incurred rent expense for Year 5 lease+}\\ \text{Rent expense incurred during the year for Year 6 lease}\end{array}\right)\\ =\left(\$4,800\times \frac{2}{12}\right)+\left(\$4,800\times \frac{10}{12}\right)\\ =\$800+\$4,000\\ =\$4,800\end{array}$ (3)

Calculate the value of rent expense for office space

$\begin{array}{c}\begin{array}{l}\text{Rent expense}\\ \text{ for office space}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Incurred rent expense for Year 5 lease+}\\ \text{Rent expense incurred during the year for Year 6 lease}\end{array}\right)\\ =\left(\$7,200\times \frac{4}{12}\right)+\left(\$7,200\times \frac{8}{12}\right)\\ =\$2,400+\$4,800\\ =\$7,200\end{array}$ (4)

Calculate total rent expense incurred during the year

$\begin{array}{c}\text{Total rent expense = }\left(\begin{array}{l}\text{Rent expense for Van (3) + }\\ \text{Rent expense for office space (4)}\end{array}\right)\\ =\$4,800+\$7,200\\ =\$12,000\end{array}$ (5)

b.

To determine

Post the transactions to the T-accounts.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increase or decrease in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components that are as follows:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

Post the transactions to the T-accounts as follows:

Cash
Bal.		74,210	1.	1,000
12.		89,300	2.	100
20b.		30	3.	4,800
			4.	7,200
			6.	28,000
			8.	2,100
			9.	93
			11.	25,000
			13.	3,600
			14.	2,500
			15.	10,000
			20a.	175
Bal.	78,972

Petty Cash
2.	100
Bal.	100

Accounts Receivable
Bal.	13,500
7a.	57,120	12.	89,300
10.	52,000
20a.	120
Bal.	33,440

Supplies
Bal.	200
5.	400	16.	440
Bal.	160

Prepaid Rent
Bal.	3,200
3.	4,800	17.	12,000
4.	7,200
Bal.	3,200

Merchandise Inventory
Bal.	6,620	7b.	28,180
6.	28,000
Bal.	6,440

Land
Bal.	4,000

Accounts Payable
8.	2,100	Bal.	1,950
		5.	400
		Bal.	250

Unearned Revenue
18.	900	Bal.	900
		Bal.	0

Salaries Payable
		Bal.	1,000
1.	1,000	19.	1,400
		Bal.	1,400

Common Stock
		Bal.	50,000

Retained Earnings
		Bal.	47,880

Dividends
15.	10,000
Bal.	10,000

Alarm Sales Revenue
		7a.	57,120
		Bal.		57,120

Monitoring Service Revenue
			10.		52,000
			18.		900
			Bal.	52,900

Cost of Goods Sold
7b.	28,180
Bal.	28,180

Advertising Expense
13.		3,600
Bal.	3,600

Office Supplies Expense
9.	23
20a.		55
Bal.	78

Maintenance Expense
9.	55
Bal.	55

Miscellaneous Expense
9.	14
Bal.	14

Rent Expense
17.	12,000
Bal.	12,000

Salaries Expense
11.	25,000
19.	1,400
Bal.	26,400

Supplies Expense
16.	440
Bal.	440

Utilities Expense
14.	2,500
Bal.	2,500

Cash Short/Over
9.	1
Bal.	1

Interest Revenue
		20b.	30
		Bal.	30

c.

To determine

Prepare bank reconciliation at the end of the year.

Explanation of Solution

Bank reconciliation:

Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.

Prepare bank reconciliation at the end of the year as follows:

Company P
Bank Reconciliation
December 31, 2016
Particulars	$
Unadjusted Bank Balance, 12/31/2016	80,822
Add: Deposits in Transit	6,500
Less: Outstanding Checks	(8,350)
True Cash Balance, 12/31/2016	78,972
Unadjusted Book Balance, 12/31/2016	79,117
Add: Interest Earned	30
Less: Debit Memo for Printed Checks	(55)
NSF Check	(120)
True Cash Balance, 12/31/2016	78,972

Table (3)

Therefore, true cash balance of Company P as of December 31, 2016 is $78,972.

