Chapter 11, Problem 11.2CACR

(a)

To determine

Record the journal entries and adjusting entries in books during 2017.

Explanation of Solution

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

Prepare the journal entries for Incorporation C during 2017:

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
February 1	Cash		13,000
	Common Stock			7,500 (1)
	Paid-in-Capital in Excess of par value – Common Stock			5,500 (2)
	(To record the issuance of common stock)
February 1	Cash		8,000
	Notes payable			8,000
	(To record the issuance of notes payable.)
February 1	Equipment		9,020
	Cash			9,020
	(To record the purchase of equipment)
February 1	Utility Expense		220
	Cash			220
	(To record the payment of utility expense)
February 3	Supplies		980
	Accounts Payable			980
	(To record the purchase of supplies on account)
February 5	Prepaid insurance		2,460
	Cash			2,460
	(To record the payment of insurance in advance)
February 5	Cash		3,950
	Loss on Disposal of Plant Assets		250 (3)
	Equipment			4,200
	(To record the cash received for sale of equipment)
February 16	Accounts Receivable		3,900
	Service Revenue			3,900
	(To record the service revenue)
February 17	Cash		540
	Unearned Service Revenue			540
	(To record the unearned service revenue)
February 18	Accounts Payable		300
	Cash			300
	(To record the payment for accounts payable)
February 20	Treasury Stock		900 (4)
	Cash			900
	(To record the purchase of treasury stock)
February 23	Accounts Receivable		4,300
	Service Revenue			4,300
	(To record the service revenue)
February 24	Salaries and Wages Expense		3,840 (5)
	Cash			3,840
	(To record the payment of utility expense)
Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
February 25	Cash		2,500
	Accounts Receivable			2,500
	(To record the cash received for accounts receivable)
February 27	Prepaid Expense		220
	Cash			220
	(To record the payment of prepaid expense)
February 28	Dividends		940 (6)
	Cash			940
	(To record the payment of dividends)

Table (1)

Working Note 1: Calculate the amount of common stock.

Total number of share issued = 5,000

Price per share = $1.5

$\begin{array}{c}\text{Common stock = 5,000 × \$1}\text{.5}\\ \text{= \$7,500}\end{array}$

Working Note 2: Calculate the amount of paid-in capital.

Common stock = $7,500 (1)

Cash received for common stock = $13,000

$\begin{array}{c}\text{Paid-in capital = \$13,000 – \$7,500}\\ \text{= \$5,500}\end{array}$

Working Note 3: Calculate the loss on disposal of plant asset.

Equipment cost = $4,200

Cash received from sale of equipment = $3,950

$\begin{array}{c}\text{Loss on disposal of Plant Assets = \$4,200 – \$3,950}\\ \text{= \$250}\end{array}$

Working Note 4: Calculate the amount of treasury stock.

Number of shares purchased = 300

Price per share = $3

$\begin{array}{c}\text{Amount of treasury stock = 300 × \$3}\\ \text{= \$900}\end{array}$

Working Note 5: Calculate the salaries and wages expense.

Per week wages = $480

Number of employees = 4

Number of weeks = 2

$\begin{array}{c}\text{Amount of salaries and wages expense = \$480}\text{×}\text{4}\times 2\\ \text{= \$3,840}\end{array}$

Working Note 6: Calculate the amount of dividends payable.

Dividend per share (common stock) = $0.20

Common stock outstanding = 4,700 (5,000 - 300)

  $\begin{array}{c}\text{Dividends payable =}\left(\begin{array}{l}\text{Dividend per share}\\ \times \text{Common stock outstanding}\end{array}\right)\\ \text{= }\left(\$0.20\times 4,700\right)\\ \text{=}\text{\$940}\end{array}$

(d)

To determine

Record the adjusting entries of Incorporation C during 2017.

Explanation of Solution

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.

Journalize the adjusting entries.

