Chapter 2, Problem 2.4P

Accounting cycle; adjusting entries through post-closing trial balance

• LO2–3, LO2–5 through LO2–7

Refer to P 2–3 and complete the following steps:

1. Enter the unadjusted balances from the trial balance into T-accounts.

2. Post the adjusting entries prepared in P 2–3 to the accounts.

3. Prepare an adjusted trial balance.

4. Prepare an income statement and a statement of shareholders’ equity for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. Assume that no common stock was issued during the year and that $4,000 in cash dividends were paid to shareholders during the year. The $4,000 reduction in cash and in retained earnings is reflected in the unadjusted trial balance amounts. That is, the retained earnings balance at the beginning of the year was $28,500.

5. Prepare closing entries and post to the accounts.

6. Prepare a post-closing trial balance.

To determine

Accounting Cycle:

Accounting cycle refers to the process of recording a business transaction in the books of accounts. This cycle concludes when the financial statements are prepared.

T-account:

• T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
• The components of the T-account are as follows:

1. 1. a) The title of the account
   1. b) The left or debit side
   1. c) The right or credit side

Adjusted Trial Balance:

An adjusted trial balance refers to the final trial balance resulting after posting the adjusting entries at the end of the period.

Closing Entries:

Closing entries are those journal entries which are passed to transfer the balances of temporary accounts to the permanent accounts. These are passed at the end of the period, to transfer the final balance.

Post-closing trial balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

Income statement

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time. It is prepared to find out the net income of an organization.

Balance sheet

Balance sheet is a financial position statement which represents all the assets, liabilities, and stockholders’ equity of a concern on a particular date. The balance sheet displays that on a particular date all the assets of a concern must be equal to the sum of liabilities and stockholders’ equity.

To Enter: The unadjusted balances from the trial balance into T-accounts.

Explanation of Solution

Prepare T-accounts for balance sheet accounts from the unadjusted trial balance:

Cash Account:

Cash Account

December 31		$30,000
December 31		$30,000

Accounts Receivable:

Accounts Receivable Account

December 31		$40,000
December 31		$40,000

Prepaid Rent:

Prepaid Rent Account

December 31		$2,000
December 31		$2,000

Prepaid Insurance:

Prepaid Insurance Account

December 31		0
December 31		0

Supplies:

Supplies Account

December 31		$1,500
December 31		$1,500

Inventory:

Inventory Account

December 31		$60,000
December 31		$60,000

Note receivable:

Note receivable Account

December 31		$20,000
December 31		$20,000

Office Equipment:

Office Equipment Account

December 31		$80,000
December 31		$80,000

Interest Receivable:

Interest Receivable Account

December 31		0
December 31		0

Accumulated Depreciation:

Accumulated Depreciation Account

			December 31		$30,000
			December 31		$30,000

Accounts Payable:

Accounts Payable Account

			December 31		$31,000
			December 31		$31,000

Salaries and Wages Payable:

Salaries and Wages Payable Account

			December 31		0
			December 31		0

Note Payable:

Note Payable Account

			December 31		$50,000
			December 31		$50,000

Interest Payable:

Interest Payable Account

			December 31		0
			December 31		0

Deferred Revenue:

Deferred Revenue Account

			December 31		0
			December 31		0

Common Stock:

Common Stock Account

			December 31		$60,000
			December 31		$60,000

Retained Earnings:

Retained Earnings Account

			December 31		$24,500
			December 31		$24,500

Prepare T-accounts for income statement accounts from the unadjusted trial balance:

Sales Revenue:

Sales Revenue Account

			December 31		$148,000
			December 31		$148,000

Interest Revenue:

Interest Revenue Account

			December 31		0
			December 31		0

Cost of Goods Sold:

Cost of Goods Sold Account

December 31		$70,000
December 31		$70,000

Salaries and Wages expense:

Salaries and Wages expense Account

December 31		$18,900
December 31		$18,900

Rent Expense:

Rent Expense Account

December 31		$11,000
December 31		$11,000

Depreciation Expense:

Depreciation Expense Account

December 31		0
December 31		0

Interest Expense:

Interest Expense Account

December 31		0
December 31		0

Supplies Expense:

Supplies Expense Account

December 31		$1,100
December 31		$1,100

Insurance Expense:

Insurance Expense Account

December 31		$6,000
December 31		$6,000

Advertising Expense:

Advertising Expense Account

December 31		$3,000
December 31		$3,000

To determine

To Post: The adjusting entries to the T-accounts.

