Chapter 2, Problem 2.3APR

Journal entries and trial balance

On November 1, 2018, Kris Lehman established an interior decorating business. Modem Designs. During the month, Kris completed the following transactions related to die business:

Nov. 1.	Kris transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $36,000.
1.	Paid rent for period of November 1 to end of month, $4,000.
6.	Purchased office equipment on account, $16,000.
8.	Purchased a truck for $43,000 paying $4,300 cash and giving a note payable for the remainder.
10.	Purchased supplies for cash, $1,860.
12.	Received cash for job completed, $8,000.
15.	Paid annual premiums on property and casualty insurance, $2,400.
23.	Recorded jobs completed on account and sent invoices to customers, $15,500
24.	Received an invoice for truck expenses, to be paid in November. $1,250
Enter the following transactions on Page 2 of the two-column journal:
29.	. Paid utilities expense. $3,660.
29.	Paid miscellaneous expenses, $ 1,700.
30.	Received cash from customers on account, $ 10,500.
30.	Paid wages of employees, $4,750.
30.	Paid creditor a portion of the amount owed for equipment purchased on November 6. $4,000.
30.	Paid dividends, $1,600.

Instructions

1. 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted.

11	Cash	31	Common Stock
12	Accounts Receivable	33	Dividends
13	Supplies	41	Fees Earned
14	Prepaid Insurance	51	Wages Expense
16	Equipment	53	Rent Expense
18	Truck	54	Utilities Expense
21	Notes Payable	55	Truck Expense
22	Accounts Payable	59	Miscellaneous Ex

1. 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted.
2. 3. Prepare an unadjusted trial balance for Modern Designs as of November 30, 2018.
3. 4. Determine the excess of revenues over expenses for November.
4. 5. Can you think of any reason why the amount determined in (4) might not be the net income for November?

To determine

Journal:

Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Rules of debit and credit:

“An increase in an asset account, an increase in an expense account, a decrease in liability account, and a decrease in a revenue account should be debited.

Similarly, an increase in liability account, an increase in a revenue account and a decrease in an asset account, a decrease in an expenses account should be credited”.

T-account:

An account is referred to as a T-account, because the alignment of the components of the account resembles the capital letter ‘T’. An account consists of the three main components which are as follows:

• The title of the account
• The left or debit side
• The right or credit side

Unadjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.

To journalize: The transactions in a two column journal beginning on Page 1.

Explanation of Solution

Journalize each transaction in a two column journal beginning on Page 1.

Journal                                           Page          1
Date		Description	Post. Ref	Debit ($)	Credit ($)
2018		Cash	11	36,000
November	1	Common stock	31		36,000
		(To record the transfer of cash from personal bank account to business account in exchange for common stock)
	1	Rent expense	53	4,000
		Cash	11		4,000
		(To record the payment of rent for the month of June)
	6	Equipment	16	16,000
		Accounts payable	22		16,000
		(To record the purchase of equipment on account)
	8	Truck	18	43,000
		Cash	11		4,300
		Notes payable	21		38,700
		(To record the purchase of truck by cash and on account)
	10	Supplies	13	1,860
		Cash	11		1,860
		(To record the purchase of supplies)
	12	Cash	11	8,000
		Fees earned	41		8,000
		(To record the receipt of cash for the completed job)
	15	Prepaid insurance	14	2,400
		Cash	11		2,400
		(To record the payment made for insurance premiums)
	23	Accounts receivable	12	15,500
		Fees earned	41		15,500
		(To record the invoices sent to customers for the jobs completed)
	24	Truck expense	55	1,250
		Accounts payable	22		1,250
		(To record the receipt of invoices for van expenses)

Table (1)

Journal                                           Page 2
Date		Description	Post. Ref	Debit ($)	Credit ($)
2018	29	Utilities expense	54	3,660
November		Cash	11		3,660
		(To record the payment of utilities expense)
	29	Miscellaneous expense	59	1,700
		Cash	11		1,700
		(To record the payment of miscellaneous expense)
	30	Cash	11	10,500
		Accounts receivable	12		10,500
		(To record the receipt of cash from customers on account)
	30	Wages expense	51	4,750
		Cash	11		4,750
		(To record the payment of wages expense)
	30	Accounts payable	22	4,000
		Cash	11		4,000
		(To record the payment made to creditor on account)
	30	Dividends	33	1,600
		Cash	11		1,600
		(To record the withdrawal of cash for personal use)

Table (2)

To determine

To post: The journal to a ledger of four-column accounts with appropriate post references, and the balances after each transaction is posted.

