Chapter 9, Problem 1CP

a.

To determine

Prepare the general journal entry of Incorporation PSS.

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.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare the general journal entry of Incorporation PSS as follows:

Event	Account titles and Explanation	Debit ($)	Credit ($)
1.	Salaries payable	1,500
	Cash		1,500
	(To record salaries payable)
2.	Prepaid rent (Office)	9,000
	Cash		9,000
	(To record  prepaid rent)
3.	Supplies	425
	Accounts payable		425
	(To record purchase of supplies on account)
4.	Merchandise inventory	42,050
	Cash		42,050
	(To record purchase of merchandise inventory)
5.	Allowance for doubtful accounts	2,060
	Accounts receivable		2,060
	(To record write off uncollectible accounts receivable)
6a.	Accounts receivable	79,170
	Alarm sales revenue $\left(130\times \$580\right)$		75,400
	Sales tax payable (1)		3,770
	(To record sales of alarm systems)
6b.	Cost of goods sold (2)	37,470
	Merchandise inventory		37,740
	(To record the adjustment from cost to market value for inventory write-downs)
7.	Accounts receivable - credit card	40,320
	Accounts receivable	65,000
	Credit card expense	1,680
	Monitoring service revenue		107,000
	(To record service rendered to monitoring services)
8.	Maintenance expense	60
	Office supplies expense	15
	Miscellaneous expense	17
	Cash short/over expense	3
	Cash		95
	(To record replenishment of petty cash fund)
9.	Cash	40,320
	Accounts receivable - credit card		40,320
	(To record cash received from credit card company)
10.	Sales tax payable $\left(\$69,000\times 5\%\right)$	3,480
	Cash		3,480
	(To record sales tax paid to alarm services)
11.	Salaries expense	65,000
	Federal income tax payable		7,500
	FICA Tax-Social security tax payable (3)		3,900
	FICA Tax-Medicare payable (4)		975
	Cash		52,625
	(To record payroll expense)
12.	Warranty payable	1,950
	Cash		1,950
	(To record warranty payable)
13.	Cash	12,000
	Notes payable		12,000
	(To record the notes payable)
14.	Cash	136,100
	Accounts receivable		136,100
	(To record accounts receivable during the year)
15.	Advertising expense	15,000
	Cash		15,000
	(To record advertising expense)
16.	Utilities expense	7,200
	Cash		7,200
	(To record utilities expense)
17.	Payroll income tax expense (5)	4,500
	Federal income tax payable	7,000
	FICA - Social security tax payable (6)	3,600
	FICA - Medicare tax payable (7)	900
	Cash		16,000
	(To record payroll liabilities)
18.	Accounts payable	425
	Cash		425
	(To record cash paid for accounts payable)
19.	Dividends	10,000
	Cash		10,000
	(To record payment of cash dividend)
20.	Supplies expense (8)	440
	Supplies		440
	(To record adjustment entry for supplies)
21.	Rent expense (9)	9,000
	Prepaid rent		9,000
	(To record adjustment for rent expense)
22.	Uncollectible accounts expense (10)	3,965
	Allowance for doubtful accounts		3,965
	(To record adjustment for uncollectible accounts expense)
23.	Depreciation expense (11)	8,150
	Accumulated depreciation		8,150
	(To record adjustment  entry for depreciation expense)
24.	Warranty expense (12)	2,262
	Warranty payable		2,262
	(To record adjustment entry for warranty expense)
25.	Interest expense	320
	Interest payable		320
	(To record adjustment entry for interest expense)
26.	Payroll tax expense (13)	630
	Unemployment tax payable		630
	(To record adjustment entry for unemployment tax expense)
27.	Payroll tax expense (14)	375
	FICA - Social security tax payable		300
	FICA - Medicare tax payable		75
	(To record adjustment entry for payroll expense)

Table (1)

Working notes:

Calculate sales tax payable:

$\begin{array}{c}\text{Sales tax payable = Alarm sales }\times \text{Percent of sales tax}\\ \text{=}\text{\$75,400}\times \text{5\%}\\ \text{=}\text{\$3,770}\end{array}$ (1)

Calculate the cost of goods sold:

Cost of goods sold
Unit (A)	Cost per unit ($) (B)	Total $\left(\text{A×B}\right)$
23	280	6,440
107	290	31,030
Total		37,470

