Chapter 8, Problem 1CP

a.

To determine

Prepare journal entry to record the given transactions.

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:

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

Ø  Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Prepare journal entry to record the given transactions.

Event Number	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
1.	Salaries Payable	2,100
	Cash		2,100
	(To record the salaries paid from the 2017)
2.	Equipment (1)	9,000
	Van (2)	27,000
	Cash		36,000
	(To record the purchase made on equipment and van)
3.5/1	Prepaid rent	9,000
	Cash		9,000
	(To record the payment of office rent in advance)
4.	Supplies	300
	Accounts payable		300
	(To record the purchase of supplies on account )
5.	Merchandise inventory	33,600
	Cash		33,600
	(To record the purchase of alarms system for cash)
6	Allowance for doubtful accounts	2,350
	Accounts receivable		2,350
	(To record the allowance fir doubtful accounts)
7 a.	Accounts receivable	66,700
	Alarms sales revenue		66,700
	(To record the sales made  on account)
7. b	Cost of goods sold (3)	32,290
	Merchandise inventory		32,290
	(To record the cost goods sold )
8.	Accounts receivable-credit card	34,560
	Accounts receivable	50,000
	Credit card expense	1,440
	Monitoring service revenue		86,000
	(To record the monitoring services provided on account)
9.	Maintenance expense	45
	Office supplies expense	28
	Miscellaneous Expense	11
	Cash short\over (4)	4
	Cash		88
	(To record the replenished petty cash fund)
10.	Cash	34,560
	Accounts receivable-credit card		34,560
	(To record the amount collected on due)
11.	Salaries expense	52,000
	Cash		52,000
	(To record the payment of salaries)
12.	Cash	115,000
	Accounts receivable		115,000
	(To record the amount collected on accounts receivable)
13.	Advertising expense	12,500
	Cash		12,500
	(To record the cash paid on advertising expense)
14.	Utilities expense	6,800
	Cash		6,800
	(To record the cash paid on utilities expense)
15.	Cash	12,000
	Land		4,000
	Gain on sale of land		8,000
	(To record the sale made on land)
16.	Accounts payable	300
	Cash		300
	(To record the payment of accounts payable)
17.	Dividend	10,000
	Cash		10,000
	(To record the dividend paid  to the shareholders)
18.	Supplies Expense (5)	370
	Supplies		370
	(To record the supplies that was on hand at the end of the year.)
19.	Rent Expense (6)	9,600
	Prepaid rent		9,600
	(To recognize the rent that was expired)
20.	Uncollectible Accounts Expense (7)	3,501
	Allowance for doubtful accounts		3,501
	(To recognize uncollectible accounts expense for the year)
21.	Depreciation Expense (10)	14,900
	Accumulated depreciation		14,900
	(To recognize the depreciation expense  on the equipment and the van)
22.	Salaries Expense	1,500
	Salaries payable		1,500
	(To record  the accrued salaries at December 31, 2018)

(Table 1)

Note:

Since the equipment is appraised by $10,000 and the van is appraised by $30,000. The book value of equipment and van is identified by using the proportion of 1:3$\left(\frac{1}{4}\right)$.

Working Note:

Calculate of equipment cost:

$\begin{array}{c}\text{Equipment cost = Cash purchase × }\frac{\text{1}}{\text{4}}\\ =\$36,000\times \frac{1}{4}\\ =\$9,000\end{array}$ (1)

Calculate of van cost:

$\begin{array}{c}\text{Van cost = Cash purchase × }\frac{3}{\text{4}}\\ =\$36,000\times \frac{3}{4}\\ =\$27,000\end{array}$ (2)

Calculate the cost of goods sold:

Cost of goods sold
Unit (A)	Cost per unit ($) (B)	Total $\left(\text{A×B}\right)$
18	285	5,130
97	280	27,160
Total		32,290

Table (2)

(3)

Calculate the value of cash short over:

$\begin{array}{c}\text{Cash short = Petty cash fund }-\left(\begin{array}{l}\text{Cash + Cash receipts + Office supplies expense }\\ \text{+ miscellaneous expense}\end{array}\right)\\ =\$100-\left(\$12+\$45+\$28+\$11\right)\\ =\$100-\$96\\ =\$4\end{array}$ (4)

