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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

MASTERY PROBLEM

Elizabeth Soltis owns and operates Aunt Ibby’s Styling Salon. A year-end work sheet is provided on the next page. Using this information, prepare adjusting entries, financial statements, and closing entries. Soltis made no additional investments during the year.

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To determine

Prepare the following:

  • Adjusting entries at December 31.
  • Closing entries at December 31.
  • Financial statements.
Explanation

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 stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare adjusting entries at December 31.

Date Account Title and ExplanationDebit ($)Credit ($)
December 31Styling Supplies expense (SE–)1,450 
       Styling Supplies (A–) 1,450
 (To record cost of supplies used)  
    
December 31Insurance Expense (SE–)650 
      Prepaid Insurance (A–) 650
 (To record expired insurance.)  
    
December 31Wages expense (SE–)40 
     Wages payable (L+) 40
 (To record accrued wages)  
    
December 31Depreciation Expense-Salon equipment (SE–)900
     Accumulated Depreciation- Salon Equipment (A–)900
(To record the depreciation of salon equipment)

Table (1)

Closing entries: The journal entries prepared to close the temporary accounts to permanent account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare the closing entries at December 31.

DateAccounts and Explanation

Debit

 ($)

Credit ($)
December 31Styling fees (SE–)32,000 
 Income Summary (SE+) 32,000
 (To close the revenue account.)  
    
December 31Income summary (SE–)18,290 
 Wages expense (SE+) 8,040
 Rent expense (SE+) 6,000
 Styling supplies expense (SE+) 1,450
 Phone expense (SE+) 450
 Utilities expense (SE+) 800
 Insurance expense (SE+) 650
 Depreciation expense (SE+) 900
 (To close the expense accounts.)  
    
December 31Income Summary (SE–)13,710 
 ES, Capital (SE+) 13,710
 (To close the income summary accounts)  
    
December 31ES, Capital (SE–)12,000 
 ES, Drawings (SE+) 12,000
 (To close drawings account.)  

Table (2)

Working Note:

Calculate the amount of ES capital (transferred).

ES Capital =(Total Revenues-Total Expenses)=($32,000$18,290)=$13,710

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

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