Chapter 12, Problem 1CP

1.

To determine

Prepare an income statement for ABA Spa for two months ended August 31, 20--.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for ABA Spa for two months ended August 31, 20--.

ABA Spa
Income Statement
For the Year Ended August 31, 20--
Particulars	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Revenue from sales:
Merchandise sales			$25,398.00
Less: Sales returns and allowances		$17.46
Sales discounts		88.00	105.46
Net sales				$25,292.54
Cost of goods sold:
Merchandise inventory, July 1, 20--			$0.0
Purchases		$24,101.00
Less: Purchase returns and allowances	$123.00
Purchases discounts	82.00	205.00
Net purchases		23,896.00
Add: Freight-in		992.00
Delivered cost of purchases			24,888.00
Cost of goods available for sale			24,888.00
Less: Merchandise inventory, August    31, 20--			13,110.00
Cost of goods sold				11,778.00
Gross profit				13,514.54
Operating expenses:
Wages expense			16,250.00
Rent expense			3,300.00
Office supplies expense			173.00
Spa supplies expense			395.00
Laundry expense			179.00
Advertising expense			455.00
Utilities expense			963.00
Insurance expense			281.67
Depreciation expense, Office      equipment			20.00
Depreciation expense, Spa equipment			129.76
Promotional expense			371.90
Total operating expenses				22,518.33
Loss from operations				(9,003.79)
Other income:
Income from services				22,489.65
Net income				$13,485.86

Table (1)

Conclusion

Thus, the income statement of ABA Spa for two months ended August 31, 20—reports net income of $13,485.86.

2.

To determine

Prepare a statement of owners’ equity for ABA Spa for two months ended August 31, 20--.

Explanation of Solution

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owners’ equity. Additional capital, net income from income statement is added to, and drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement of owners’ equity for ABA Spa for two months ended August 31, 20--.

ABA Spa
Statement of Owners’ Equity
For Two Months Ended August 31, 20--
Particulars	Amount ($)	Amount ($)
AV, Capital, July 1, 20--		$50,219.62
Additional investment	$0
Net income for the year	13,485.86
	13,485.86
Less: Withdrawals for the year	(5,000.00)
Increase in capital		8,485.86
AV, Capital, December 31, 20--		$58,705.48

Table (2)

Conclusion

Thus, the statement of owners’ equity of ABA Spa for two months ended August 31, 2-- reports the capital amount of $58,705.48.

3.

To determine

Prepare a balance sheet for ABA Spa (Refer to Table (2) for capital of the owner from the statement of owners’ equity prepared in Part (2)).

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and owners (owners’ equity) over those resources. The resources of the company are assets which include money contributed by owners and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and owners’ equity.

Prepare the balance sheet for ABA Spa as at August 31, 20--.

ABA Spa
Balance Sheet
August 31, 20--
Assets	Amount ($)	Amount ($)	Amount ($)
Current Assets:
Cash		$36,489.12
Accounts Receivable		6,253.79
Office Supplies		75.00
Spa Supplies		345.00
Merchandise Inventory		13,110.00
Prepaid Insurance		518.33
Total Current Assets			$56,791.24
Property and Equipment:
Office Equipment	$1,570.00
Less: Accumulated Depreciation	30.00	1,540.00
Spa Equipment	18,083.00
Less: Accumulated Depreciation	194.64	17,888.36
Total Property and Equipment			19,428.36
Total Assets			$76,291.60
Liabilities
Current Liabilities:
Accounts Payable		$15,513.00
Sales Tax Payable		2,001.12
Total Current Liabilities			$17,514.12
Total Liabilities			$17,514.12
Owners’ Equity
AV, Capital			58,705.48
Total Liabilities and Owners’ Equity			$76,291.60

Table (3)

Conclusion

Thus, the balance sheet of ABA Spa as at August 31, 20-- reports the total assets, and total liabilities and owners’ equity of $76,291.60.

4.

To determine

Prepare closing entries for ABA Spa.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to capital account are referred to as closing entries. The revenue, expense, and drawing accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Steps in closing procedure:

1. 1. Close the revenue accounts and the income statement accounts with credit balances to Income Summary account.
2. 2. Close the expense accounts and the income statement accounts with debit balances to Income Summary account.
3. 3. Close the Income Summary account and transfer the net income or net loss balance to the Capital account.
4. 4. Close the Drawing account to Capital account.

Prepare closing entries for ABA Spa.

Step 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
August	31	Income from Services		411	25,398.00
		Merchandise Sales		412	22,489.65
		Purchases Returns and Allowances		512	123.00
		Purchases Discounts		513	82.00
			Income Summary	313		40,092.65
		(Record closing of revenue and income statement accounts with credit balances to Income Summary account)

Table (4)

Description:

• Income from Services and Merchandise Sales are revenue accounts. Revenue accounts have normal credit balance. Since revenue is closed to Income Summary account, the accounts are debited.
• Purchases Returns and Allowances and Purchase Discounts are contra-cost accounts and have normal credit balances. Since contra-cost accounts are closed to Income Summary account, the accounts are debited.
• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is credited to hold the transferred balance from revenue account and other income statement accounts with credit balances.

Step 2:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
August	31	Income Summary		313	47,716.79
			Sales Discounts	413		17.46
			Sales Returns and Allowances	414		88.00
			Purchases	511		24,101.00
			Freight-In	515		992.00
			Wages Expense	611		16,250.00
			Rent Expense	612		3,300.00
			Office Supplies Expense	613		173.00
			Spa Supplies Expense	614		395.00
			Laundry Expense	615		179.00
			Advertising Expense	616		455.00
			Utilities Expense	617		963.00
			Insurance Expense	618		281.67
			Depreciation Expense, Office Equipment	619		20.00
			Depreciation Expense, Spa Equipment	620		129.76
			Promotional Expense	630		371.90
		(Record closing of expenses and income statement accounts with debit balances to Income Summary account)

Table (5)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is debited to hold the transferred balance from expense accounts other income statement accounts with debit balances.
• Sales Discounts and Sales Returns and Allowances are contra-revenue accounts and have normal debit balances. Since contra-revenue accounts are closed to Income Summary account, the account is credited.
• All expense accounts have normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.