Calculate the value of supplies expense

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Opening balance of supplies + }\\ \text{Purchase of supplies}-\\ \text{Closing balance of supplies}\end{array}\right)\\ =\$250+\$300-\$180\\ =\$370\end{array}$ (5)

Calculate rent expense:

Table (3)

(6)

Calculate uncollectible accounts expense:

Table (4)

(7)

Calculate the depreciation expense for equipment using straight line method:

$\begin{array}{c}\text{Depreciation expense of equipment}=\frac{\text{Bookvalue-Salvage value}}{\text{Estimated useful life}}\\ =\frac{\$9,000-\$2,000}{5}\\ =\$1,400\end{array}$ (8)

Calculation depreciation expense of van using double declining method:

$\begin{array}{c}\text{Depreciation expense of van}=\text{Vancost ×}\frac{\text{Number of life}}{\text{Estimated useful life}}\text{× 2}\\ =\$27,000\times \frac{1}{4}\times 2\\ =\$27,000\times 0.25\times 2\\ =\$13,500\end{array}$ (9)

Calculation of total depreciation expense:

$\begin{array}{c}\text{Total}\text{depreciation}\text{expense=}\left(\begin{array}{l}\text{Depreciation expense}\\ \text{ of equipment (8)}\end{array}\right)\text{ + Depreciation expense of van (9)}\\ \text{=\$1,400+\$13,500}\\ \text{=\$14,900}\end{array}$ (10)

b.

To determine

Post the transaction to 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 which are as follows:

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

Cash
Bal.		93,708	1.	2,100
10.		34,560	2.	36,000
12.	115,500		3.	9,000
15.		12,000	5.	33,600
			9.	88
			11.	52,000
			13.	12,500
			14.	6,800
			16.	300
			17.	10,000
Bal.	93,380

Petty Cash
Bal.	100

Accounts Receivable
Bal.	22,540
7a.		66,700	6.	2,350
8.		50,000	12.	115,500
Bal.		21,390

Accounts Rec. Credit Cards
8.	34,560	10.	34,560
Bal.	0

Allow. for Doubt. Accounts
6.	2,350	Bal.	1,334
		20.	3,501
		Bal.	2,485

Supplies
Bal.	250
4.	300	18.	370
Bal.	180

Accounts Payable
16.	300	4.	300
		Bal.	-0-

Salaries Payable
		Bal.	2,100
1.	2,100	22.	1,500
		Bal.	1,500

Common Stock
		Bal.	50,000

Retained Earnings
		Bal.	75,894

Dividends
17.	10,000
Bal.	10,000

Alarm Sales Revenue
		7a.	66,700
		Bal.		66,700

Monitoring Service Rev.
		8.	86,000
		Bal.	86,000

Cost of Goods Sold
7b.	32,290
Bal.	32,290

Advertising Expense
13.		12,500
Bal.		12,500
Credit Card Expense
8.	1,440
Bal.	1,440

Depreciation Expense
21.		14,900
Bal.	14,900

Maintenance Expense
9.	45
Bal.		45

Prepaid Rent
Bal.	3,600
3.	9,000	19.	9,600
Bal.	3,000

Merchandise Inventory
Bal.	5,130	7b.	32,290
5.	33,600
Bal.	6,440

Equipment
2.	9,000
Bal.	9,000

Van
2.	27,000
Bal.	27,000

Accumulated Depreciation
		21.	14,900
		Bal.	14,900

Land
Bal.	4,000	15.	4,000
Bal.	-0-

Miscellaneous Expense
9.	11
Bal.	11

Office Supplies Expense
9.	28
Bal.	28

Rent Expense
19.		9,600
Bal.		9,600
Salaries Expense
11.		52,000
22.		1,500
Bal.	53,500

Supplies Expense
18.	370
Bal.	370

Uncollectible Accts. Exp.
20.	3,501
Bal.	3,501

Utilities Expense
14.	6,800
Bal.	6,800

Cash Short/Over
9.	4
Bal.	4

Gain on Sale of Land
		15.	8,000
		Bal.	8,000

c.