Explanation of Solution

Post the adjusting entries in T-accounts for balance sheets accounts as follows:

Cash Account:

Cash Account

December 31		$30,000
December 31		$30,000

Accounts Receivable:

Accounts Receivable Account

December 31		$40,000
December 31		$40,000

Prepaid Rent:

Prepaid Rent Account

December 31		$2,000
			8.		$1,000
December 31		$1,000

Prepaid Insurance:

Prepaid Insurance Account

December 31		0
5		$3,750
December 31		$3,750

Supplies:

Supplies Account

December 31		$1,500
			6.		$700
December 31		$800

Inventory:

Inventory Account

December 31		$60,000
December 31		$60,000

Note receivable:

Note receivable Account

December 31		$20,000
December 31		$20,000

Office Equipment:

Office Equipment Account

December 31		$80,000
December 31		$80,000

Interest Receivable:

Interest Receivable Account

December 31		0
4.		$1,333
December 31		$1,333

Accumulated Depreciation:

Accumulated Depreciation Account

			December 31		$30,000
			1		$10,000
			December 31		$40,000

Accounts Payable:

Accounts Payable Account

			December 31		$31,000
			December 31		$31,000

Salaries and Wages Payable:

Salaries and Wages Payable Account

			December 31		0
			2		$1,500
			December 31		$1,500

Note Payable:

Note Payable Account

			December 31		$50,000
			December 31		$50,000

Interest Payable:

Interest Payable Account

			December 31		0
			3		$1,500
			December 31		$1,500

Deferred Revenue:

Deferred Revenue Account

			December 31		0
			7		$2,000
			December 31		$2,000

Common Stock:

Common Stock Account

			December 31		$60,000
			December 31		$60,000

Retained Earnings:

Retained Earnings Account

			December 31		$24,500
			December 31		$24,500

Prepare T-accounts for income statement accounts from the unadjusted trial balance:

Sales Revenue:

Sales Revenue Account

			December 31		$148,000
7.		$2,000
			December 31		$146,000

Interest Revenue:

Interest Revenue Account

			December 31		0
			4.		$1,333
			December 31		$1,333

Cost of Goods Sold:

Cost of Goods Sold Account

December 31		$70,000
December 31		$70,000

Salaries and Wages expense:

Salaries and Wages expense Account

December 31		$18,900
2.		$1,500
December 31		$20,400

Rent Expense:

Rent Expense Account

December 31		$11,000
8.		$1,000
December 31		$12,000

Depreciation Expense:

Depreciation Expense Account

December 31		0
1.		$10,000
December 31		$10,000

Interest Expense:

Interest Expense Account

December 31		0
3.		$1,500
December 31		$1,500

Supplies Expense:

Supplies Expense Account

December 31		$1,100
6.		$700
December 31		$1,800

Insurance Expense:

Insurance Expense Account

December 31		$6,000
			5.		$3,750
December 31		$2,250

Advertising Expense:

Advertising Expense Account

December 31		$3,000
December 31		$3,000

To determine

To Prepare: An adjusted trial balance.

Explanation of Solution

Prepare an adjusted trial balance:

Account Title	Debit ($)	Credit ($)
Cash	30,000
Accounts Receivable	40,000
Prepaid rent	1,000
Prepaid insurance	3,750
Supplies	800
Inventory	60,000
Note receivable	20,000
Interest receivable	1,333
Office equipment	80,000
Accumulated depreciation – office equipment		40,000
Accounts payable		31,000
Salaries and wages payable		1,500
Note payable		50,000
Interest payable		1,500
Deferred revenue		2,000
Common stock		60,000
Retained earnings		24,500
Sales revenue		146,000
Interest revenue		1,333
Cost of goods sold	70,000
Salaries and wages expense	20,400
Rent expense	12,000
Depreciation expense	10,000
Interest expense	1,500
Supplies expense	1,800
Insurance expense	2,250
Advertising expense	3,000
Totals	$357,833	$357,833

Table (1)

To determine

To Prepare: An income statement, a statement of shareholder’s equity for the year ended December 31, 2018, and a classified balance sheet.

Explanation of Solution

Prepare income statement for P Company for the year ended December 31, 2018.

P Company Income Statement For the Year Ended  December 31, 2018
Particulars	Amount	Amount
Sales revenue	146,000
Less: Cost of goods sold	70,000
Gross Profit		76,000
Less: Operating Expenses:
Salaries and wages expense	20,400
Rent expense	12,000
Depreciation expense	10,000
Supplies expense	1,800
Insurance expense	2,250
Advertising expense	3,000
Total operating expenses		49,450
Operating income		$26,550
Other income (expense):
Interest revenue	1,333
Less: Interest expense	(1,500)	(167)
Net Income		$26,383

Table (2)

Prepare statement of shareholders’ equity for P Company for the year ended December 31, 2018.