• The deposits that are not recorded by the bank are referred to as deposits in transit. Since the deposits in transit are not reflected on the bank statement, the company should add deposits in transit to cash balance per bank, while preparation of bank reconciliation statement.
• Outstanding checks are the checks that are issued by the company, but not yet paid by the bank. When the check is issued for payment, the company deducts the cash balance immediately. But the bank deducts only when the cash is paid for the issued check. So, company deducts the cash balance per bank to remove the differences.
• Interest earned on checking account is credited by bank to the bank account of that the company is not aware of. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• Banks deduct the service charge for the services rendered like lock box rental, or printed checks. But the company is not aware of such deductions. So, company deducts the cash balance per books while doing bank reconciliation.
• While bank reconciliation, the NSF check should be deducted from the cash balance per book. This is because the bank could not collect funds from the customer’s bank due to lack of funds. But being recorded as Accounts Receivable previously, the balance should be deducted from books, to increase the Accounts Receivable account.

d.

To determine

Record the adjusting or correcting entries of Company P from the bank reconciliation.

Explanation of Solution

Non-sufficient checks (NSF):

When the customer bank returns the deposited check to the depositor’s bank indicating that there are insufficient funds in the account, such returned or bounced check is referred to as NSF check.

Record the adjusting or correcting entries of Company P from the bank reconciliation as follows:

Check issued for new supplies

Date	Account Titles	Debit ($)	Credit ($)
	Office supplies	55
	Cash		55
	(To record check issued for office supplies)

Table (4)

• Office supplies are an asset account, and it increases the value of asset by $55. Hence, debit the accounts receivable account for $55.
• Cash is an asset account, and it decreases the value of asset by $55. Hence, credit the cash account for $55.

NSF check for $120.

Date	Account Titles	Debit ($)	Credit ($)
	Accounts receivable	120
	Cash		120
	(To record adjusting entry for NSF check)

Table (5)

• Accounts receivable is an asset account, and it increases the value of asset by $120 because the bank has not collected the amount from the customer due to insufficient funds. As the collection could not be made, the amount of accounts receivable account is increased. Hence, debit the accounts receivable account for $120.
• Cash is an asset account, and it decreases the value of asset by $120. Hence, credit the cash account for $120.

Interest earned for $30 mentioned in the bank statement.

Date	Account Titles	Debit ($)	Credit ($)
	Cash	30
	Interest revenue		30
	(To record interest revenue in the book)

Table (6)

• Cash is an asset account, and it increases the value of asset by $30. Hence, debit the cash account for $30.
• Interest revenue is a revenue account, and it increases the value of stockholder’s equity by $30. Hence, credit the interest revenue account for $30.

e.

To determine

Prepare a trial balance of Company P.

Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given point of time.  It is usually prepared at end of the accounting period.  Debit balances are listed in left   column and credit balances are listed in right column.  The totals of debit and credit column should be equal.  Trial balance is useful in the preparation of the financial statements.

Prepare a trial balance of Company P as follows:

Company P
Trial Balance
December 31, 2016
Accounts	Debit ($)	Credit ($)
Cash	78,972
Petty Cash	100
Accounts Receivable	33,440
Supplies	160
Prepaid Rent	3,200
Merchandise Inventory	6,440
Land	4,000
Accounts Payable		250
Salaries Payable		1,400
Common Stock		50,000
Retained Earnings		47,880
Dividends	10,000
Alarm Sales Revenue		57,120
Monitoring Service Revenue		52,900
Cost of Goods Sold	28,180
Advertising Expense	3,600
Office Supplies Expense	78
Maintenance Expense	55
Miscellaneous Expense	14
Rent Expense	12,000
Salaries Expense	26,400
Supplies Expense	440
Utilities Expense	2,500
Cash Short/Over	1
Interest Revenue		30
Totals	209,580	209,580

Table (7)

Therefore, the total of debit, and credit columns of trial balance is $209,580 and agree.

f.

