Chapter 6, Problem 1MPS

2.

To determine

Prepare journal entry for the given transactions in a general journal.

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.

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 journal entry for the given transactions in a general journal.

General Journal                                                             Page 3
Date		Accounts Title and Explanation		Post Ref.	Debit ($)	Credit ($)
2020
January	2	Supplies		121	7,000
			Cash	101		7,000
			(To record purchases of supplies for cash)
	2	Prepaid Insurance		134	8,400
			Cash	101		8,400
			(To record purchases of insurance for one year)
	7	Cash		101	20,000
		Accounts Receivable		111	5,000
			Fees Income	401		25,000
			(To record services performed for cash and account)
	12	Cash		101	4,000
			Accounts Receivable	111		4,000
			(To record receipts of cash on account)
	12	Advertising Expense		526	3,600
			Cash	101		3,600
			(To record payment of advertising on radio)
	13	Cash		101	4,500
			Accounts Receivable	111		4,500
			(To record receipts of cash on account)
	14	Cash		101	750
			Supplies	121		750
			(To record damage supplies return for cash)
	15	Cash		101	20,700
		Accounts Receivable		111	2,300
			Fees Income	401		23,000
			(To record services performed for cash and account)

Table (1)

General Journal                                                             Page 4
Date		Account Title and Explanation		Post. Ref.	Debit ($)	Credit ($)
2020
January	20	Supplies		121	5,000
			Accounts Payable	202		5,000
			(To record purchases of supplies on account)
	20	Cash		101	12,500
		Accounts Receivable		111	3,500
			Fees Income	401		16,000
			(To record services performed for cash and account)
	20	Cash		101	5,600
			Accounts Receivable	111		5,600
			(To record the collection on account)
	21	Maintenance Expense		529	7,065
			Cash	101		7,065
			(To record the payment for maintenance on equipment)
	22	Advertising Expense		526	3,600
			Cash	101		3,600
			(To record payment of cash for newspaper ads)
	23	Telephone Expense		532	1,025
			Cash	101		1,025
			(To Record the payment of telephone bill)
	26	Cash		101	1,600
			Accounts Receivable	111		1,600
			(To record the collection on account)
	27	Accounts Payable		202	3,000
			Cash	101		3,000
		(To record the payment to creditors)

Table (2)

General Journal                                                             Page 5
Date		Accounts Title and Explanation		Post Ref.	Debit ($)	Credit ($)
2020
January	28	Utilities Expense		514	2,675
			Cash	101		2,675
			(To record the payment of utility bill)
	29	Cash		101	19,000
		Accounts Receivable		111	2,750
			Fees Income	401		21,750
			(To record services performed for cash and account)
	31	Salaries Expense		511	32,800
			Cash	101		32,800
			(To record payment of monthly salaries)
	31	TE, Drawing		302	12,000
			Cash	101		12,000
			(To record withdrawal of cash for personal use)
	31	Maintenance Expense		529	4,150
			Cash	101		4,150
			(To record payment of monthly maintenance services)
	31	Equipment		141	15,000
			Cash	101		10,000
			Accounts Payable	202		5,000
			(To record the purchases of equipment for cash and on account)
	31	Cash		101	7,600
		Accounts Receivable		111	1,620
			Fees Income	401		9,220
			(To record services performed for cash and account)

Table (3)

4, 5 and 6.

To determine

Prepare trail balance section, indicate the given adjustments, and complete the worksheet for E Consulting Services for the month ended January 31, 2020.

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.

Prepare trail balance section, indicate the given adjustments, and complete the worksheet for E Consulting Services for the month ended January 31, 2020.

Table (4)

7.

To determine

Prepare income statement for E Consulting Services for the month ended January 31, 2020.

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 income statement for E Consulting Services for the month ended January 31, 2020.

E Consulting Services
Income Statement
For the Month Ended January 31, 2020
Particulars	Amount ($)	Amount ($)
Revenues:
Fees Income		94,970
Expenses:
Salaries Expense	32,800
Utilities Expense	2,675
Supplies Expense	7,050
Rent Expense	4,000
Insurance Expense	700
Depreciation Expense, Equipment	183
Advertising Expense	7,200
Telephone Expense	1,025
Maintenance Expense	11,215
Total expenses		66,848
Net income		$28,122

Table (5)

8.

