Chapter 12, Problem 4PB

The following accounts appear in the ledger of Sheldon Company on January 31, the end of this fiscal year.

The data needed for adjustments on January 31 are as follows:

  a–b.    Merchandise inventory, January 31, $55,750.

  c.    Insurance expired for the year, $1,285.

  d.    Depreciation for the year, $5,482.

  e.    Accrued wages on January 31, $1,556.

  f.    Supplies used during the year $1,503.

Required

1. 1. Prepare a work sheet for the fiscal year ended January 31. Ignore this step if using QuickBooks or general ledger.
2. 2. Prepare an income statement.
3. 3. Prepare a statement of owner’s equity. No additional investments were made during the year. Ignore this step if using CLGL.
4. 4. Prepare a balance sheet.
5. 5. Journalize the adjusting entries.
6. 6. Journalize the closing entries.

Check Figure

Net loss, $1,737

To determine

Indicate the given adjustments and complete the worksheet for Company S for the year ended January 31, 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 S for the year ended January 31, 20--.

Figure-(1)

To determine

Prepare an income statement for Company S for the year ended January 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 Company S for the year ended January 31, 20--.

Company S
Income Statement
For the Year Ended January 31, 20--
Revenue from sales:
Sales			$227,000
Less: Sales returns and allowances			2,000
Net sales				$225,000
Cost of goods sold:
Merchandise inventory, February 1, 20--			$55,500
Purchases		$172,000
Less: Purchase returns and allowances	$2,375
Purchases discounts	3,567	5,942
Net purchases		166,058
Add: Freight-in		7,491
Delivered cost of purchases			173,549
Cost of goods available for sale			229,049
Less: Merchandise inventory, June 30, 20--			55,750
Cost of goods sold				173,299
Gross profit				51,701
Operating expenses:
Wages expense			26,536
Advertising expense			5,912
Rent expense			12,900
Store supplies expense			1,503
Insurance expense			1,285
Depreciation expense, Store equipment			5,482
Total operating expenses				53,438
Net income (loss)				$(1,737)

Table (1)

Conclusion

Thus, the income statement of Company C for the year ended June 30, 20—reposts the net loss of $1,737.

To determine

Prepare a statement of owners’ equity for Company S for the year ended January 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 Company S for the year ended January 31, 20--.

Company S
Statement of Owners’ Equity
For the Year Ended January 31, 20--
MES, Capital, July 1, 20--		$126,484
Net loss for the year	$1,737
Less: Withdrawals for the year	36,000
Decrease in capital		37,737
BEC, Capital, June 30, 20--		$88,747

Table (2)

Conclusion

Thus, the statement of owners’ equity of Company S for the year ended January 31, 20—reports the capital amount of $88,747.

To determine

Prepare a balance sheet for Company S, 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 S as at January 31, 20--.

Company S
Balance Sheet
January 31, 20--
Assets
Current Assets:
Cash	$16,400
Accounts Receivable	15,100
Merchandise Inventory	55,750
Store Supplies	100
Prepaid Insurance	1,795
Total Current Assets		$89,145
Property and Equipment:
Store Equipment	24,900
Less: Accumulated Depreciation	9,342
Total Property and Equipment		15,558
Total Assets		$104,703
Liabilities
Current Liabilities:
Accounts Payable	14,400
Wages Payable	1,556
Total Liabilities		$15,956
Owners’ Equity
BEC, Capital		88,747
Total Liabilities and Owners’ Equity		$104,703

Table (3)

Conclusion

Thus, the balance sheet of Company S as at January 31, 20—reports the total assets, and total liabilities and owners’ equity of $104,703.

To determine

Prepare adjusting journal entries for Company S.

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 S.

Adjusting entry for removing beginning inventory:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
January	31	Income Summary			55,500
			Merchandise Inventory			55,500
		(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--
January	31	Merchandise Inventory			55,750
			Income Summary			55,750
		(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--
January	31	Wages Expense			1,556
			Wages Payable			1,556
		(Record accrued wages 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--
January	31	Insurance Expense			1,285
			Prepaid Insurance			1,285
		(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--
January	31	Depreciation Expense, Store Equipment			5,482
			Accumulated Depreciation, Store Equipment			5,482
		(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--
January	31	Store Supplies Expense			1,503
			Store supplies			1503
		(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 S.

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 S.

Step 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Sales			227,000
		Purchases Returns and Allowances			2,375
		Purchases Discounts			3,567
			Income Summary			232,942
		(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 ($)	Credit ($)
January	31	Income Summary			234,929
			Sales Returns and Allowances			2,000
			Purchases			172,000
			Freight-In			7,491
			Wages Expense			26,356
			Advertising Expense			5,912
			Rent Expense			12,900
			Store Supplies Expense			1,503
			Insurance Expense			1,285
			Depreciation Expense, Store Equipment			5,482
		(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 ($)	Credit ($)
January	31	MES, Capital			1,737
			Income Summary			1,737
		(Record closing of net loss to capital account)

Table (12)

Description:

• MES, Capital is a capital account. Since net loss is transferred to the account, the account value decreased, and a decrease in capital is debited.
• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. Since net loss is closed, the account is reversed, hence, the Income Summary account is credited.

Step 4:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	31	MES, Capital			36,000
			MES, Drawing			36,000
		(Record closing of drawing to capital account)

Table (13)

Description:

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