Chapter 12, Problem 1CP

It is now August 31. You have journalized and posted the adjustments in the All About You Spa accounting records, and Ms. Valli wants to see financial statements for the last two months (July and August). Then she would like you to prepare the closing entries.

Required

1. 1. Prepare an income statement for the two months ended August 31, 20--.
2. 2. Prepare a statement of owner’s equity for the two months ended August 31, 20--. Ignore this step if using QuickBooks.
3. 3. Prepare a balance sheet as of August 31, 20--.
4. 4. Journalize the closing entries in the general journal.
   • If you are preparing the closing entries using Working Papers, enter your transactions beginning on page 5.
5. 5. Post the closing entries to the general ledger accounts.
   • Ignore this step if you are using QuickBooks or CLGL.
6. 6. Prepare a post-closing trial balance as of August 31, 20--.

Check Figures

1. 1. Net income, $15,314.18
2. 2. A. Valli, Capital (end of period), $67,085.93
3. 3. Balance Sheet report total assets, $83,081.33
4. 4. Post-closing trial balance total, $83,935.12

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--
Revenue from sales:
Merchandise sales			$28,261.54
Less: Sales returns and allowances		$17.46
Sales discounts		70.00	87.46
Net sales				$28,714.08
Cost of goods sold:
Merchandise inventory, July 1, 20--			$0.0
Purchases		$23,344.00
Less: Purchase returns and allowances	$82.00
Purchases discounts	168.00	250.00
Net purchases		23,094.00
Add: Freight-in		975.00
Delivered cost of purchases			24,069.00
Cost of goods available for sale			24,069.00
Less: Merchandise inventory, August    31, 20--			11,310.00
Cost of goods sold				12,759.00
Gross profit				15,415.08
Operating expenses:
Wages expense			18,260.00
Rent expense			3,000.00
Office supplies expense			134.00
Spa supplies expense			305.00
Laundry expense			110.00
Advertising expense			555.00
Utilities expense			701.00
Insurance expense			233.34
Depreciation expense, Office      equipment			30.00
Depreciation expense, Spa equipment			660.54
Promotional expense			400.80
Total operating expenses				24,389.68
Loss from operations				(8,974.60)
Other income:
Income from services				24,288.78
Net income				$15,314.18

Table (1)

Conclusion

Thus, the income statement of ABA Spa for two months ended August 31, 20-- is $15,314.18.

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 is 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--
AV, Capital, July 1, 20--		$34,271.75
Additional investment	$22,000.00
Net income for the year	15,314.18
	37,314.18
Less: Withdrawals for the year	(4,500.00)
Increase in capital		32,814.18
MJE, Capital, December 31, 20--		$67,085.93

Table (2)

Conclusion

Thus, the statement of owners’ equity of ABA Spa for two months ended August 31, 2-- reports the capital amount of $67,085.93.

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
Current Assets:
Cash		$44,742.45
Accounts Receivable		5,335.01
Office Supplies		100.00
Spa Supplies		425.00
Merchandise Inventory		11,310.00
Prepaid Insurance		466.66
Total Current Assets			$62,379.12
Property and Equipment:
Office Equipment	$1,740.00
Less: Accumulated Depreciation	43.25	1,696.75
Spa Equipment	19,816.00
Less: Accumulated Depreciation	810.54	19,005.46
Total Property and Equipment			20,702.21
Total Assets			$83,081.33
Liabilities
Current Liabilities:
Accounts Payable		$14,919.00
Sales Tax Payable		1,076.40
Total Current Liabilities			$15,995.40
Total Liabilities			$15,995.40
Owners’ Equity
AV, Capital			67,085.93
Total Liabilities and Owners’ Equity			$83,081.33

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 $83,081.33.