P Company
Statement of shareholders’ equity
For the year ended December 31, 2018
Particulars	Common stock ($)	Retained earnings ($)	Total shareholders’ equity ($)
Beginning at January 1, 2018	60,000	28,500	88,500
Issue of common stock	0	0	0
Net income for 2018		26,383	26,383
Less: Dividends	0	(4,000)	(4,000)
Balance at December 31, 2018	$60,000	$50,883	$110,883

Table (3)

Prepare a classified balance sheet for P Company at December 31, 2018 as follows;

P Company
Balance Sheet
December 31, 2018
Assets
Current assets:	Amount ($)	Amount ($)
Current assets:
Cash		30,000
Accounts receivables		40,000
Supplies		800
Inventory		60,000
Note receivable		20,000
Interest receivable		1,333
Prepaid rent		1,000
Prepaid insurance		3,750
Total current assets		156,883
Property, plant and equipment:
Office equipment	80,000
Less: Accumulated depreciation	(40,000)
Net property, plant and equipment		40,000
Total assets		$196,883
Liabilities and shareholders’ Equity
Current liabilities:
Accounts payable		31,000
Salaries and wages payable		1,500
Note payable		50,000
Interest payable		1,500
Deferred revenue		2,000
Total current liabilities		86,000
Shareholders’ equity:
Common stock	60,000
Retained earnings	50,883
Total shareholders’ equity		110,883
Total liabilities and shareholders’ equity		$196,883

Table (4)

To determine

To Prepare: The closing entries, and also post the closing entries.

Explanation of Solution

Prepare closing entries for the month ended December 31, 2018.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31 2018	Sales Revenue (SE-)		146,000
	Interest Revenue (SE-)		1,333
	Income Summary (SE+)			147,333
	(To close the revenue accounts)
December 31 2018	Income Summary (SE-)		120,950
	Cost of Goods Sold  (SE+)			70,000
	Salaries and Wages Expense (SE+)			20,400
	Rent Expense  (SE+)			12,000
	Depreciation Expense (SE+)			10,000
	Interest Expense (SE+)			1,500
	Supplies Expense (SE+)			1,800
	Insurance Expense (SE+)			2,250
	Advertising Expense (SE+)			3,000
	(To close the expense accounts)
December 31 2018	Income Summary (SE-)		26,383
	Retained Earnings (SE+)			26,383
	(To close the income summary account)

Table (5)

To Post: The closing entries in T-accounts.

Sales Revenue:

Sales Revenue Account

			December 31		$148,000
7.		$2,000
December 31		$146,000 (Closing)
			December 31		0

Interest Revenue:

Interest Revenue Account

			December 31		0
			4.		$1,333
December 31		$1,333 (Closing)
			December 31		0

Cost of Goods Sold:

Cost of Goods Sold Account

December 31		$70,000
			December 31		$70,000 (Closing)
December 31		0

Salaries and Wages expense:

Salaries and Wages expense Account

December 31		$18,900
2.		$1,500
			December 31		$20,400 (Closing)
December 31		0

Rent Expense:

Rent Expense Account

December 31		$11,000
8.		$1,000
			December 31		$12,000 (Closing)
December 31		0

Depreciation Expense:

Depreciation Expense Account

December 31		0
1.		$10,000
			December 31		$10,000 (Closing)
December 31		0

Interest Expense:

Interest Expense Account

December 31		0
3.		$1,500
			December 31		$1,500 (Closing)
December 31		0

Supplies Expense:

Supplies Expense Account

December 31		$1,100
6.		$700
			December 31		$1,800 (Closing)
December 31		0

Insurance Expense:

Insurance Expense Account

December 31		$6,000
			5.		$3,750
			December 31		$2,250 (Closing)
December 31		0

Advertising Expense:

Advertising Expense Account

December 31		$3,000
			December 31		$3,000 (Closing)
December 31		0

Income Summary:

Income Summary Account

December 31		0
December 31		$120,950 (Closing)	December 31		$147,333 (Closing)
December 31		$26,383 (Closing)
December 31		0

Retained Earnings:

Retained Earnings Account

			December 31		$24,500
			December 31		26,383 (Closing)
			December 31		$50,883

To determine

To Prepare: A post-closing trial balance.

Explanation of Solution

Prepare a post closing trial balance for P Company at December 31, 2018.

Account title	Debit ($)	Credit ($)
Cash	30,000
Accounts receivable	40,000
Prepaid rent	1,000
Prepaid insurance	3,750
Supplies	800
Inventory	60,000
Note receivable	20,000
Interest receivable	1,333
Office equipment	80,000
Accumulated depreciation – office equipment		40,000
Accounts payable		31,000
Salaries and wages payable		1,500
Note payable		50,000
Interest payable		1,500
Deferred revenue		2,000
Common stock		60,000
Retained earnings		50,883
Totals	$236,883	$236,883

Table (5)