Table (2) (2)

Calculate FICA – Social security tax payable:

$\begin{array}{c}\begin{array}{l}\text{FICA - Social security}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$65,000}\times \text{6\%}\\ \text{= \$3,900}\end{array}$ (3)

Calculate FICA – Medicare tax payable:

$\begin{array}{c}\begin{array}{l}\text{FICA - Medicare}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$65,000}\times 1.5\text{\%}\\ \text{= \$975}\end{array}$ (4)

Calculate FICA – Pay roll tax expense:

$\begin{array}{c}\begin{array}{l}\text{FICA - Payroll }\\ \text{incometax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$60,000}\times 7.5\text{\%}\\ \text{= \$4,500}\end{array}$ (5)

Calculate FICA – Social security tax payable:

$\begin{array}{c}\begin{array}{l}\text{FICA - Social security}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$60,000}\times 6\text{\%}\\ \text{= \$3,600}\end{array}$ (6)

Calculate FICA – Medicare tax payable:

$\begin{array}{c}\begin{array}{l}\text{FICA - Medicare}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$60,000}\times 1.5\text{\%}\\ \text{= \$900}\end{array}$ (7)

Calculate the value of supplies expense

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Opening balance of supplies + }\\ \text{Purchase of supplies}-\\ \text{Closing balance of supplies}\end{array}\right)\\ =\$180+\$425-\$165\\ =\$440\end{array}$ (8)

Calculate rent expense:

Particulars		Amount ($)
Expired rent paid in year 8	$\left(\$9,000\times \frac{4}{12}\right)$	3,000
Expired rent paid in year 9	$\left(\$9,000\times \frac{8}{12}\right)$	6,000
Total rent expense for year 9		9,000

Table (3) (9)

Calculate uncollectible accounts expense:

Particulars	Amount ($)
Alarm sales on account	79,170
Add: Monitoring service revenue	65,000
Total credit sales (A)	144,170
Estimated uncollectible percent (B)	2.75%
Uncollectible Account expense (A÷B)	3,965

Table (4) (10)

Calculate the depreciation expense for equipment using straight line method:

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

Calculation depreciation expense of van using double declining method:

$\begin{array}{c}\text{Depreciation expense of van}=\text{Van}\text{cost ×}\frac{\text{Number of life}}{\text{Estimated useful life}}\text{× 2}\\ =\left(\$27,000-\$13,500\right)\times 2\times .25\\ =\$6,750(\text{B)}\end{array}$

Calculate the total depreciation expense:

 $\begin{array}{c}\text{Total depreciation expense}=\left(\begin{array}{l}\text{Depreciation expense for }\\ \text{equipment}\end{array}\right)+\left(\begin{array}{l}\text{Depreciation expense for}\\ \text{ van}\end{array}\right)\\ =\$1,400(\text{A)}+\$6,750(\text{B)}\\ =\$8,150\end{array}$ (11)

Calculate warranty expenses:

$\begin{array}{c}\text{Warranty}\text{Expenses}\text{=}\left(\begin{array}{l}\text{Sale of}\text{Company P (alarm systems)×}\\ \text{Estimated}\text{warranty}\text{cost}\end{array}\right)\\ \text{=}\text{\$75,400×3\%}\\ \text{=}\text{\$2,262}\end{array}$ (12)

Note: Sale of Company P ($75,400) = $\left(\text{130units}\text{×\$580}\right)$

Calculate the interest expense:

$\begin{array}{c}\text{Interest expense}=\text{Loan amount}\times \text{Rate of interest}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$12,000\times 8\%\times \frac{4}{12}\\ =\$320\end{array}$ (13)

Calculate Payroll tax Expense:

$\begin{array}{c}\text{Payroll}\text{tax}\text{expense}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Amount}\text{of}\text{unpaid}\text{payroll}\text{tax}\text{on}\text{salaries}\text{×}\\ \text{Percentage}\text{of}\text{social}\text{securitytax}\text{payable}\end{array}\right)\text{+}\\ \left(\begin{array}{l}\text{Amount}\text{of}\text{unpaid}\text{payroll}\text{tax}\text{on}\text{salaries}\text{×}\\ \text{Medical}\text{care}\text{tax}\text{payable}\end{array}\right)\end{array}\right]\\ \text{=}\left[\left(\text{\$5,000×6\%}\right)\text{+}\left(\text{\$5,000×1}\text{.05\%}\right)\right]\\ \text{=}\text{\$300+\$75}\\ \text{=\$375}\end{array}$ (14)

b.