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	24,288.78
		Merchandise Sales		412	28,261.54
		Purchases Returns and Allowances		512	82.00
		Purchases Discounts		513	168.00
			Income Summary	313		52,800.32
		(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	48,796.14
			Sales Discounts	413		17.46
			Sales Returns and Allowances	414		70.00
			Purchases	511		23,344.00
			Freight-In	515		975.00
			Wages Expense	611		18,260.00
			Rent Expense	612		3,000.00
			Office Supplies Expense	613		134.00
			Spa Supplies Expense	614		305.00
			Laundry Expense	615		110.00
			Advertising Expense	616		555.00
			Utilities Expense	617		701.00
			Insurance Expense	618		233.34
			Depreciation Expense, Office Equipment	619		30.00
			Depreciation Expense, Spa Equipment	620		660.54
			Promotional Expense	630		400.80
		(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	15,314.18
			AV, Capital	311		15,314.18
		(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	4,500.00
			AV, Drawing	312		4,500.00
		(Record closing of drawing to capital account)

Table (7)

Description:

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

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	✓			44,742.45

Table (8)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			5,335.01

Table (9)

ACCOUNT    Office Supplies                                              ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			234.00
	31	Adjusting		134.00		100.00

Table (10)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			730.00
	31	Adjusting		305.00		425.00

Table (11)

ACCOUNT    Merchandise Inventory                                   ACCOUNT NO. 116
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		11,310		11,310

Table (12)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			700.00
	31	Adjusting			233.34	466.66

Table (13)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			1,740

Table (14)

ACCOUNT    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				13.25
	31	Adjusting			30.00		43.25

Table (15)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			19,816

Table (16)

ACCOUNT    Accumulated Depreciation, Spa Equipment               ACCOUNT NO. 129
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				150.00
	31	Adjusting			660.54		810.54

Table (17)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				14,919

Table (18)

ACCOUNT    Sales Tax Payable                                         ACCOUNT NO. 215
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				1,076.40

Table (19)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				56,271.75
	31	Closing			15,314.18		71,585.93
	31	Closing		4,500.00			67,085.93

Table (20)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			4,500
	31	Closing			4,500	0

Table (21)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				24,288.78
	31	Closing		24,288.78			0

Table (22)

ACCOUNT    Merchandise Sales                                              ACCOUNT NO. 412
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓				28,261.54
	31	Closing		28,261.54			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	✓			70.00
	31	Closing			70.00	0

Table (25)

ACCOUNT    Purchases                                                            ACCOUNT NO. 511
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			23,344
	31	Closing			23,344	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	✓				168
	31	Closing		168			0

Table (28)

ACCOUNT    Freight-In                                                            ACCOUNT NO. 515
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			975
	31	Closing			975	0

Table (29)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			18,260
	31	Closing			18,260	0

Table (30)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			3,000
	31	Closing			3,000	0

Table (31)

ACCOUNT    Office Supplies Expense                                  ACCOUNT NO. 613
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		134		134
	31	Closing			134	0

Table (32)

ACCOUNT    Spa Supplies Expense                                       ACCOUNT NO. 614
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Adjusting		305		305
	31	Closing			305	0

Table (33)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			110
	31	Closing			110	0

Table (34)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			555
	31	Closing			555	0

Table (35)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			701
	31	Closing			701	0

Table (36)

ACCOUNT    Insurance Expense                                            ACCOUNT NO. 618
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			233.34
	31	Closing			233.34	0

Table (37)

ACCOUNT    Depreciation Expense, Office Equipment                ACCOUNT NO. 619
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			30
	31	Closing			30	0

Table (38)

ACCOUNT    Depreciation Expense, Spa Equipment                    ACCOUNT NO. 620
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			660.54
	31	Closing			660.54	0

Table (39)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
August	31	Balance	✓			400.80
	31	Closing			400.80	0

Table (40)

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 all the 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--
Cash	$44,742.45
Accounts Receivables	5,335.01
Office Supplies	234.00
Spa Supplies	730.00
Prepaid Insurance	11,310.00
Office Equipment	466.66
Accumulated Depreciation, Office Equipment		$43.25
Spa Equipment	19,816.00
Accumulated Depreciation, Spa Equipment		810.54
Accounts Payable		14,919.00
Sales Tax Payable		1,076.40
AV, Capital		67,085.93
	$83,935.12	$83,935.12

Table (41)

Conclusion

Thus, the post-closing trial balance of ABA Spa shows a debit and credit balance of $83,935.12.