Chapter 12, Problem 4PA

The following accounts appear in the ledger of Celso and Company as of June 30, the end of this fiscal year.

The data needed for the adjustments on June 30 are as follows:

  a–b.    Merchandise inventory, June 30, $54,600.

  c.    Insurance expired for the year, $475.

  d.    Depreciation for the year, $4,380.

  e.    Accrued wages on June 30, $1,492.

  f.    Supplies on hand at the end of the year, $100.

Required

1. 1. Prepare a work sheet for the fiscal year ended June 30. Ignore this step if using CLGL.
2. 2. Prepare an income statement.
3. 3. Prepare a statement of owner’s equity. No additional investments were made during the year.
4. 4. Prepare a balance sheet.
5. 5. Journalize the adjusting entries.
6. 6. Journalize the closing entries.
7. 7. Journalize the reversing entry as of July 1, for the wages that were accrued in the June adjusting entry.

Check Figure

Net income, $14,066

To determine

Indicate the given adjustments and complete the worksheet for Company C for the year ended June 30, 20--.

Explanation of Solution

Worksheet: Worksheet is an accounting tool that help accountants to record adjustments and up-date balances required to prepare financial statements. Worksheet is a central place where trial balance, adjustments, adjusted trial balance, income statement, and balance sheet are presented.

Indicate the given adjustments and complete the worksheet for Company C for the year ended June 30, 20--.

Figure-(1)

To determine

Prepare an income statement for Company C for the year ended June 30, 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 Company C for the year ended June 30, 20--.

Company C
Income Statement
For the Year Ended June 30, 20--
Revenue from sales:
Sales			$208,030
Less: Sales returns and allowances			1,740
Net sales				$206,290
Cost of goods sold:
Merchandise inventory, July 1, 20--			$50,280
Purchases		$133,050
Less: Purchase returns and allowances	$4,295
Purchases discounts	3,853	8,148
Net purchases		124,902
Add: Freight-in		8,350
Delivered cost of purchases			133,252
Cost of goods available for sale			183,532
Less: Merchandise inventory, June 30, 20--			54,600
Cost of goods sold				128,932
Gross profit				77,358
Operating expenses:
Wages expense			36,892
Advertising expense			7,710
Rent expense			12,000
Store supplies expense			1,835
Insurance expense			475
Depreciation expense, Store equipment			4,380
Total operating expenses				63,292
Net income				$14,066

Table (1)

Conclusion

Thus, the income statement of Company C for the year ended June 30, 20—reports net income of $14,066.

To determine

Prepare a statement of owners’ equity for Company C for the year ended June 30, 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 Company C for the year ended June 30, 20--.

Company C
Statement of Owners’ Equity
For the Year Ended June 30, 20--
BEC, Capital, July 1, 20--		$96,524
Net income for the year	$14,066
Less: Withdrawals for the year	30,000
Decrease in capital		15,934
BEC, Capital, June 30, 20--		$80,590

Table (2)

Conclusion

Thus, the statement of owners’ equity of Company C for the year ended June 30, 20—reports the capital amount of $80,590.

To determine

Prepare a balance sheet for Company C, based on the account balances from work sheet, and capital of the owner from the statement of owners’ equity prepared in Part (3).

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 Company C as at June 30, 20--.

Company C
Balance Sheet
June 30, 20--
Assets
Current Assets:
Cash	$15,349
Accounts Receivable	13,810
Merchandise Inventory	54,600
Store Supplies	100
Prepaid Insurance	910
Total Current Assets		$84,769
Property and Equipment:
Store Equipment	18,640
Less: Accumulated Depreciation	11,262
Total Property and Equipment		7,378
Total Assets		$92,147
Liabilities
Current Liabilities:
Accounts Payable	10,065
Wages Payable	1,492
Total Liabilities		$11,557
Owners’ Equity
BEC, Capital		80,590
Total Liabilities and Owners’ Equity		$92,147

Table (3)

Conclusion

Thus, the balance sheet of Company C as at June 30, 20-- reports the total assets, and total liabilities and owners’ equity of $92,147.

To determine

Prepare adjusting journal entries for Company C.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and owners’ or stockholders’ equity) to maintain the records according to accrual basis principle and matching concept.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare adjusting journal entries for Company C.