To determine

Post the transactions of T-Accounts for Incorporation PSS.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Post the transactions of T-Accounts for Incorporation PSS as follows:

Cash
Beginng Balance	93,380	1.	1,500
9.	40,320	2.	9,000
13.	12,000	4.	42,050
14.	136,100	8.	95
		10.	3,480
		11.	52,625
		12.	1,950
		15.	15,000
		16.	7,200
		17.	16,000
		18.	425
		19.	10,000
Ending balance	122,475

Petty Cash
Balance.	100

Accounts receivable
Beginning balance	$21,390	5.	$2,060
6a.	$79,170	14.	$136,100
7.	$65,000
Ending balance	$27,400

Allowance for doubtful accounts
5.	$2,060	Beginning balance	$2,485
		22.	$3,965
		Ending balance	$4,390

Accounts receivables-Credit cards
7.	$40,320	9.	$40,320
Ending balance	$0

Supplies
Beginning balance	$180	20.	$440
3.	$425
Ending balance	$165

Merchandise inventory
Beginning balance	$6,440	6b.	$37,470
3.	$425
Ending balance	$11,020

Equipment
Beginning balance	$9,000

Van
Beginning balance	27,000

Accumulated depreciation
		Beginning balance.	$14,900
		23.	$8,150
		Ending balance	$23,050

Prepaid rent
Beginning balance	$3,000	21.	$9,000
2.	$9,000
Ending balance	$3,000
Accounts payable
18.	$425	3.	$425
		Ending balance	$0

Salaries payable
1.	$1,500	Beginning balance	$1,500
		Ending balance	$0

Sales tax payable
10.	$3,480	6a.	$3,770
		Ending balance	$290
Federal income tax payable
17.	$7,000	11.	$7,500
		Ending balance	$500

FICA-Social Security tax payable
17.	$3,600	11.	$3,900
		27.	$600
		Ending balance	$600

FICA-Medicare tax payable
17.	$900	11.	$975
		27.	$75
		Ending balance	$150

Warranty payable
18.	$1,950	24.	$2,262
		Ending balance	$312

Unemployment tax payable
		26.	$630
		Ending balance	$630

Interest payable
		25.	$320
		Ending balance	$320

Notes payable
		13.	$12,000
		Ending balance	$12,000

Common stock
		Beginning Balance	$50,000

Retained earnings
		Beginning Balance	$91,605

Dividends
10.	$10,000
Ending balance	$10,000

Alarm sales revenue
		6a.	$75,400
		Ending balance	$75,400

Monitoring service revenue
		7.	$107,000
		Ending balance	$107,000

Cost of goods sold
6a.	$37,470
Ending balance	$37,470

Advertising expense
15.	$15,000
Ending balance	$15,000

Credit card expense
7.	$1,680
Ending balance	$1,680

Depreciation expense
23.	$8,150
Ending balance	$8,150

Maintenance expense
8.	$60
Ending balance	$60

Miscellaneous expense
8.	$17
Ending balance	$17

Payroll tax expense
17.	$4,500
26.	$630
27.	$375
Ending balance	$5,505

Office supplies expense
8.	$15
Ending balance	$15

Rent expense
21.	$9,000
Ending balance	$9,000

Salaries expense
11.	$65,000
Ending balance	$65,000

Supplies expense
20.	$440
Ending balance	$440

Uncollectible accounts expense
22.	$3,635
Ending balance	$3,635

Utilities expense
16.	$7,200
Ending balance	$7,200

Warranty expense
24.	$2,262
Ending balance	$2,262

Cash short/Over
8.	$3
Ending balance	$3

Interest expense
25.	$320
Ending balance	$320

c.

