Chapter 11, Problem 18E

(Supplement 11 A) Comparing Stockholders' Equity Sections for Alternative Forms of Organization

Assume for each of the following independent cases that the annual accounting period ends on December 31 and that the total of all revenue accounts was $150,000 and the total of all expense accounts was $130,000.

Case A:	Assume that the business is a sole proprietorship owned by Proprietor A. Prior to the closing entries, the Capital account reflected a credit balance of $50,000 and the Drawings account showed a balance of $8,000.
Case B:	Assume that the business is a partnership owned by Partner A and Partner B. Prior to the closing entries, the owners’ equity accounts reflected the following balances: A, Capital, $40,000; B, Capital, $38,000; A, Drawings, $5,000; and B, Drawings, $9,000. Profits and losses are divided equally.
Case C:	Assume that the business is a corporation. Prior to the closing entries, the stockholders’ equity accounts showed the following: Capital Stock, par $10, authorized 30,000 shares, outstanding 15,000 shares; Additional Paid-In Capital, $5,000; Retained Earnings, $65,000.

Required:

1. 1. Give all the closing entries required at December 31 for each of the separate cases.
2. 2. Show how the equity section of the balance sheet would appear at December 31 for each case. Show computations.

To determine

To Prepare: The closing entries for each of the separate cases at December 31.

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 the income summary account. Closing entries produce a zero balance in each temporary account.

The closing entries for each of the separate cases are as follows:

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	Individual revenue account		150,000
	Individual expense account			130,000
	Proprietor A’s Capital			20,000
	(To record closing entries of revenue and expenses accounts)

Table (1)

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December, 31	Proprietor A’s Capital		8,000
	Proprietor A’s Drawings			8,000
	(To record drawing account transferred 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 startup a business. As previously stated for sole proprietorship, partnership firms too enjoy tax advantages.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December, 31	Individual revenue account		150,000
	Individual expense account			130,000
	Partner A’s Capital			10,000
	Partner B’s Capital			10,000
	(To record closing entries of revenue and expenses accounts)

Table (3)

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
December, 31	Partner A’s Capital		5,000
	Partner B’s Capital		9,000
	Partner A’s Drawings			5,000
	Partner A’s Drawings			9,000
	(To record drawing account transferred 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	Individual revenue account		150,000
	Individual expense account			130,000
	Retained earnings			20,000
	(To record closing entries of revenue and expenses accounts)

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.

To determine

To prepare: The equity section of balance sheet for each of the separate give cases at December 31.

Explanation of Solution

Equity Section:

It is refers to the section of the balance sheet that shows the available balance of stockholders’ equity 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	$50,000
Net Income	20,000
Total	70,000
Withdrawals	8,000
A, Capital, December 31		$62,000

Table (6)

Case B: Partnership:

Partners’ Equity
A, Capital  (1)	$45,000
B, Capital  (1)	$39,000
Total Partners’ Equity		$84,000

Table (7)

Working note:

Calculate the closing balance of partners’ equity

Statement of Partners’ Equity
Particulars	A ($)	B ($)	Total ($)
Partners’ Equity, January 1	40,000	$38,000	$78,000
Net Income	10,000	10,000	20,000
Total	50,000	48,000	98,000
Withdrawals	-5,000	-9,000	-14,000
Partners’ Equity, December 31	$45,000	$39,000	$84,000

Table (8)

(1)

Case C: Corporation:

Stockholders’ Equity
Contributed Capital:	$	$
Capital Stock, par $10, authorized 30,000 shares, outstanding 15,000 shares	$150,000
Additional Paid-in Capital	5,000
Total Contributed Capital	155,000
Add: Retained Earnings (2)	85,000
Total Stockholders’ Equity		240000

Table (9)

Working note:

Calculate the closing balance of retained earnings:

Statement of Retained Earnings
Particulars	$
Retained Earnings, Jan. 1	$65,000
Net Income	20,000
Retained Earnings, Dec. 31	$85,000

Table (10)

(2)