Adjusting entry for removing beginning inventory:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Income Summary			50,280
			Merchandise Inventory			50,280
		(Record the entry to remove beginning inventory)

Table (4)

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 eliminate the beginning inventory balance.
• Merchandise Inventory is an asset account. Since beginning inventory is eliminated and transferred to Income Summary account, asset account decreased, and a decrease in asset is credited.

Adjusting entry for entering the ending inventory:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Merchandise Inventory			54,600
			Income Summary			54,600
		(Record the entry to enter ending inventory)

Table (5)

Description:

• Merchandise Inventory is an asset account. Since ending inventory or physical count of inventory at the end of the period is entered to record in the financial statements, asset account increased, and an increase in asset is 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 enter the ending inventory balance.

Adjusting entry for the wages payable:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Wages Expense			1,492
			Wages Payable			1,492
		(Record accrued salaries expenses)

Table (6)

Description:

• Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Wages Payable is a liability account. Since amount of payables has increased, liability decreased, and an increase in liability is credited.

Adjusting entry for the insurance expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Insurance Expense			475
			Prepaid Insurance			475
		(Record part of prepaid insurance expired)

Table (7)

Description:

• Insurance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Insurance is an asset account. Since amount of insurance is expired, asset account decreased, and a decrease in asset is credited.

Adjusting entry for the depreciation expense, store equipment:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Depreciation Expense, Store Equipment			4,380
			Accumulated Depreciation, Store Equipment			4,380
		(Record depreciation expense)

Table (8)

Description:

• Depreciation Expense, Store Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation, Store Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Adjusting entry for the supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Store Supplies Expense			1,835
			Store supplies			1,835
		(Record part of supplies consumed)

Table (9)

Description:

• Store Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Store Supplies is an asset account. Since amount of supplies is consumed, asset account decreased, and a decrease in asset is credited.

To determine

Prepare closing entries for Company C.

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 Company C.

Step 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Sales			208,030
		Purchases Returns and Allowances			4,295
		Purchases Discounts			3,853
			Income Summary			216,178
		(Record closing of revenue and income statement accounts with credit balances to Income Summary account)

Table (10)

Description:

• Sales is a revenue account. Revenue accounts have normal credit balance. Since revenue is closed to Income Summary account, the account is 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 ($)	Credit ($)
June	30	Income Summary			206,432
			Sales Returns and Allowances			1,740
			Purchases			133,050
			Freight-In			8,350
			Wages Expense			36,892
			Advertising Expense			7,710
			Rent Expense			12,000
			Store Supplies Expense			1,835
			Insurance Expense			475
			Depreciation Expense, Store Equipment			4,380
		(Record closing of expenses and income statement accounts with debit balances to Income Summary account)

Table (11)

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 Returns and Allowances is contra-revenue account and has a normal debit balances. Since contra-revenue accounts are closed to Income Summary account, the account is credited.
• Purchases, Freight-In, Wages Expense, Advertising Expense, Rent Expense, Store Supplies Expense, Insurance Expense, and Depreciation Expense-Store Equipment, are expense accounts. Expense account has a 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 ($)	Credit ($)
June	30	Income Summary			14,066
			BEC, Capital			14,066
		(Record closing of net income to capital account)

Table (12)

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.
• BEC, 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 ($)	Credit ($)
June	30	BEC, Capital			30,000
			BEC, Drawing			30,000
		(Record closing of drawing to capital account)

Table (13)

Description:

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

To determine

Journalize the reversing entry.

Explanation of Solution

Reversing entries: These are the entries that are recorded on the first day of following fiscal period to reverse the effect of certain adjusting entries.

The following are the rules to recognize whether or not adjusting entries should be reversed:

• The adjusting entry that should be reversed, should increase an asset or a liability account.
• The asset or liability account in the adjusting entry that should be reversed, should not have a previous balance.

Journalize the reversing entry for the accrued salaries on July 1.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
July	30	Wages Payable			1,492
			Wages Expense			1,492
		(Record accrued salaries expenses)

Table (14)

Description:

• Wages Payable is a liability account. Since wages payables does not have a previous balance and increases the liability value with the adjustment, the liability account is debited to reverse the previous adjustment effect.
• Wages Expense is an expense account. The wages expense account is credited to reverse the previous adjustment effect.