To determine

Prepare trial balance of Incorporation PSS.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare trail balance of Incorporation PSS as follows:

Incorporation PSS
Trial Balance
December 31, Year 9
Particulars	Debit ($)	Credit ($)
Cash	122,475
Petty Cash	100
Accounts receivable	27,400
Allowance for doubtful accounts		4,390
Supplies	165
Prepaid rent	3,000
Merchandise inventory	11,020
Equipment	9,000
Van	27,000
Accumulated depreciation		23,050
Sales tax payable		290
Federal Employee Income tax payable		500
FICA - Social security tax payable		600
FICA - Medicare tax payable		150
Warranty payable		312
Unemployment tax payable		630
Interest payable		320
Notes payable		12,000
Common stock		50,000
Retained earnings		91,605
Dividend	10,000
Alarms Sales Revenue		75,400
Monitoring Service Revenue		107,000
Cost of Goods Sold	37,470
Advertising Expense	15,000
Credit Card Expense	1,680
Depreciation Expense	8,150
Maintenance Expense	60
Miscellaneous Expense	17
Payroll Tax Expense	5,505
Office Supplies Expense	15
Rent Expense	9,000
Salaries Expense	65,000
Supplies Expense	440
Uncollectible Accounts Expense	3,965
Utilities Expense	7,200
Warranty Expense	2,262
Cash Short/Over	3
Interest expense	320
Total	$366,247	$366,247

Table (5)

d.

To determine

Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows of Incorporation PSS.

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.

Prepare the income statement of Incorporation PSS as follows:

Incorporation PSS
Income Statement
December 31, Year 9
Particulars	Amount ($)	Amount ($)
Revenue:
Monitoring service revenue	107,000
Alarm sales revenue	75,400
Total revenue		182,400
Less: Cost of goods sold		37,470
Gross margin		144,930
Less: Expenses:
Advertising expense	15,000
Credit card expense	1,680
Depreciation expense	8,150
Maintenance expense	60
Miscellaneous Expense	17
Office supplies expense	15
Payroll tax expense	5,505
Rent expense	9,000
Salaries expense	65,000
Supplies expense	440
Uncollectible accounts expense	3,965
Utilities expense	7,200
Warranty expense	2,262
Cash short and over	3
Total Operating expenses		118,297
Net operating income		$26,633
Less: Non -operating expense
Interest expense		$320
Net income		$26,313

Table (6)

Statement of changes in Stockholder’s equity:

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

Prepare the statement of changes in stockholders’ equity of Incorporation PSS as follows:

Incorporation PSS
Statement of Changes in Stockholders' Equity
December 31, Year 9
Particulars	Amount ($)	Amount ($)
Opening common stock	50,000
Add: Common stock issued	0
Ending Common stock		50,000
Beginning retained earnings	91,605
Add: Net income	26,313
Less: Dividends	10,000
Ending Retained earnings		107,918
Total stockholders' equity		157,918

Table (7)

Balance Sheet:

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

Prepare the Balance sheet of Incorporation PSS as follows:

Incorporation PSS
Balance Sheet
December 31, Year 9
	Amount	Amount
Assets:
Cash		122,475
Petty cash		100
Accounts Receivable	27,400
Less: Allowance for doubtful accounts	4,390	23,010
Supplies		165
Prepaid rent		3,000
Merchandise inventory		11,020
Equipment	9,000
Van	27,000
Less: Accumulated depreciation	23,050	12,950
Total Assets		172,720
Liabilities:
Sales tax payable	290
Federal Employee income tax payable	500
FICA social security tax payable	600
FICA - Medicare tax payable	150
Warranty payable	312
Unemployment tax payable	630
Interest payable	320
Notes payable	12,000
Total liabilities		14,802
Stockholders' equity
Common stock	50,000
Retained earnings	107,918
Total stockholders' equity		157,918
Total liabilities and stockholders' equity		172,720

Table (8)

Statement of cash flows:

Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the statement of cash flows for Incorporation PSS as follows:

Incorporation PSS
Statement of Cash Flows
December 31, Year 9
Particulars	Amount ($)	Amount ($)
Cash flows from Operating Activities:
Cash receipts from customers (15)	176,420
Cash payment for expenses (16)	(145,845)
Cash payment for sales tax payable	(3,480)
Net cash flow from Operating Activities		27,095
Cash flow from Investing Activities
Cash flow from Financing Activities:
Cash inflow from loan	12,000
Cash payment for dividends	(10,000)
Net cash flow from Financing Activities		2,000
Net increase in cash		29,095
Add: Opening cash balance		93,380
Ending cash balance		122,475

Table (9)

Working notes:

Calculate total cash from customers.