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
February 28	Accounts Receivable		3,800
	Service Revenue			3,800
	(To record the adjustment of service revenue)
February 28	Allowance for doubtful accounts		200
	Accounts receivable			200
	(To record the adjustment of account receivables)
February 28	Bad debt expense		479
	Allowance for doubtful accounts			479
	(To record the adjustment of bad debt expense)
February 28	Depreciation expense		90 (7)
	Accumulated depreciation- Equipment			90
	(To record the adjustment of depreciation expense)
February 28	Insurance expense		820 (8)
	Prepaid insurance			820
	(To record the adjustment of insurance expense)
February 28	Supplies expense		580 (9)
	Supplies			580
	(To record the adjustment of supplies expense)
February 28	Unearned service revenue		135 (10)
	Service revenue			135
	(To record the adjustment of service revenue)
February 28	Salaries and wages expense		1,920 (11)
	Salaries and wages payable			1,920
	(To record the adjustment of salaries and wages expense)
February 28	Interest expense		40 (12)
	Interest payable			40
	(To record the adjustment of interest expense)
February 28	Income tax expense		779 (13)
	Income tax payable			779
	(To record the adjustment of income tax expense)

Table (2)

Working Note 7: Calculate the amount of depreciation expense.

Equipment value = $4,820

Salvage value = $500

Life of building = 4 years

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{\$4,820}-\$500}{4\text{years}}\times \frac{1}{12}\\ =\frac{\$4,320}{4}\times \frac{1}{12}\\ =\$1,080\times \frac{1}{12}\\ =\$90\end{array}$

Working Note 8: Calculate the amount of insurance expense.

Insurance coverage per year = $9,840

$\begin{array}{c}\text{Insurance expense = }\frac{\text{\$9,840}}{12\text{months}}\\ =\$820\end{array}$

Working Note 9: Calculate the amount of supplies expense.

Purchase = $980

Ending balance = $400

$\begin{array}{c}\text{Supplies expense = Purchase}–\text{Ending balance}\\ \text{= \$980}–\text{\$400}\\ \text{= \$580}\end{array}$

Working Note 10: Calculate the amount of service revenue adjusted.

Services collected in advance for 4 weeks = $540

Weeks adjusted for unearned service revenue = 1

$\begin{array}{c}\text{Amount of service revenue adjusted = \$540}\times \frac{1}{4}\\ =\$135\end{array}$

Working Note 11: Calculate the amount of salaries and wages expense.

Wages per week = $480

Wages accrue for weeks = 1 weeks

Number of employees = 4

$\begin{array}{c}\text{Amount of salaries and wages expense = \$480}\text{×}\text{4}\times 1\\ \text{= \$1,920}\end{array}$

Working Note 12: Calculate the amount of interest expense.

Amount of notes payable = $8,000

Percentage of interest = 6%

$\begin{array}{c}\text{Amount of interest expense = \$8,000}\times \frac{6}{100}\times \frac{1}{12}\\ \text{= \$40}\end{array}$

Working Note 13: Calculate the income tax expense.

Net income before tax = $3,896 (Refer Table 34)

Income tax rate = 20%

  $\begin{array}{c}\text{Amount of income tax expense = \$3,896}\times \frac{20}{100}\\ \text{= \$779}\end{array}$

(b) and (e)

To determine

Post the above journal entries and adjusting entries to T-accounts of Incorporation C.

Explanation of Solution

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.

The following are the T-accounts.

Cash Account:

Cash Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Common stock	7,500		Equipment	9,020
	Paid-in capital in Excess of par value – Common stock	5,500		Utilities expense	220
	Notes Payable	8,000		Prepaid insurance	2,460
	Equipment	3,950		Accounts payable	300
	Unearned service revenue	540		Treasury stock	900
	Accounts receivable	2,500		Salaries and wages payable	3,840
				Prepaid expense	220
				Dividends	940
				Ending Balance	10,090
	Total	27,990		Total	27,990

Table (3)

Accounts Receivable Account:

Accounts Receivable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Sales Revenue	3,900		Cash	2,500
	Sales Revenue	4,300		Ending Balance	5,700
	Total	8,200		Total	8,200
	Opening Balance	5,700		Adjustment	200
	Adjustment	3,800		Ending Balance	9,300
	Total	9,500		Total	9,500

Table (4)

Allowance for Doubtful Accounts:

Allowance for doubtful Accounts
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	200		Adjustment	479
	Ending Balance	279
	Total	479		Total	479

Table (5)

Supplies Account:

Supplies Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Accounts Payable	980		Ending Balance	980
	Total	980		Total	980
	Opening Balance	980		Adjustment	580
				Ending Balance	400
	Total	980		Total	980

Table (6)

Prepaid Insurance Account:

Prepaid Insurance Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	2,460		Ending Balance	2,460
	Total	2,460		Total	2,460
	Opening Balance	2,460		Adjustment	820
				Ending Balance	1,640
	Total	2,460		Total	2,460