To determine

Prepare statement of owners’ equity for E Consulting Services for the month ended January 31, 2020.

Explanation of Solution

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 of owners’ equity for E Consulting Services for the month ended January 31, 2020.

E Consulting Services
Statement of Owners’ Equity
For the Month Ended January 31, 2020
Particulars	Amount ($)	Amount ($)
TE, Capital, January 1, 2020		$128,667
Net income for January	28,122
Less: Withdrawals for January	12,000
Increase in capital		16,122
HK, Capital, January 31, 2020		$144,789

Table (6)

9.

To determine

Prepare balance sheet for E Consulting Services as at January 31, 2020.

Explanation of Solution

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 for E Consulting Services as at January 31, 2020.

E Consulting Services
Balance Sheet
January 31, 2019
Assets
Cash		$112,285
Accounts Receivable		4,470
Supplies		5,200
Prepaid Insurance		7,700
Equipment	$26,000
Less: Accumulated Depreciation	336	25,634
Total Assets		$155,289
Liabilities and owner’s equity
Liabilities
Accounts Payable		10,500
Owners’ Equity
TE, Capital		144,789
Total Liabilities and Owners’ Equity		$155,289

Table (7)

10.

To determine

Prepare adjusting entry for the given adjustments.

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.

Prepare adjusting entry for supplies.

GENERAL JOURNAL				Page 6
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Supplies expense	517	7,050
	Supplies	121		7,050
	(to record supplies used)

Table (8)

Description:

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

Prepare adjusting entry for insurance expense:

GENERAL JOURNAL				Page 6
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Insurance expense	535	700
	Prepaid insurance	134		700
	(to record part of prepaid insurance expired)

Table (9)

Description:

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

Prepare adjusting entry for rent expense:

GENERAL JOURNAL				Page 6
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Rent expense	520	4,000
	Prepaid rent	137		4,000
	(to record part of prepaid rent expired)

Table (10)

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 6
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Depreciation expense-Equipment	523	183
	Accumulated depreciation-Equipment	142		183
	(to record depreciation expense)

Table (11)

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.

11.

To determine

Prepare closing entries in general ledger.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to capital account are referred to as closing entries. The revenue, expense, and drawing 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.

Steps in closing procedure:

1. 1. Close the revenue accounts to Income Summary account.
2. 2. Close the expense accounts to Income Summary account.
3. 3. Close the Income Summary account and transfer the net income or net loss balance to the Capital account.
4. 4. Close the Drawing account to Capital account.

Close the revenue accounts to Income Summary account.

GENERAL JOURNAL						Page 6
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2019		Fees Income		401	94,970
January	31		Income Summary	309		94,970
		(Record closing of revenue to Income Summary account)

Table (12)

Description:

• Fees income is a revenue account. Revenue account has a normal credit balance. Since revenue is closed to Income Summary account, the account is debited.
• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is credited to hold the transferred balance from revenue account.

Close the expense accounts to Income Summary account.

GENERAL JOURNAL						Page 6
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2019		Income Summary		309	19,980
January	31		Salaries Expense	511		32,800
			Utilities Expense	514		2,675
			Supplies Expense	517		7,050
			Rent Expense	520		4,000
			Depreciation Expense, Equipment	523		183
			Advertising Expense	526		7,200
			Maintenance Expense	529		11,215
			Telephone Expense	532		1,025
			Insurance Expense	535		700
		(Record closing of expenses to Income Summary account)

Table (13)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is debited to hold the transferred balance from expense accounts.
• Salaries expense, Utilities expense, Supplies expense, Rent expense, Depreciation expense, Advertising expense, Maintenance expense, Telephone expense, and Insurance expense are expense accounts. Expense account has a normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.

Close the net income to Income Summary account.

