Chapter 11, Problem 11.1CACR

 (a)

To determine

Accounting Cycle: The accounting cycle refers to the entire process of recording the accounting transactions of an organization and then processing them. The accounting cycle starts when a transaction takes places and it ends at the time when these transactions are recorded in the financial statements of the company.

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

The following are the rules of debit and credit:

1. 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.
2. 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.

To Record: The journal entries and adjusting entries in books during 2017.

Explanation of Solution

Prepare the journal entries for Company H during 2017:

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
1	Cash		49,200
	Preferred Stock			48,000 (1)
	Paid-in-Capital in Excess of par value – Preferred Stock			1,200 (2)
	(To record the issuance of preferred stock)
2	Cash		21,000
	Common Stock			9,000
	Paid-in-Capital in Excess of par value – Common Stock			12,000
	(To record the issuance of common stock)
3	Accounts Receivable		320,000
	Service revenue			320,000
	(To record service revenue)
4	Cash		36,000
	Unearned Service Revenue			36,000
	(To record unearned service revenue)
5	Cash		276,000
	Accounts Receivable			276,000
	(To record cash received for accounts receivable)
6	Supplies		35,100
	Accounts Payable			35,100
	(To record purchase of supplies on account)
7	Accounts Payable		32,200
	Cash			32,200
	(To record the payment for accounts payable)
8	Treasury Stock		11,200 (3)
	Cash			11,200
	(To record purchase of treasury stock)
9	Other operating expense		188,200
	Cash			188,200
	(To record other operating expense)
10	Cash dividends		13,560
	Dividends payable			13,560 (4)
	(To record the dividends payable)
11	Allowance for doubtful accounts		1,700
	Accounts Receivable			1,700
	(To record the settlement of allowance for doubtful accounts)

Table (1)

Working Notes:

Calculate the amount of preferred stock.

Total number of share issued = 1,200

Price per share = $40

    $\begin{array}{c}\text{Preferred stock = 1,200 × \$40}\\ \text{= \$48,000}\end{array}$ (1)

Calculate the amount of paid-in capital.

Preferred stock = $48,000 (1)

Cash received for preferred stock = $49,200

  $\begin{array}{c}\text{Paid-in capital = \$49,200 – \$48,000}\\ \text{= \$1,200}\end{array}$ (2)

Calculate the amount of treasury stock.

Number of shares purchased = 400

Price per share = $28

    $\begin{array}{c}\text{Amount of treasury stock = 400 × \$28}\\ \text{= \$11,200}\end{array}$ (3)

Calculate the amount of dividends payable.

Dividend per share (common stock) = $1.20

Common stock outstanding = 8,500

7% preferred stock = $3,360 $\left(\text{\$48,000 × 7\%}\right)$

  $\begin{array}{c}\text{Dividends payable = 7\% preferred stock + }\left(\begin{array}{l}\text{Dividend per share}\\ \times \text{Common stock outstanding}\end{array}\right)\\ \text{= \$3,360}\text{+}\left(\$1.20\times 8,500\right)\\ \text{= \$3,360}\text{+}\text{\$10,200}\\ \text{=}\text{\$13,560}\end{array}$ (4)

To determine

Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.

To Record: The adjusting entries of Company H during 2017.

Explanation of Solution

Journalize the adjusting entries.

The following is the adjusting entry for the supplies during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Supplies Expense		33,600 (5)
	Supplies Payable			33,600
	(To adjust for supplies expense)

Table (2)

Working Note:

Calculate the amount of supplies expense.

Beginning balance = $4,400

Purchase = $35,100 (Refer Table 1)

Ending balance = $5,900

$\begin{array}{c}\text{Supplies expense = Begining balance + Purchase}–\text{Ending balance}\\ \text{= \$4,400 + \$35,100}–\text{ \$5,900 }\\ \text{= \$33,600}\end{array}$ (5)

Description:

• Supplies expense is an expense and it is increased by $33,600. Therefore, debit supplies expense account with $33,600.
• Supplies payable is a liability and it is increased by $33,600. Therefore, credit supplies payable account with $33,600.

The following is the adjusting entry for the unearned revenue during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Unearned service revenue		27,000
	Service revenue			27,000 (6)
	(To adjust for unearned service revenue)

Table (3)

Working Note:

Calculate the amount of service revenue adjusted.

Fees collected in advance for April 2017 to March 2018 = $36,000

Months adjusted for unearned service revenue = 9 (April 2017 to December 2017)

  $\begin{array}{c}\text{Amount of service revenue adjusted = \$36,000}\times \frac{9}{12}\\ =\$27,000\end{array}$ (6)

Description:

• Unearned service revenue is a liability and it is decreased by $27,000. Therefore, debit unearned service revenue account with $27,000.
• Service revenue is revenue and it increases the value of equity by $27,000. Therefore, credit service revenue with $27,000.