To determine

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows of Company P.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Statement of stockholder's’ equity:

This statement reports the beginning stockholder’s equity and all the changes that led to ending stockholder's’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholder’s equity to arrive at the end result, ending stockholder’s equity.

Balance Sheet:

Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows

The financial statement that shows the changes in cash flows from operating, investing, and financing activities is referred to as statement of cash flows.

Cash flows from operating activities:

These refer to the cash received or cash paid in day-to-day operating activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

• Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
• Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

Cash flow from investing activities:

This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

Cash flow from financing activities:

This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows of Company P as follows:

Company P
Income Statement
For the Year Ended December 31, 2016
	$	$
Revenues:
Monitoring Service Revenue	52,900
Alarm Sales Revenue	57,120
Total Revenues		110,020
Cost of Goods Sold		(28,180)
Gross Margin		81,840
Expenses:
Advertising Expense	3,600
Office Supplies Expense	78
Maintenance Expense	55
Miscellaneous Expense	14
Rent Expense	12,000
Salaries Expense	26,400
Supplies Expense	440
Utilities Expense	2,500
Cash Short and Over	1
Total Operating Expenses		45,088
Net Operating Income		36,752
Non-Operating Items
Interest Revenue		30
Net Income		36,782

Table (8)

Therefore, the net income of Company P is $36,782.

Company P
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2016
Particulars	$	$
Beginning Common Stock	50,000
Plus: Common Stock Issued
Ending Common Stock		50,000
Beginning Retained Earnings	47,880
Plus: Net Income	36,782
Less: Dividends	(10,000)
Ending Retained Earnings		74,662
Total Stockholders’ Equity		124,662

Table (9)

Therefore, the total stockholder’s equity is $124,662.

Company P
Balance Sheet
As of December 31, 2016
	$	$
Assets
Cash	78,972
Petty Cash	100
Accounts Receivable	33,440
Supplies	160
Prepaid Rent	3,200
Merchandise Inventory	6,440
Land	4,000
Total Assets		126,312
Liabilities
Accounts Payable	250
Salaries Payable	1,400
Total Liabilities		1,650
Stockholders’ Equity
Common Stock	50,000
Retained Earnings	74,662
Total Stockholders’ Equity		124,662
Total Liabilities and Stockholders’ Equity		126,312

Table (10)

Therefore, the total assets of Company P are $126,312, and the total liabilities and stockholders’ equity is $126,312.

Company P
Statement of Cash Flows
For the Year Ended December 31, 2016
	$	$
Cash Flows From Operating Activities:
Cash Receipts from Customers (6)	89,300
Cash from Interest Earned	30
Cash Payment for Expenses (7)	(74,468)
Net Cash Flow from Operating Activities		14,862
Cash Flows From Investing Activities:
Cash Flows From Financing Activities:
Cash Payments for Dividends	(10,000)
Net Cash Flow from Financing Activities		(10,000)
Net Increase in Cash		4,862
Plus: Beginning Cash Balance		74,210
Ending Cash Balance		79,072

Table (11)

Therefore, the net increase in cash of Company P for the year ended December 31, 2016 is, $4,862.

Working note:

Calculate the total cash from customers

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{customers}\end{array}\}=\left(\begin{array}{l}\text{Cash received from customer}\\ +\text{Decrease in accounts receivable}\end{array}\right)\\ =\$89,300+\$0\\ =\$89,300\end{array}$ (6)

Calculate total cash payment for expense

$\begin{array}{c}\begin{array}{l}\text{Total cash payments}\\ \text{ forexpesnes}\end{array}\}=\left(\begin{array}{l}\text{Prepaid rent+Salaries+Inventory+}\\ \text{Accounts payable+Advertising+}\\ \text{Utilities expense+Expense from petty cash}\\ \text{+Office supplies+NSF checks}\end{array}\right)\\ =\left(\begin{array}{l}\$12,000+\$26,000+\$28,000\\ +\$2,100+\$3,600+\$2,500+\\ \$93+\$55+\$120\end{array}\right)\\ =\$74,468\end{array}$ (7)

g.