Table (7)

Prepaid Expenses Account:

Prepaid Expenses Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	220		Ending Balance	220
	Total	220		Total	220

Table (8)

Equipment Account:

Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	9,020		Cash	3,950
				Loss on disposal	250
				Ending Balance	4,820
	Total	9,020		Total	9,020

Table (9)

Accumulated Depreciation - Equipment Account:

Accumulated Depreciation - Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	90		Adjustment	90
	Total	90		Total	90

Table (10)

Accounts Payable Account:

Accounts Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	300		Supplies	980
	Ending Balance	680
	Total	980		Total	980

Table (11)

Notes Payable Account:

Notes Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	8,000		Cash	8,000
	Total	8,000		Total	8,000

Table (12)

Salaries and Wages Payable Account:

Salaries and Wages Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	1,920		Adjustment	1,920
	Total	1,920		Total	1,920

Table (13)

Interest Payable Account:

Interest Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	40		Adjustment	40
	Total	40		Total	40

Table (14)

Income Tax Payable Account:

Income Tax Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	779		Adjustment	779
	Total	779		Total	779

Table (15)

Unearned Service Revenue Account:

Unearned Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	540		Cash	540
	Total	540		Total	540
	Adjustment	135		Opening balance	540
	Ending Balance	405
	Total	540		Total	540

Table (16)

Common Stock Account:

Common Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	7,500		Cash	7,500
	Total	7,500		Total	7,500

Table (17)

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	5,500		Cash	5,500
	Total	5,500		Total	5,500

Table (18)

Dividends Account:

Dividends Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	940		Ending Balance	940
	Total	940		Total	940

Table (19)

Treasury Stock Account:

Treasury Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	900		Ending Balance	900
	Total	900		Total	900

Table (20)

Retained Earnings Account:

Retained Earnings Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Dividends	940		Income Summary	3,117
	Ending Balance	2,177
	Total	3,117		Total	3,117

Table (21)

Income Summary Account:

Income Summary Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Bad debt expense	479		Service Revenue	12,135
	Depreciation expense	90
	Insurance expense	820
	Supplies expense	580
	Salaries and wages expense	5,760
	Interest expense	40
	Utilities expense	220
	Loss on disposal of assets	250
	Income tax expense	779
	Retained earnings	3117
	Total	12,135		Total	12,135

Table (22)

Service Revenue Account:

Service Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Ending Balance	8,200		Accounts receivable	3,900
				Accounts receivable	4,300
	Total	8,200		Total	8,200
	Ending Balance	12,135		Opening balance	8,200
				Adjustment	3,800
				Adjustment	135
	Total	12,135		Total	12,135

Table (23)

Utilities Expense Account:

Utilities Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	220		Ending Balance	220
	Total	220		Total	220

Table (24)

Salaries and Wages Expense Account:

Salaries and Wages Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	3,840		Ending Balance	3,840
	Total	3,840		Total	3,840
	Opening balance	3,840		Ending balance	5,760
	Adjustment	1,920
	Total	5,760		Total	5,780

Table (25)

Insurance Expense Account:

Insurance Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	820		Ending Balance	820
	Total	820		Total	820

Table (26)

Depreciation Expense Account:

Depreciation Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	90		Ending Balance	90
	Total	90		Total	90

Table (27)

Bad Debt Expense Account:

Bad Debt Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	479		Ending Balance	479
	Total	479		Total	479

Table (28)

Supplies Expense Account:

Supplies Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	580		Ending Balance	580
	Total	580		Total	580

Table (29)

Interest Expense Account:

Interest Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	40		Ending Balance	40
	Total	40		Total	40

Table (30)

Loss on Disposal of Plant Assets Expense Account:

Loss on Disposal of Plant Assets Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Cash	250		Ending Balance	250
	Total	250		Total	250

Table (31)

Income Tax Expense Account:

Income Tax Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
	Adjustment	779		Ending Balance	779
	Total	779		Total	779

Table (32)

(c) and (f)

To determine

Prepare trial balance for Incorporation C as on February 28, 2017.

Answer to Problem 11.2CACR

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.

The following is the adjusted trial balance of Incorporation C as on February 28, 2017.

Table (33)

Explanation of Solution

The trial balance as shown in Table (33) 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.

(g)

To determine

Prepare the income statement, retained earnings statement, and balance sheet of Incorporation C for the year ended February 28, 2017.

Explanation of Solution

Prepare the income statement of Incorporation C.