Particulars	Amount ($)
Collection of Accounts Receivable	136,100
Add: Collection of credit cards	40,320
Total cash from customers	176,450

Table (10) (15)

Calculate total cash payment for expenses.

Particulars	Amount ($)
Payment of compensation and related taxes	70,125
Payment of prepaid rent	9,000
Payment of inventory	42,050
Payment of accounts payable	425
Payment of advertising expense	15,000
Payment for Utilities expense	7,200
Payment for warranty expense	1,950
Payment for Expense from petty cash	95
Total cash payment for expenses	145,845

Table (11) (16)

e.

To determine

Prepare to close the temporary accounts to retained earnings of Incorporation PSS.

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Prepare to close the temporary accounts to retained earnings of Incorporation PSS as follows:

Date	Account titles and Explanation	Debit	Credit
December 31	Alarm sales revenue	75,400
	Monitoring service revenue	107,000
	Retained earnings		182,400
	(To close all revenue accounts)
December 31	Retained earnings	156,087
	Cost of goods sold		37,470
	Advertising expense		15,000
	Credit card expense		1,680
	Depreciation expense		8,150
	Maintenance expense		60
	Miscellaneous expense		17
	Office supplies expense		15
	Payroll tax expense		5,505
	Rent expense		9,000
	Salaries expense		65,000
	Supplies expense		440
	Uncollectible accounts expense		3,965
	Utilities expense		7,200
	Warranty expense		2,262
	Interest Expense		320
	Cash/Short and over		3
	(To close all expenses accounts)
December 31	Retained earnings	10,000
	Dividends		10,000
	(To record dividend account)

Table (12)

f.

To determine

Post the closing entries to the T-Accounts and prepare an after closing trail balance of Incorporation PSS.

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

Post the closing entries to the T- Accounts of Incorporation PSS as follows:

Retained earnings
		Balance	$91,605
Closing balance	156,087	Closing balance	182,400
Closing balance	10,000
		Balance	0

Dividends
Balance	$10,000	Closing balance	$10,000
Ending balance	$0

Alarm sales revenue
Closing balance	$75,400	Balance	$75,400
		Ending balance	$0

Monitoring service revenue
Closing balance	$107,000	Balance	$107,000
		Ending balance	$0

Cost of goods sold
Balance	$37,470	Closing balance	$37,470
Ending balance	$0

Advertising expense
Balance	$15,000	Closing balance	$15,000
Ending balance	$0

Credit card expense
Balance	$1,680	Closing balance	$1,680
Ending balance	$0

Depreciation expense
Balance	$8,150	Closing balance	$8,150
Ending balance	$0

Maintenance expense
Balance	$60	Closing balance	$60
Ending balance	$0

Miscellaneous expense
Balance	$17	Closing balance	$17
Ending balance	$0

Payroll tax expense
Balance	$5,505	Closing balance	$5,505
Ending balance	$0

Office supplies expense
Balance	$15	Closing balance	$15
Ending balance	$0

Rent expense
Balance	$9,000	Closing balance	$9,000
Ending balance	$0

Salaries expense
Balance	$65,000	Closing balance	$65,000
Ending balance	$0

Supplies expense
Balance	$440	Closing balance	$440
Ending balance	$0

Uncollectible accounts expense
Balance	$3,635	Closing balance	$3,635
Ending balance	$0

Utilities expense
Balance	$7,200	Closing balance	$7,200
Ending balance	$0

Warranty expense
Balance	$2,262	Closing balance	$2,262
Ending balance	$0

Cash short/Over
Balance	$3	Closing balance	$3
Ending balance	$0

Interest expense
Balance	$320	Closing balance	$320
Ending balance	$0

Prepare post -closing trail balance of Incorporation PSS as follows:

Incorporation PSS
Trail Balance
December 31, Year 9
Particulars	Debit	Credit
Cash	122,475
Petty Cash	100
Accounts receivable	27,400
Allowance for doubtful accounts		4,390
Supplies	165
Prepaid rent	3,000
Merchandise inventory	11,020
Equipment	9,000
Van	27,000
Accumulated depreciation		23,050
Sales tax payable		290
Federal Employee Income tax payable		500
FICA - Social security tax payable		600
FICA - Medicare tax payable		1500
Warranty payable		312
Unemployment tax payable		630
Notes payable		12,000
Common stock		50,000
Retained earnings		107,918
Total	200,160	200,160

Table (13)