To determine

Prepare closing entries of Company P.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, that are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to retained earnings. Closing entries produce a zero balance in each temporary account.

Prepare closing entries of Company P as follows:

Date	Account Titles	Debit	Credit
Dec. 31	Alarm Sales Revenue	57,120
	Monitoring Service Revenue	52,900
	Interest Revenue	30
	Retained Earnings		110,050
	(To close all revenue accounts)
Dec. 31	Retained Earnings	73,268
	Cost of Goods Sold		28,180
	Advertising Expense		3,600
	Office Supplies Expense		78
	Maintenance Expense		55
	Miscellaneous Expense		14
	Rent Expense		12,000
	Salaries Expense		26,400
	Supplies Expense		440
	Utilities Expense		2,500
	Cash Short and Over		1
	(To close all expense account)
Dec. 31	Retained Earnings	10,000
	Dividends		10,000
	(To close dividends account)

Table (12)

Closing entry for revenue account:

In this closing entry, the service revenue and interest revenue accounts are closed by transferring the amount of service revenue and interest revenue accounts to retained earnings in order to bring the revenue account balance to zero. Hence, debit the service revenue account for $110,050, and credit the retained account for $110,050.

Closing entry for expenses account:

In this closing entry, all expense accounts are closed by transferring the amount of total expense to the retained earnings in order to bring the expense account balance to zero. Hence, debit the retained earnings for $73,268 and credit supplies account for $73,268.

Closing entry for dividends account:

In this closing entry, the dividends account is closed by transferring the amount of dividends to retained earnings in order to bring the dividends account balance to zero. Hence, debit the retained earnings for $10,000 and credit dividends account for $10,000.

h.

To determine

Post the closing entries to the T-account, and prepare a post-closing trial balance.

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.

Post the closing entries to the T-account, and prepare a post-closing trial balance as follows:

Cash
Bal.	78,972

Petty Cash
Bal.	100

Accounts Receivable
Bal.	33,440

Supplies
Bal.	160

Prepaid Rent
Bal.	3,200

Merchandise Inventory
Bal.	6,440

Land
Bal.	4,000

Accounts Payable
		Bal.	250

Common Stock
		Bal.	50,000

Retained Earnings
			Bal.		47,880
cl	73,268		cl	110,050
cl		10,000
			Bal.		74,662

Dividends
Bal.	10,000	cl	10,000
Bal.	0

Alarm Sales Revenue
cl		57,120	Bal.	57,120
			Bal.	0

Monit. Service Revenue
cl	52,900	Bal.	52,900
		Bal.	0

Cost of Goods Sold
Bal.	28,180	cl	28,180
Bal.	0

Advertising Expense
Bal.	3,600	cl	3,600
Bal.	0

Maintenance Expense
Bal.	55	cl	55
Bal.	0

Miscellaneous Expense
Bal.	14	cl	14
Bal.	0

Office Supplies Expense
Bal.	78	cl	78
Bal.	0

Rent Expense
Bal.	12,000	cl	12,000
Bal.	0

Salaries Expense
Bal.	26,400	cl	26,400
Bal.	0

Supplies Expense
Bal.	440	cl	440
Bal.	0

Utilities Expense
Bal.	2,500	cl	2,500
Bal.	0

Cash Short/Over
Bal.	1	cl	1
Bal.	0

Interest Revenue
cl	30	Bal.	30
		Bal.	0

Company P
Post-Closing Trial Balance
December 31, 2016
Account Titles	Debit	Credit
Cash	78,972
Petty Cash	100
Accounts Receivable	33,440
Supplies	160
Prepaid Rent	3,200
Merchandise Inventory	6,440
Land	4,000
Accounts Payable		250
Salaries Payable		1,400
Common Stock		50,000
Retained Earnings		74,662
Totals	126,312	126,312

Table (13)

Therefore, the total of debit, and credit columns of post-closed trial balance is $126,312 and agree.