The following is the adjusting entry for the bad debt expense during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Bad Debts Expense		3,700 (7)
	Allowance for doubtful accounts			3,700
	(To record the amount of bad debt expense for the year)

Table (4)

Working Note:

Ending balance of allowance for doubtful accounts = $3,500

Amount written off as uncollectible = $1,700

Beginning balance of allowance for doubtful accounts = $1,500

  $\begin{array}{c}\text{Bad debt expense = \$3,500 + \$1,500}–\text{\$1,700 }\\ \text{= \$3,700}\end{array}$ (7)

Description:

• Bad debt expense is an expense and it is increased by $3,700. Therefore, debit bad debt expense account with $3,700.
• Allowance for doubtful accounts is a contra asset account and would have a credit balance. Therefore credit allowance for doubtful account with $3,700.

The following is the adjusting entry for the depreciation expired during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense		4,400 (8)
	Accumulated Depreciation - Building			4,400
	(To record the amount of depreciation for the year)

Table (5)

Working Note:

Calculate the amount of depreciation expense.

Building value = $142,000

Salvage value = $10,000

Life of building = 30 years

    $\begin{array}{c}\text{Depreciation expense = }\frac{\text{\$142,000}-\$10,000}{30\text{years}}\\ =\frac{\$132,000}{30}\\ =\$4,400\end{array}$ (8)

Description:

• Depreciation expense is an expense and it is increased by $4,400. Therefore, debit depreciation expense account with $4,400.
• Accumulated Depreciation-Building is a contra asset account and would have a credit balance. Therefore credit accumulated depreciation-equipment account with $4,400.

The following is the adjusting entry for the accrued income tax for the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Income Tax Expense		35,130
	Income Tax Payable			35,130
	(To record the amount of accrued income tax for the year)

Table (6)

Description:

• Income tax expense is an expense and it is increased by $35,130. Therefore, debit income tax expense account with $35,130.
• Income tax payable is a liability and it is increased by $35,130. Therefore, credit income tax payable account with $35,130.

(b)

To determine

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Post: The above journal entries and adjusting entries to T-accounts of Company H.

Explanation of Solution

The following are the T-accounts.

Cash Account:

Cash Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Beginning balance	24,600		Accounts Payable	32,200
	Preferred stock	48,000		Treasury stock	11,200
	Paid-in capital in Excess of par value – Preferred stock	1,200		Other operating expenses	188,200
	Common stock	9,000		Ending Balance	175,200
	Paid-in capital in Excess of par value – Common stock	12,000
	Unearned service revenue	36,000
	Accounts Receivable	276,000
	Total	406,800		Total	406,800

Table (7)

Accounts Receivable Account:

Accounts Receivable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Beginning Balance	45,500		Cash	276,000
	Sales Revenue	320,000		Sales discounts	1,700
				Ending Balance	87,800
	Total	365,500		Total	365,500

Table (8)

Allowance for Doubtful Accounts:

Allowance for doubtful Accounts
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Accounts receivable	1,700		Beginning Balance	1,500
	Ending Balance	3,500		Bad debt expense	3,700
	Total	5,200		Total	5,200

Table (9)

Supplies Account:

Supplies Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Beginning balance	4,400		Adjustment	33,600
	Accounts Payable	35,100		Ending Balance	5,900
	Total	39,500		Total	39,500

Table (10)

Land Account:

Land Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Beginning balance	40,000		Ending Balance	40,000
	Total	40,000		Total	40,000

Table (11)

Building Account:

Building Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Beginning balance	142,000		Ending Balance	142,000
	Total	142,000		Total	142,000

Table (12)

Accumulated Depreciation - Building Account:

Accumulated Depreciation - Building Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	26,400		Beginning balance	22,000
				Adjustment	4,400
	Total	26,400		Total	26,400

Table (13)

Accounts Payable Account:

Accounts Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	32,200		Beginning balance	25,600
	Ending Balance	28,500		Supplies	35,100
	Total	60,700		Total	60,700

Table (14)

Income Tax Payable Account:

Income Tax Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	35,130		Adjustment	35,130
	Total	35,130		Total	35,130

Table (15)

Unearned Service Revenue Account:

Unearned Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	27,000		Cash	36,000
	Ending Balance	9,000
	Total	36,000		Total	36,000

Table (16)

Dividends Payable Account:

Dividends Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	13,560		Cash dividends	13,560
	Total	13,560		Total	13,560

Table (17)

Preferred Stock Account:

Preferred Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	48,000		Cash	48,000
	Total	48,000		Total	48,000

Table (18)

Paid-In Capital in Excess of Par Value - Preferred Stock Account:

Paid-In Capital in Excess of Par Value - Preferred Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	1,200		Cash	1,200
	Total	1,200		Total	1,200

Table (19)

Common Stock Account:

Common Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	89,000		Beginning balance	80,000
				Cash	9,000
	Total	89,000		Total	89,000

Table (20)

Paid-In Capital in Excess of Par Value - Common Stock Account:

Paid-In Capital in Excess of Par Value - Common Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	12,000		Cash	12,000
	Total	12,000		Total	12,000

Table (21)

Retained Earnings Account:

Retained Earnings Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	127,400		Beginning balance	127,400
	Total	127,400		Total	127,400

Table (22)

Cash Dividends Account:

Cash Dividends Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Dividends payable	13,560		Ending Balance	13,560
	Total	13,560		Total	13,560

Table (23)

Treasury Stock Account:

Treasury Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	11,200		Ending Balance	11,200
	Total	11,200		Total	11,200

Table (24)

Service Revenue Account:

Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	347,000		Accounts receivable	320,000
				Unearned Service Revenue	27,000
	Total	347,000		Total	347,000

Table (25)

Bad Debt Expense Account:

Bad Debt Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	3,700		Ending Balance	3,700
	Total	3,700		Total	3,700

Table (26)

Depreciation Expense Account:

Depreciation Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	4,400		Ending Balance	4,400
	Total	4,400		Total	4,400

Table (27)

Supplies Expense Account:

Supplies Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	33,600		Ending Balance	33,600
	Total	33,600		Total	33,600

Table (28)

Other Operating Expense Account:

Other Operating Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	188,200		Ending Balance	188,200
	Total	188,200		Total	188,200

Table (29)

Income Tax Expense Account:

Income Tax Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	35,130		Ending Balance	35,130
	Total	35,130		Total	35,130

Table (30)

To determine

Trial balance: This is a statement prepared to show all the year-end account balances of a business. The balances are shown in separate columns as debit and credit. Trial balance is made to check whether books of accounts of the business are arithmetically accurate.

Prepare trial balance for Company H as on December 31, 2017.

Explanation of Solution

The following is the adjusted trial balance of Company H as on December 31, 2017.

Company H
Adjusted Trial Balance
At December 31, 2017
Account Title	Balance ($)
	Debit	Credit
Cash	175,200
Accounts Receivable	87,800
Allowance for doubtful accounts		3,500
Supplies	5,900
Land	40,000
Buildings	142,000
Accumulated Depreciation – Buildings		26,400
Accounts Payable		28,500
Income Tax Payable		35,130
Unearned Service Revenue		9,000
Dividends payable		13,560
Preferred Stock		48,000
Paid-in capital in excess of par value- Preferred stock		1,200
Common Stock		89,000
Paid-in capital in excess of par value- Common stock		12,000
Retained Earnings		127,400
Cash dividends	13,560
Treasury Stock	11,200
Service Revenue		347,000
Bad Debt expense	3,700
Depreciation Expense	4,400
Supplies Expense	33,600
Other operating Expense	188,200
Income Tax Expense	35,130
Total	740,690	740,690

Table (31)

Description:

The trial balance as shown in Table (31) is prepared after placing the journal entries and adjusting entries to the ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.

Conclusion

Therefore, the total debit balance and credit balance of Company H is $740,690

(c)

To determine

To Prepare: The income statement, retained earnings statement, and balance sheet of Company H for the year ended December 31, 2017.

Explanation of Solution

Prepare the income statement of Company H.

Income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Company H
Income Statement
For the Year Ended December 31, 2017
Particulars	Amount ($)	Amount ($)
Service revenue		347,000
Operating expenses
Other operating expenses	188,200
Supplies expense	33,600
Depreciation expense	4,400
Bad debt expense	3,700
Total operating expenses		229,900
Income before taxes		117,100
Income tax expense		35,130
Net income		81,970

Table (32)

Prepare a retained earnings statement of Company H for the year ended December 31, 2017.

Retained Earnings Statement is one of the financial statement, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and used to pay its debts and obligations. It shows the amount of earnings that is not paid as dividends to the shareholders.

Company H
Retained Earnings Statement
For the Year Ended December 31, 2017
Details	Amount ($)
Beginning Balance of Retained earnings	127,400
Add: Net Income for the year	81,970
Total Retained Earnings	209,370
Less: Dividends	(13,560)
Ending balance of Retained Earnings	195,810

Table (33)

Prepare the balance sheet of Company H for the year ended December 31, 2017.

The balance sheet: This is a financial statement that shows the assets, liabilities, and stockholders’ equity of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

Company H
Balance Sheet
As of December 31, 2017
Assets	Amount ($)	Amount ($)	Amount ($)
Current assets:
Cash			175,200
Accounts receivable		87,800
Less: Allowance for doubtful accounts	(3500)		84,300
Supplies			5,900
Total current assets			265,400
Property, plant, and equipment:
Land		40,000
Buildings	142,000
Less: Accumulated Depreciation Building	(26,400)	115,600	155,600
Total Assets			421,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		28,500
Income taxes payable		35,130
Dividends payable		13,560
Unearned service revenue		9,000
Total current liabilities			86,190
Stockholders’ Equity:
Paid-in capital
Capital stock
Preferred stock	48,000
Common stock	89,000
Total capital stock		137,000
Additional paid-in capital:
Paid-in capital in excess of par value—preferred stock	1,200
Paid-in capital in excess of par value—common stock	12,000
Total additional paid-in capital		13,200
Total paid-in capital		150,200
Retained earnings		195,810
Total paid-in capital and retained earnings		346,010
Less:  Treasury stock (400 shares)		(11,200)
Total Stockholders’ Equity			334,810
Total Liabilities and Stockholders’ Equity			421,000

Table (34)