GENERAL JOURNAL						Page 6
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2019		Income Summary		309	28,122
January	31		TE, Capital	301		28,122
		(Record closing of net income to capital account)

Table (14)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. Since net income is closed, the account is reversed; hence, the Income Summary account is debited.
• TE, Capital is a capital account. Since net income is transferred to the account, the value increased, and an increase in capital is credited.

Working Note 1:

Compute net income.

$\begin{array}{c}\text{Net income = Revenue–Expenses}\\ \text{=\$94,970–\$66,848}\\ \text{=\$28,122}\end{array}$

Close the Drawing account to Capital account.

GENERAL JOURNAL						Page 6
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2019		TE, Capital			12,000
January	31		TE, Drawing			12,000
		(Record closing of drawing to capital account)

Table (15)

Description:

• TE, Capital is a capital account. Since drawings are transferred to the account, the value decreased, and a decrease in capital is debited.
• TE, Drawing is a capital account. Since drawings are transferred, the account is credited to reverse the previously debited effect.

1, 3, 10, and 11.

To determine

Open the general ledger account, enter the balance for January 1, 2020, and post the journal entries, adjusting entries, and closing entries.

Explanation of Solution

Open the general ledger account, enter the balance for January 1, 2020, and post the journal entries, adjusting entries, and closing entries.

ACCOUNT: Cash                                                                  ACCOUNT NO. 101
DATE		Item	Post   Ref.	Debit ($)	Credit ($)	BALANCE
						Debit ($)	Credit ($)
2020
January	1	Balance	✔			111,350
	2		J3		7,000	104,350
	2		J3		8,400	95,950
	7		J3	20,000		115,950
	12		J3	4,000		119,950
	12		J3		3,600	116,350
	13		J3	4,500		120,850
	14		J3	750		121,600
	15		J4	20,700		142,300
	20		J4	12,500		154,800
	20		J4	5,600		160,400
	21		J4		7,065	153,335
	22		J4		3,600	149,735
	23		J4		1,025	148,710
	26		J4	1,600		150,310
	27		J5		3,000	147,310
	28		J5		2,675	144,635
	29		J5	19,000		163,635
	31		J5		32,800	130,835
	31		J5		12,000	118,835
	31		J5		4,150	114,685
	31		J5		10,000	104,685
	31		J5	7,600		112,285

Table (16)

ACCOUNT: Accounts Receivable                                 ACCOUNT NO. 111
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔			5,000
	7		J3	5,000		10,000
	12		J3		4,000	6,000
	13		J3		4,500	1,500
	15		J4	2,300		3,800
	20		J4	3,500		7,300
	20		J4		5,600	1,700
	26		J4		1,600	100
	29		J5	2,750		2,850
	31		J5	1,620		4,470

Table (17)

ACCOUNT: Supplies                                                        ACCOUNT NO. 121
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔			1,000
	2		J3	7,000		8,000
	14		J3		750	7250
	20		J4	5,000		12,250
	31	Adjusting	J6		7,050	5,200

Table (18)

ACCOUNT: Accounts Payable                                          ACCOUNT NO. 202
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔				3,500
	20		J4		5,000		8,500
	27		J5	3,000			5,500
	31		J5		5,000		10,500

Table (19)

ACCOUNT: TE, Capital                                                    ACCOUNT NO. 301
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔				128,667
	31	Closing	J6		34,597		163,264
	31	Closing	J6	15,000			148,264

Table (20)

ACCOUNT: TE, Drawing                                                     ACCOUNT NO. 302
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31		J5	12,000		12,000
	31	Closing	J6		12,000

Table (21)

ACCOUNT: Prepaid Insurance                                           ACCOUNT NO. 134
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	2		J3	8,400		8,400
	31	Adjusting	J6		700	7,700

Table (22)

ACCOUNT: Prepaid Rent                                                    ACCOUNT NO. 137
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔			4,000
	31	Adjusting	J6		4,000

Table (23)

ACCOUNT: Equipment                                                        ACCOUNT NO. 141
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔			11,000
	31		J5	15,000		26,000

Table (24)

ACCOUNT: Accumulated Depreciation-Equipment          ACCOUNT NO. 142
DATE		Item	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	1	Balance	✔				183
	31	Adjusting	J6		183		366

