Chapter 13, Problem 1CTP

Programs Plus is a retail firm that sells computer programs for home and business use. On December 31, 2019, its general ledger contained the accounts and balances shown below:

The following accounts had zero balances:

The data needed for the adjustments on December 31 are as follows:

a.–b.    Ending merchandise inventory, $67,850.

c.    Uncollectible accounts, 0.5 percent of net credit sales of $245,000.

d.    Supplies on hand December 31, $1,020.

e.    Expired insurance, $1,190.

f.    Depreciation Expense—Equipment, $5,600.

g.    Accrued interest expense on notes payable, $325.

h.    Accrued salaries, $2,100.

i.    Social Security Tax Payable (6.2 percent) and Medicare Tax Payable (1.45 percent) of accrued salaries.

INSTRUCTIONS

1. 1. Prepare a worksheet for the year ended December 31, 2019.
2. 2. Prepare a classified income statement. The firm does not divide its operating expenses into selling and administrative expenses.
3. 3. Prepare a statement of owner’s equity. No additional investments were made during the period.
4. 4. Prepare a classified balance sheet. All notes payable are due within one year.
5. 5. Journalize the adjusting entries. Use 25 as the first journal page number.
6. 6. Journalize the closing entries.
7. 7. Journalize the reversing entries.

Analyze: By what percentage did the owner’s capital account change in the period from January 1, 2019, to December 31, 2019?

To determine

Prepare the worksheet and complete the sections of Trial balance, adjustments and compute the changes to the BW Capital that will be shown in the statement of owner's equity.

Explanation of Solution

Worksheet: A worksheet is the used in the preparation of the financial statement. It is a pre-defined form, having multiple columns, used in the adjustment process.

Prepare the worksheet for the year ended December 31, 2019.

Figure (1)

Figure (2)

To determine

Show the Classified Income Statement.

Explanation of Solution

Classified Income statement: The classified income statement is a financial statement that shows the revenues, expenses with various classifications and sub-totals. The classified income statement is used for complex income statement as its more easily understandable.

Prepare the classified income statement:

Company PP
Income Statement
Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Operating Revenue
Sales				$514,980
Less: Sales Returns and Allowances				$9,600
Net Sales				$505,380
Cost of Goods Sold
Merchandise Inventory, January 1, 2019			$62,375
Purchases		$319,430
Freight In		$3,600
Delivered Cost of Purchases		$323,030
Less: Sales Returns and Allowances	$7,145
Purchases Discount	$5,760	$12,905
Net Delivered Cost of Purchases			$310,125
Total Merchandise Available for sale			$372,500
Less: Merchandise Inventory, closing			$67,850
Cost of Goods Sold				$304,650
Gross Profit on Sales				$200,730
Operating Expenses
Rent expense		$14,500
Telephone Expense		$2,164
Salaries Expense		$94,100
Payroll Taxes Expense		$7,460.65
Supplies Expense		$5,720
Insurance Expense		$1,190
Depreciation Expense - Equipment		$5,600
Uncollectible Accounts Expense		$1,225
Total Operating Expenses				$131,959.65
Income from Operations				$68,770.35
Other Expense
Interest Expense				$510.00
Net income for the year				$68,260.35

Table (1)

To determine

Show the Statement of Owner's equity.

Explanation of Solution

Statement of owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity.

Prepare the Statement of owner's’ equity:

Company PP
Statement of Owner's Equity
Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)
YT Capital, January 1, 2019		$93,620
Net income for the year	$68,260.35
Deduct - Withdrawals	$50,000.00
Increase in Capital		$18,260.35
YT Capital, December 31, 2019		$111,880.35

Table (2)

To determine

Show the Classified Balance Sheet and compute the percentage change in the owner’s capital in the accounting year 2019.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare the classified balance sheet:

Company PP
Balance Sheet
December 31, 2019
Particulars	Amount ($)	Amount ($)	Amount ($)
Assets
Current Assets
Cash			$15,280
Accounts receivable		$26,600
Less: Allowance for Doubtful Debts		$1,320	$25,280
Merchandise Inventory			$67,850
Prepaid expenses
Supplies		$1,020
Prepaid insurance		$1,190	$2,210
Total Current Assets			$110,620
Plant and Equipment
Equipment	$34,000
Less: Accumulated Depreciation	$15,700	$18,300
Total Plant and Equipment			$18,300
Total Assets			$128,920
Liabilities and Owner's Equity
Current Liabilities
Notes Payable		$7,264
Accounts payable		$6,500
Interest Payable		$325
Social Security Tax Payable		$690.20
Medicare Tax Payable		$160.45
Salaries Payable		$2,100
Total Current Liabilities			$17,039.65
Owner's Equity
YT Capital			$111,880.35
Total Liabilities and Owner's Equity			$128,920