To determine

Prepare trial balance.

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 trial balance.

(Table 5)

Therefore, the total of debit, and credit columns of trial balance is $305,479.

d.

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 changes in stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’ equity during the end of an accounting period by explaining about the increase or decrease in the capital reserves of shares.

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

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

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, 2018
Particulars	Amount in $	Amount in $
Revenues:
Monitoring Service Revenue	86,000
Alarm Sales Revenue	66,700
Total Revenues		152,700
Cost of Goods Sold		(32,920)
Gross Margin		120,410
Expenses:
Advertising Expense	12,500
Credit card Expense	1,440
Depreciation Expense	14,900
Office Supplies Expense	28
Maintenance Expense	45
Miscellaneous Expense	11
Rent Expense	9,600
Salaries Expense	53,500
Supplies Expense	370
Uncollectible Accounts Expense	3,501
Utilities Expense	6,800
Cash Short and Over	4
Total Operating Expenses		102,699
Net Operating Income		17,711
Non-Operating Items
Gain on sale of land		8,000
Net Income		25,711

(Table 6)

Therefore, the net income of Company P is $25,711.

Company P
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2018
Particulars	Amount in $	Amount  in $
Beginning Common Stock	50,000
Plus: Common Stock Issued	-
Ending Common Stock		50,000
Beginning Retained Earnings	75,894
Plus: Net Income	25,711
Less: Dividends	(10,000)
Ending Retained Earnings		91,605
Total Stockholders’ Equity		141,605

(Table 7)

Therefore, the total stockholder’s equity is $141,605

Company P
Balance Sheet
As of December 31, 2018
Particulars	Amount in  $	Amount in $
Assets:
Cash		93,380
Petty Cash		100
Accounts Receivable	21,390
Allowance for doubtful accounts	(2,485)	18,905
Supplies		180
Prepaid Rent		3,000
Merchandise Inventory		6,440
Equipment	9,000
Van	27,000
Accumulated depreciation	(14,900)	21,100
Total Assets		143,105
Liabilities:
Salaries Payable	1,500
Total Liabilities		1,500
Stockholders’ Equity:
Common Stock	50,000
Retained Earnings	91,605
Total Stockholders’ Equity		141,605
Total Liabilities and Stockholders’ Equity		143,105

(Table 8)

Therefore, the total assets of Company P are $143,105, and the total liabilities and stockholders’ equity is $143,105.

Company P
Statement of Cash Flows
For the Year Ended December 31, 2018
Particulars	Amount  in $	Amount in $
Cash Flows From Operating Activities:
Cash Receipts from Customers (11)	150,060
Cash Payment for Expenses (12)	(116,388)
Net Cash Flow from operating activities		33,672
Cash Flows From Investing Activities:
Inflow from Sale of Land	12,000
Outflow to Purchase Equip. and Van	(36,000)
Net Cash Flow from investing activities		(24,000)
Cash Flows From Financing Activities:
Cash Payments for Dividends	(10,000)
Net Cash Flow from financing activities		(10,000)
Net Increase in Cash		(328)
Plus: Beginning Cash Balance		93,808
Ending Cash Balance		93,880

(Table 9)

Therefore, the net increase in cash of Company P for the year ended December 31, 2018 is $93,880.

Working note:

Calculate the total cash from customers

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{customers}\end{array}\}=\left(\begin{array}{l}\text{Collection of accounts receivable}\\ \text{+ collection of credit cards}\end{array}\right)\\ =\$115,500+\$34,560\\ =\$150,060\end{array}$ (11)

Calculate total cash payment for expense

$\begin{array}{c}\begin{array}{l}\text{Total cash payments}\\ \text{ for expesnes}\end{array}\}=\left(\begin{array}{l}\text{Prepaid rent+Salaries+Inventory+}\\ \text{Accounts payable+Advertising+}\\ \text{Utilities expense+Expense from petty cash}\end{array}\right)\\ =\left(\begin{array}{l}\$9,000+\$54,100+\$33,600\\ +\$300+\$12,500+\$6,800+\\ \$88\end{array}\right)\\ =\$116,388\end{array}$ (12)

e.