Table (25)

ACCOUNT: Income Summary                                         ACCOUNT NO. 309
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31	Closing	J6		94,970		94,970
	31	Closing	J6	66,848			28,122
	31	Closing	J6	28,122

Table (26)

ACCOUNT: Fees Income                                                        ACCOUNT NO. 401
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	7		J3		25,000		25,000
	15		J4		23,000		48,000
	20		J4		16,000		64,000
	29		J5		21,750		85,750
	31		J5		9,220		94,970
	31	Closing	J6	94,970

Table (27)

ACCOUNT: Salaries Expense                                                  ACCOUNT NO. 511
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31		J5	32,800		32,800
	31	Closing	J6		32,800

Table (28)

ACCOUNT: Utilities Expense                                                   ACCOUNT NO. 514
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	28		J5	2,675		2,675
	31	Closing	J6		2,675

Table (29)

ACCOUNT: Supplies Expense                                                   ACCOUNT NO. 517
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31	Adjusting	J6	7,050		7,050
	31	Closing	J6		7,050

Table (30)

ACCOUNT: Rent Expense                                                        ACCOUNT NO. 520
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31	Adjusting	J6	4,000		4,000
	31	Closing	J6		4,000

Table (31)

ACCOUNT: Depreciation Expense -Equipment                          ACCOUNT NO. 523
DATE		ITEM	POST.REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31	Adjusting	J6	183		183
	31	Closing	J6		183

Table (32)

ACCOUNT: Advertising Expense                                                ACCOUNT NO. 526
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	12		J3	3,600		3,600
	22		J4	3,600		7,200
	31	Closing	J6		7200	0

Table (33)

ACCOUNT: Maintenance Expense                                          ACCOUNT NO. 529
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	21		J4	7,065		7,065
	31		J5	4,150		11,215
	31	Closing	J6		11,215	0

Table (34)

ACCOUNT: Telephone Expense                                                ACCOUNT NO. 532
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	23		J4	1,025		1,025
	31	Closing	J6		1,025	0

Table (35)

ACCOUNT: Insurance Expense                                               ACCOUNT NO. 535
DATE		ITEM	POST REF.	DEBIT ($)	CREDIT ($)	BALANCE
						DEBIT ($)	CREDIT ($)
2020
January	31	Adjusting	J6	700		700
	31	Closing	J6		700	0

Table (36)

12.

To determine

Prepare a post-closing trial balance for E Consulting Services as at January 31, 2020.

Explanation of Solution

Post-closing trial balance: Post-closing trial balance is a summary of all the assets, liabilities, and capital accounts and their balances, after the closing entries are prepared. So, post-closing trial balance reports the balances of permanent accounts only.

Prepare a post-closing trial balance for E Consulting Services as at January 31, 2020.

E Consulting Services Post- closing Trial Balance January 31, 2020
Account Title	Debit ($)	Credit ($)
Cash	112,285
Accounts Receivable	4,470
Supplies	5,200
Prepaid Insurance	7,700
Equipment	26,000
Accumulated Depreciation		366
Accounts Payable		10,500
TE, Capital		144,789
Total	155,655	155,655

Table (37)

To determine

Analyze the changes of total assets, liabilities, and the ending balance of owner’s capital of by comparing the January 31, 2020 balance sheet and December 31, 2019 balance sheet.

Explanation of Solution

The total assets are increased by $23,122$\left(\$155,289–\$132,167\right)$.

The total liabilities are increased by $7,000$\left(\$10,500–\$3,500\right)$.

The Owner’s capital is increased by $16,122$\left(\$144,789–\$128,667\right)$.

To determine

Analyze the changes arisen in cash and accounts receivable accounts.

Explanation of Solution

The cash account is increased by $935$\left(\$112,285–\$111,350\right)$.

 The accounts receivable account is decreased by $530$\left(\$4,470–\$5,000\right)$.

To determine

Analyze the improvement in the firm’s financial position.

Explanation of Solution

The firm’s capital is increased by $16,122$\left(\$144,789–\$128,667\right)$. Hence, it can be said that the firm’s financial position is improved.