Table (3)

Compute the percentage increase in owner’s capital:

$\begin{array}{c}\text{Increase = }\frac{\text{Beginning Capital }-\text{Closing Capital }}{\text{Closing Capital}}\\ =\frac{\$111,880.35-\$93,620.00}{\$93,620}\\ =19.5\%\end{array}$

The percentage increase in the owner’s capital is 19.5%.

To determine

Journalize the adjusting entries as on December 31, 2019.

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 stockholders’ equity) to maintain the records according to accrual basis principle.

Pass the adjusting entry for the given transaction:

	General Journal			Page - 25
Date	Description	Post Ref.	Debit	Credit
2019
December 31	Income Summary		$62,375
	Merchandise Inventory			$62,375
	(To record the beginning inventory)
December 31	Merchandise Inventory		$67,850
	Income Summary			$67,850
	(To record the closing inventory)
December 31	Uncollectible Accounts Expense		$1,225
	Allowance for Doubtful Accounts			$1,225
	(To record the estimated loss on the net credit sale)

Table (4)

	General Journal			Page - 26
Date	Description	Post Ref.	Debit	Credit
2019
December 31	Supplies Expense		$5,720
	Supplies			$5,720
	(To record the Supplies used)
December 31	Insurance expense		$1,190
	Prepaid Insurance			$1,190
	(To record the prepaid insurance)
December 31	Depreciation Expense - Equipment		$5,600
	Accumulated Depreciation - Equipment			$5,600
	(To record the depreciation on equipment)
December 31	Interest expense		$325
	Interest Payable			$325
	(To record the interest payable)
December 31	Salaries Expense		$2,100
	Salaries Payable			$2,100
	(To record the salaries payable)
December 31	Payroll Taxes Expense		$160.65
	Social Security Tax Payable			$130.20
	Medicare Tax Payable			$30.45
	(To record the taxes on accrued wages)

Table (5)

To determine

Journalize the closing entries as on December 31, 2019.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends 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.

Pass the closing entries:

	General Journal			Page - 27
Date	Description	Post Ref	Debit	Credit
2019
December 31	Sales		$514,980
	Purchases Returns and allowances		$7,145
	Purchases Discounts		$5,760
	Income Summary			$527,885
	(To record the closing entry for the income)
December 31	Income Summary		$465,099.65
	Sales Returns and Allowances			$9,600
	Purchases			$319,430
	Freight In			$3,600
	Rent Expense			$14,500
	Telephone Expense			$2,164
	Salaries Expense			$94,100.00
	Payroll Taxes Expense			$7,460.65
	Supplies Expense			$5,720
	Insurance expense			$1,190
	Depreciation Expense - Warehouse Equipment			$5,600
	Uncollectible Accounts Expense			$1,225
	Interest Expense			$510
	(To record the closing entry for the expenses)

Table (6)

	General Journal			Page - 28
Date	Description	Post Ref	Debit	Credit
2019
December 31	Income Summary		$68,260.35
	YT Capital			$68,260.35
	(To record the closing entry for the capital)
December 31	YT Capital		$50,000
	YT Drawings			$50,000
	(To record the closing entry for the capital)

Table (7)

To determine

Journalize the reversing entries as on January 1, 2020.

Explanation of Solution

Reversing entries: Reversing entries are those entries which are recorded at the beginning of the year, to reverse or set right the adjusting entries made in the end of the previous accounting year, in order to maintain the records according to accrual basis principle.

Pass the reversing entries:

	General Journal			Page - 29
Date	Description	Post Ref	Debit	Credit
2020
January 1	Interest Payable		$325
	Interest Expense			$325
	(To record the reversing entry for interest payable)
January 1	Salaries Payable		$2,100
	Salaries Expense - Office			$2,100
	(To record the reversing entry for salaries payable)
January 1	Social Security Tax Payable		$130.20
	Medicare Tax Payable		$30.45
	Payroll Taxes Expense			$160.65
	(To record the reversing entry for payroll taxes payable)

Table (8)