Chapter 11, Problem 12P

1.

To determine

Prepare the closing entries for each of the separate cases as at December 31, 2014.

Explanation of Solution

Closing entries for sole proprietorship and partnership form of business:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the capital account. Closing entries produce a zero balance in each temporary account.

Closing entries for corporate form of business:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries for each of the separate cases as at December 31, 2014.

Case A: Sole proprietorship:

Sole proprietorship:

It is one form of simple business that is owned and maintained by a single person. Set up of very simple and taking care of business is very easy. Government provides tax advantages for these firms.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December 31, 2014	Proprietor A’s Capital		20,000
	Individual revenue account		144,000
	Individual expense account			164,000
	(To record closing of revenue and expenses accounts)

Table (1)

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December 31, 2014	Proprietor A’s Capital		9,000
	Proprietor A’s Drawings			9,000
	(To record the transfer of drawing account to the capital account)

Table (2)

• In this closing entry, the revenue account is closed by transferring the amount of revenue to the proprietor A’s capital account in order to bring the revenue accounts balance to zero.
• In this closing entry, expenses account is closed by transferring the amount of all expenses to the proprietor A’s capital account in order to bring all the expense accounts balance to zero.
• In this closing entry, drawings account is closed by transferring the amount of drawings to the proprietor A’s capital account in order to bring drawings accounts balance to zero.

Case B: Partnership:

Partnership:

Partnership firms are started by two or more individuals joining together. This form of partnership is very easy to establish and there is a shared control. The duties and formalities of the concern are formalized by making a partnership agreement. In this type of company, individuals with similar interest join together and start up a business. As previously stated for sole proprietorship, partnership firms too enjoy tax advantages.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December 31, 2014	Partner A’s Capital		10,000
	Partner B’s Capital		10,000
	Individual revenue account		144,000
	Individual expense account			164,000
	(To record closing entries of revenue and expenses accounts)

Table (3)

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December 31, 2014	Partner A’s Capital		5,000
	Partner B’s Capital		7,000
	Partner A’s Drawings			5,000
	Partner A’s Drawings			7,000
	(To record the transfer of drawing account to the capital account)

Table (4)

• In this closing entry, the revenue account is closed by transferring the amount of revenue to the partners’ capital account in order to bring the revenue accounts balance to zero.
• In this closing entry, expenses account is closed by transferring the amount of all expenses to the partner’s capital account in order to bring all the expense accounts balance to zero.
• In this closing entry, drawings account is closed by transferring the amount of drawings to the partner’s capital account in order to bring drawings accounts balance to zero.

Case C: Corporation:

Corporation:

A business concern where there is a separate legal entity and are owned by shareholders are classified as corporation. Transfer of ownership and raising funds are easy in this form of organization. No personal legal liability exists among the shareholders.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December 31, 2014	Retained earnings		20,000
	Individual revenue account		144,000
	Individual expense account			164,000
	(To close the revenue and expenses account)

Table (5)

• In this closing entry, the revenue account is closed by transferring the amount of revenue to the retained earnings in order to bring the revenue accounts balance to zero.
• In this closing entry, expenses account is closed by transferring the amount of all expenses to the retained earnings in order to bring all the expense accounts balance to zero.

2.

To determine

Prepare the equity section of balance sheet for each case at December 31, 2014.

Explanation of Solution

Equity Section:

It is refers to the section of the balance sheet that shows the available balance of equity accounts as on reported date at the end of the financial year.

Case A: Sole proprietorship:

Statement of Owner’s Equity
Particulars	$	$
A, Capital, January 1	$52,000
Less: Net loss	20,000
Total	32,000
Less: Withdrawals	9,000
A, Capital, December 31		$23,000

Table (6)

Case B: Partnership:

Partners’ Equity
A, Capital  (1)	$28,000
B, Capital  (1)	$26,000
Total Partners’ Equity		$54,000

Table (7)

Case C: Corporation:

Balance sheet (Stockholders’ equity section)
As at December 31, 2014
Particulars	Amount $
Contributed Capital:
Common Stock, par $10, authorized 30,000 shares, outstanding 14,000 shares	140,000
Capital in excess of par	9,000
Total Contributed Capital	149,000
Add: Retained Earnings (2)	42,000
Total Stockholders’ Equity	191,000

Table (8)

Working note:

Calculate the closing balance of partners’ equity

Statement of Partners’ Equity
Particulars	A ($)	B ($)	Total ($)
Partners’ Equity, January 1	43,000	$43,000	$86,000
Less: Net loss	10,000	10,000	20,000
Total	33,000	33,000	66,000
Less: Withdrawals	-5,000	-7,000	-12,000
Partners’ Equity, December 31	$28,000	$26,000	$54,000

Table (9)

….. (1)

Determine the amount of retained earnings as at December 31, 2014.

Particulars	Amount $
Retained earnings, balance January 1	$62,000
Less: Net loss	$20,000
Retained earnings, balance December 31	$42,000

Table (10)

….. (2)