Explanation of Solution

General Ledger

Account:         Cash                                                              Account no.        11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	1		1	36,000		36,000
	1		1		4,000	32,000
	8		1		4,300	27,700
	10		1		1,860	25,840
	12		1	8,000		33,840
	15		1		2,400	31,440
	29		2		3,660	27,780
	29		2		1,700	26,080
	30		2	10,500		36,580
	30		2		4,750	31,830
	30		2		4,000	27,830
	30		2		1,600	26,230

Table (3)

Account:    Accounts Receivable                                             Account no. 12
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
201
November	23		1	15,500		15,500
	30		2		10,500	5,000

Table (4)

Account:          Supplies                                                         Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
201
November	10		1	1,860		1,860

Table (5)

Account:    Prepaid Insurance                                             Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	15		1	2,400		2,400

Table (6)

Account:    Equipment                                                Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	6		1	16,000		16,000

Table (7)

Account:     Truck                                                     Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	8		1	43,000		43,000

Table (8)

Account:     Notes Payable                                                     Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	8		1		38,700		38,700

Table (9)

Account:     Accounts Payable                                                   Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	6		1		16,000	–	16,000
	24		1		1,250		17,250
	30		2	4,000			13,250

Table (10)

Account:       Common Stock                                                         Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	1		1		36,000		36,000

Table (11)

Account:         Dividends                                                      Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	30		2	1,600		1,600

Table (12)

Account:          Fees earned                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	12		1		8,000		8,000
	23		2		15,500		23,500

Table (13)

Account:   Wages expense                                                       Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	30		2	4,750		4,750

Table (14)

Account:   Rent expense                                                 Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	1		1	4,000		4,000

Table (15)

Account:  Utilities expense                                                                  Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	29		2	3,660		3,660

Table (16)

Account:   Truck expense                                                            Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	24		1	1,250		1,250

Table (17)

Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
November	29		2	1,700		1,700

Table (18)

To determine

To prepare: An unadjusted trial balance of EC Designs as of June 30, 2019.

Explanation of Solution

Prepare an unadjusted trial balance of m Designs as of November 30, 2018 as follows:

M Designs Unadjusted Trial Balance November 30, 2018
Particulars	Account No.	Debit $	Credit $
Cash	11	26,230
Accounts receivable	12	5,000
Supplies	13	1,860
Prepaid insurance	14	2,400
Equipment	16	16,000
Truck	18	43,000
Notes payable	21		38,700
Accounts payable	22		13,250
Common stock	31		36,000
Dividends	33	1,600
Fees earned	41		23,500
Wages expense	51	4,750
Rent expense	53	4,000
Utilities expense	54	3,660
Truck expense	55	1,250
Miscellaneous expense	59	1,700
Total		111,450	111,450

Table (19)

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $111,450.

To determine

The excess of revenues over expenses for the month of June.

Answer to Problem 2.3APR

The excess of revenues over expenses for the month of November is $8,140.

Explanation of Solution

Working note:

Calculate the excess of revenues over expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Excess of revevnues}\\ \text{over expenses}\end{array}\right)\text{=}\left(\text{Fees earned}\right)-\left(\begin{array}{l}\text{Wages expense+Rent Expense+Utilities expense}\\ \text{+Truck Expense+Miscellaneous Expense}\end{array}\right)\\ \text{=}\left(\text{\$23,500}\right)-\left(\$4,750+\$4,000+\$3,660+\$1,250+\$1,700\right)\\ =\$8,140\end{array}$

Conclusion

Hence, the excess of revenues over expenses for the month of November is $8,140.

To determine

To discuss: The reason behind the amount determined in (4) might not be the net income for November.

Explanation of Solution

The amount determined in (4) might not be the net income for November, because adjusting entries for supplies used, insurance expired, and depreciation should be passed at the end of the accounting period in order to bring the accounts up to date.