To determine

Prepare closing entries of Company P.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which 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 and Explanation	Debit in $	Credit in $
December 31	Alarm Sales Revenue	66,700
	Monitoring Service Revenue	86,000
	Gain on sale of land	8,000
	Retained Earnings		160,700
	(To close all revenue accounts)
December 31	Retained Earnings	134,989
	Cost of Goods Sold		32,290
	Advertising Expense		12,500
	Credit card Expense		1,440
	Depreciation Expense		14,900
	Maintenance Expense		45
	Miscellaneous Expense		11
	Office supplies Expense		28
	Rent Expense		9,600
	Salaries Expense		53,500
	Supplies Expense		370
	Uncollectible Accounts Expense		3,501
	Utilities Expense		6,800
	Cash Short and Over		4
	(To close all expense account)
December 31	Retained Earnings	10,000
	Dividends		10,000
	(To close dividends account)

(Table 10)

Closing entry for revenue account:

In this closing entry, the service revenue and gain on sale of land accounts are closed by transferring the amount of service revenue and gain on sale of land accounts to retained earnings in order to bring the revenue account balance to zero. Hence, debit the service revenue account for $160,700 and credit the retained account for $160,700.

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 $134,989 and credit supplies account for $134,989.

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.

f.

To determine

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

Explanation of Solution

Post the closing entries to the T-account:

Cash
Bal.	93,380

Petty Cash
Bal.	100

Accounts Receivable
Bal.	21,390

Allow. for Doubt. Accts.
		Bal.	2,485

Supplies
Bal.	180

Prepaid Rent
Bal.	3,000

Merchandise Inventory
Bal.	6,440

Equipment
Bal.	9,000

Accumulated Depr.
		Bal.	14,900

Salaries Payable
		Bal.	1,500

Common Stock
Bal.	50,000

Retained Earnings
			Bal.		75,894
cl.	134,989		cl	160,700
cl.		10,000
			Bal.		91,605

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

Alarm Sales Revenue
cl.		66,700	Bal.	66,700
			Bal.	-0-

Monit. Service Revenue
cl.	86,000	Bal.	86,000
		Bal.	-0-

Cost of Goods Sold
Bal.	32,290	cl	32,290
Bal.	-0-

Advertising Expense
Bal.	12,500	cl	12,500
Bal.	-0-

Credit Card Expense
Bal.	1,440	cl.	1,440
Bal.	-0-

Depreciation Expense
Bal.	14,900	cl.	14,900
Bal.	-0-

Maintenance Expense
Bal.	45	cl.	45
Bal.	-0-

Miscellaneous Expense
Bal.	11	cl.	11
Bal.	-0-

Office Supplies Expense
Bal.	28	cl.	28
Bal.	-0-

Rent Expense
Bal.	9,600	cl.	9,600
Bal.	-0-

Salaries Expense
Bal.	53,500	cl.	53,500
Bal.	-0-

Supplies Expense
Bal.	370	cl.	370
Bal.	-0-

Uncoll. Accts. Expense
Bal.	3,501	cl.	3,501
Bal.	-0-

Utilities Expense
Bal.	6,800	cl.	6,800
Bal.	-0-

Cash Short/Over
Bal.	4	Bal.	4
Bal.	-0-

Gain on Sale of Land
cl.	8,000	Bal.	8,000
		Bal.	-0-

Prepare a post-closing trial balance:

Company P
Post-Closing Trial Balance
December 31, 2018
Account Titles	Debit in $	Credit in $
Cash	93,380
Petty Cash	100
Accounts Receivable	21,390
Allowance for doubtful accounts		2,485
Supplies	180
Prepaid Rent	3,000
Merchandise Inventory	6,440
Equipment	9,000
Van	27,000
Accumulated  depreciation		14,900
Salaries Payable		1,500
Common Stock		50,000
Retained Earnings		91,605
Totals	160,490	160,490

(Table 11)

Therefore, the total of debit, and credit columns of post-closed trial balance is $160,490.