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.

Incorporation C
Income Statement
For the Year Ended February 28, 2017
Particulars	Amount ($)	Amount ($)
Service revenue		12,135
Operating expenses
Salaries and wages expenses	5,760
Utilities expense	220
Bad debt expense	479
Depreciation expense	90
Insurance expense	820
Supplies expense	580
Total operating expenses		(7,949)
Income from Operations		4,186
Loss on disposal of plant assets	250
Interest expense	40	(290)
Income before income taxes		3,896
Income tax expense		779
Net income		3,117

Table (34)

Prepare a retained earnings statement of Incorporation C for the year ended February 28, 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.

Incorporation C
Retained Earnings Statement
For the Year Ended February 28, 2017
Details	Amount ($)
Beginning Balance of Retained earnings	0
Add: Net Income for the year	3,117
Total Retained Earnings	3,117
Less: Dividends	(940)
Ending balance of Retained Earnings	2,177

Table (35)

Prepare the balance sheet of Incorporation C for the year ended February 28, 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 Incorporation C has enough assets to pay off its liabilities.

Incorporation C
Balance Sheet
As of February 28, 2017
Assets	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Current assets
Cash			$10,090
Accounts receivable		$9,300
Less: Allowance for doubt. accounts		279	9,021
Prepaid expenses			220
Prepaid insurance			1,640
Supplies			400
Total current assets				21,371
Property, plant and equipment
Equipment			4,820
Less: Accumulated depreciation-equipment			90	4,730
Total Assets				$26,101
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$680
Unearned service revenue		405
Salaries and wages payable		1,920
Income tax payable		779
Interest payable		40
Total current liabilities			$3,824
Note payable, 6% due 2/1/2019			8,000
Total Liabilities				11,824
Stockholders' Equity
Common stock, $1.50 par	$7,500
Paid-in capital in excess of par	5,500	13,000
Retained earnings		2,177	15,177
Less: Treasury stock at cost			900
Total stockholders' equity				14,277
Total Liabilities and Stockholders' equity				$26,101

Table (36)

(h)

To determine

Record the closing entries of Incorporation C for the month February.

Explanation of Solution

Closing entries: These refer to the journal entries that are recorded at the end of an each accounting period. It closes all revenue accounts earned, and all expenses account incurred during the current accounting year to the income summary account.

Record the closing entry of revenue.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
February 28	Service Revenue		12,135
	Income Summary			12,135
	(To close the revenues.)

Table (37)

Description:

• Service revenue is revenue and it increases the value of equity. To close the revenue account it should be debited. Therefore, debit service revenue account by $12,135.
• Income Summary is a component of equity and it increases by $12,135. Therefore, credit income summary account by $12,135.

Record the closing entries of expenses and other debit accounts.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
February 28	Income Summary		9,018
	Bad Debt Expense			479
	Depreciation Expense			90
	Insurance Expense			820
	Supplies Expense			580
	Salaries and Wages Expense			5,760
	Interest Expense			40
	Utilities Expense			220
	Loss on Disposal of Plant Assets			250
	Income Tax Expense			779
	(To close expenses and other debit accounts)

Table (38)

Description:

• Income summary is a component of equity and it decreases by $9,018. Therefore, debit income summary account by $9,018.
• Bad debt expense, Depreciation expense, Insurance expense, Supplies Expense, Salaries and wages expense, Interest expense, Utilities expense, Loss on disposal of plant assets, and Income tax expense accounts are closed by transferring their amount to Income Summary account. Therefore, credit all these expense with their respective amounts.

Record the closing entry of income summary account.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
February 28	Income Summary		3,117
	Retained Earnings			3,117
	(To close income summary account)

Table (39)

Description:

• Income summary is a component of equity and it decreases by $3,117. Therefore, debit income summary account by $3,117.
• Retained earnings are component of equity and it increases by $3,117. Therefore, credit retained earnings account by $3,117.

Record the closing entry for dividends.

Date	Accounts and Description	Post Ref	Debit ($)	Credit ($)
February 28	Retained Earnings		940
	Dividends			940
	(To close the dividends account to retained earnings account)

Table (40)

Description:

• Retained Earnings amount is decreased because the dividends are transferred and deducted from retained earnings. Therefore, debit retained earnings account with $940.
• Dividends have a debit balance and are transferred to retained earnings account. Therefore, credit dividends account with $940.