Step 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
August	31	Income Summary		313	13,485.86
			AV, Capital	311		13,485.86
		(Record closing of net income to capital account)

Table (6)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. Since net income is closed, the account is reversed; hence, the Income Summary account is debited.
• AV, Capital is a capital account. Since net income is transferred to the account, the value increased, and an increase in capital is credited.

Step 4:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
August	31	AV, Capital		311	5,000
			AV, Drawing	312		5,000
		(Record closing of drawing to capital account)

Table (7)

Description:

• AV, Capital is a capital account. Since drawings are transferred to the account, the value decreased, and a decrease in capital is debited.
• AV, Drawing is a capital account. Since drawings are transferred, the account is credited to reverse the previously debited effect.

5.

To determine

Post the closing entries to ledger accounts.

Explanation of Solution

Post the closing entries journalized in Part (4) into the ledger accounts of general ledger.

ACCOUNT    Cash                                                                 ACCOUNT NO. 111
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			36,489.12

Table (8)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			6,253.79

Table (9)

ACCOUNT    Office Supplies                                              ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			248.00
	31	Adjusting		173.00		75.00

Table (10)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			740.00
	31	Adjusting		395.00		345.00

Table (11)

ACCOUNT    Merchandise Inventory                                   ACCOUNT NO. 116
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		13,110		13,110

Table (12)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			800.00
	31	Adjusting			281.67	518.33

Table (13)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			1,570

Table (14)

ACCOUNT    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				10.00
	31	Adjusting			20.00		30.00

Table (15)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			18,083

Table (16)

ACCOUNT    Accumulated Depreciation, Spa Equipment               ACCOUNT NO. 129
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				64.88
	31	Adjusting			129.76		194.64

Table (17)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				15,513

Table (18)

ACCOUNT    Sales Tax Payable                                         ACCOUNT NO. 215
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				2,001.12

Table (19)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				50,219.62
	31	Closing			13,485.86		63,705.48
	31	Closing		5,000.00			58,705.48

Table (20)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			5,000
	31	Closing			5,000	0

Table (21)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				25,398
	31	Closing		25,398			0

Table (22)

ACCOUNT    Merchandise Sales                                              ACCOUNT NO. 412
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				28,489.65
	31	Closing		28,489.65			0

Table (23)

ACCOUNT    Sales Discounts                                                  ACCOUNT NO. 413
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			17.46
	31	Closing			17.46	0

Table (24)

ACCOUNT    Sales Returns and Allowances                           ACCOUNT NO. 414
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			88
	31	Closing			88	0

Table (25)

ACCOUNT    Purchases                                                            ACCOUNT NO. 511
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			24,101
	31	Closing			24,101	0

Table (26)

ACCOUNT    Purchases Discounts                                           ACCOUNT NO. 512
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				82
	31	Closing		82			0

Table (27)

ACCOUNT    Purchases Returns and Allowances                    ACCOUNT NO. 513
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				123
	31	Closing		123			0

Table (28)

ACCOUNT    Freight-In                                                            ACCOUNT NO. 515
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			992
	31	Closing			992	0

Table (29)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			16,250
	31	Closing			16,250	0

Table (30)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			3,300
	31	Closing			3,300	0

Table (31)

ACCOUNT    Office Supplies Expense                                  ACCOUNT NO. 613
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		75		75
	31	Closing			75	0

Table (32)

ACCOUNT    Spa Supplies Expense                                       ACCOUNT NO. 614
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		345		345
	31	Closing			345	0

Table (33)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			179
	31	Closing			179	0

Table (34)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			455
	31	Closing			455	0

Table (35)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			963
	31	Closing			963	0

Table (36)

ACCOUNT    Insurance Expense                                            ACCOUNT NO. 618
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			281.67
	31	Closing			281.67	0

Table (37)

ACCOUNT    Depreciation Expense, Office Equipment                ACCOUNT NO. 619
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			20
	31	Closing			20	0

Table (38)

ACCOUNT    Depreciation Expense, Spa Equipment                    ACCOUNT NO. 620
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			129.76
	31	Closing			129.76	0

Table (39)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			371.90
	31	Closing			371.90	0

Table (40)

6.

To determine

Prepare a post-closing trial balance for ABA Spa as at August 31, 20--.

Explanation of Solution

Post-closing trial balance: Post-closing trial balance is a summary of the entire asset, liability, and capital accounts and their balances, after the closing entries are prepared. So, post-closing trial balance reports the balances of permanent accounts only.

Prepare a post-closing trial balance for ABA Spa as at August 31, 20--.

ABA Spa
Post-Closing Trial Balance
August 31, 20--
Particulars	Amount ($)	Amount ($)
Cash	$36,489.12
Accounts Receivables	6,253.79
Office Supplies	75.00
Spa Supplies	345.00
Merchandise Inventory	13,110.00
Prepaid Insurance	518.33
Office Equipment	1,570.00
Accumulated Depreciation, Office Equipment		$30.00
Spa Equipment	18,083
Accumulated Depreciation, Spa Equipment		194.64
Accounts Payable		15,513.00
Sales Tax Payable		2,001.12
AV, Capital		58,705.48
	$76,444.24	$76,444.24

Table (41)

Conclusion

Thus, the post-closing trial balance of ABA Spa shows a debit and credit balance of $76,444.24.