Chapter 2, Problem 2.6P

1.

To determine

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
   2. b) The left or debit side
   3. c) The right or credit side

Journal entry:

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

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

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.

Classified Balance Sheet:

A balance sheet is a statement showing position of all assets, liabilities and equity of the company at a specific time. When assets, liabilities and shareholders’ equity are further sub-categorized to make it more readable and understandable then it is called classified balance sheet

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.

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.

To Enter: The beginning balances from the trial balance to the T-accounts.

Explanation of Solution

Enter the beginning balances in T-accounts from the trial balance.

Cash Account:

Cash Account

January 1		$30,000

Accounts receivable:

Accounts receivable Account

January 1		$15,000

Equipment:

Equipment Account

January 1		$20,000

Accumulated depreciation Account:

Accumulated Depreciation Account

			January 1		$6,000

Salary Payable:

Salary Payable Account

			January 1		$9,000

Common Stock:

Common Stock Account

			January 1		$40,500

Retained earnings:

			January 1		$9,500

2.

To determine

To Prepare: A general journal entry for each of the summary transactions.

Explanation of Solution

Prepare a general journal entry for each of the summary transactions.

Transaction	Account Title and Explanation	Post Ref	Debit($)	Credit($)
a.	Cash (A+)		70,000
	Accounts receivable (A+)		30,000
	Service Revenue (E+)			100,000
	(To record the service provided on account and cash)
b.	Cash (A+)		27,300
	Accounts Receivable (A–)			27,300
	(To record cash received on account)
c.	Cash (A+)		10,000
	Common Stock (E+)			10,000
	(To record the issuance of common stock)
d.	Salaries Expense (E–)		41,000
	Salaries Payable (L–)		9,000
	Cash (A–)			50,000
	(To record the payment of  salary)
e.	Miscellaneous  Expense (E–)		24,000
	Cash (A–)			24,000
	(To record the payment of miscellaneous expense in cash)
f.	Equipment (A+)		15,000
	Cash (A–)			15,000
	(To record the purchase of  equipment in cash)
g.	Retained Earnings (E–)		2,500
	Cash (A–)			2,500
	(to record the payment of cash dividend)

Table (1)

3.

To determine

To Post: The journal entries to the accounts.

Explanation of Solution

Post the entries in T-accounts.

Cash Account:

Cash Account

January 1		$30,000
a.		$70,000	d.		$50,000
b.		$27,300	e.		$24,000
c.		$10,000	f.		$15,000
			g.		$2,500
December 31		$45,800

Accounts receivable:

Accounts receivable Account

January 1		$15,000
a.		$30,000	b.		$27,300
December 31		$17,700

Equipment:

Equipment Account

January 1		$20,000
f.		$15,000
December 31		$35,000

Accumulated depreciation Account:

Accumulated Depreciation Account

			January 1		$6,000
			December 31		$6,000

Salaries Payable:

Salaries Payable Account

			January 1		$9,000
d.		$9,000
			December 31		0

Common Stock:

Common Stock Account

			January 1		$40,500
			c.		$10,000
			December 31		$50,500

Retained Earnings:

Retained Earnings Account

			January 1		$9,500
g.		$2,500
			December 31		$7,000

Post the entries in T-accounts for income statement accounts as follows;

Service Revenue:

Service Revenue Account

			January 1		0
			a.		$100,000
			December 31		$100,000

Miscellaneous Expense:

Miscellaneous Expense Account

January 1		0
e.		$24,000
December 31		$24,000

Salaries Expense:

Salaries Expense Account

January 1		0
d.		$41,000
December 31		$41,000

4.

To determine

To Prepare: An unadjusted trial balance.

Explanation of Solution

Prepare an unadjusted trial balance.

Account Title	Debit ($)	Credit ($)
Cash	45,800
Accounts Receivable	17,700
Equipment	35,000
Accumulated depreciation		6,000
Salaries payable		0
Common stock		50,500
Retained earnings		7,000
Service revenue		100,000
Salaries expense	41,000
Miscellaneous expense	24,000
Totals	$163,500	$163,500

Table (2)

5.

To determine

To Prepare: The adjusting entries.

Explanation of Solution

Prepare the adjusting journal entry at December 31, 2016.

Date	Account Title and Explanation	Post Ref	Debit($)	Credit($)
December 31,  2016	Salaries Expense (E –)		1,000
	Salaries Payable (L+)			1,000
	(To record the amount of accrued salaries for the month.)

Table (3)

Date	Account Title and Explanation	Post Ref	Debit($)	Credit($)
December 31, 2016	Depreciation Expense (E–)		2,000
	Accumulated Depreciation (A–)			2,000
	(To record the amount of depreciation for the year)

Table (4)

To determine

To Post: The prepared adjusting entries.

Explanation of Solution

Post the Adjusting entries in T-accounts for balance sheet accounts:

Accumulated depreciation Account:

Accumulated Depreciation Account

			January 1		$6,000
			December 31		$2,000(Adjusting)
			December 31		$8,000

Salaries Payable:

Salaries Payable Account

			January 1		$9,000
d.		$9,000	December 31		$1,000(Adjusting)
			December 31		$1,000

Post the Adjusting entries in T-accounts for income statement accounts:

Depreciation Expense:

Depreciation Expense Account

January 1		0
December 31		$2,000 (Adjusting)
December 31		$2,000

Salaries Expense:

Salaries Expense Account

January 1		0
d.		$41,000
December 31		$1,000 (Adjusting)
December 31		$42,000

6.

To determine

To Prepare: An adjusted trial balance.

Explanation of Solution

Prepare an adjusted trial balance:

Account Title	Debit ($)	Credit ($)
Cash	45,800
Accounts Receivable	17,700
Equipment	35,000
Accumulated depreciation		8,000
Salaries payable		1,000
Common stock		50,500
Retained earnings		7,000
Service revenue		100,000
Salaries expense	42,000
Miscellaneous expense	24,000
Depreciation expense	2,000
Totals	$166,500	$166,500

Table (5)

7.

To determine

To Prepare: An income statement and a balance sheet as of December 31, 2016.

Explanation of Solution

Prepare an income statement for K Company as of December 31, 2016.

K Company
Income statement
Year ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Revenue:
Service revenue	100,000
Total revenue		100,000
Expenses :
Salaries expense	(42,000)
Miscellaneous expense	(24,000)
Depreciation expense	(2,000)
Total expenses		(68,000)
Net income		$32,000

Table (6)

Prepare the balance sheet for K Company as of December 31, 2016.

K Company
Balance Sheet
December 31, 2016
Assets
Current assets:	Amount ($)	Amount ($)
Cash		45,800
Accounts receivable		17,700
Total current assets		63,500
Property and equipment:
Equipment	35,000
Less: Accumulated depreciation	(8,000)	27,000
Total assets		$90,500
Liabilities and shareholders’ Equity
Current liabilities:
Salaries payable		1,000
Total current liabilities		1,000
Shareholders’ equity:
Common stock	50,500
Retained earnings	39,000	89,500
Total liabilities and shareholders’ equity		$90,500

Table (7)

Working note:

Calculate the amount of retained earnings:

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Opening balance of Retained earnings+}\\ \text{Net income}-\text{Dividends}\end{array}\right)\\ =\left(\$9,500+\$32,000-\$2,500\right)\\ =\$39,000\end{array}$

8.

To determine

To Prepare and post: The closing entries.

Explanation of Solution

Prepare closing entries for the month ended December 31, 2016.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Service Revenue (SE-)		100,000
	Income Summary (SE+)			100,000
	(To close the revenue accounts)
December 31, 2016	Income Summary (SE- )		68,000
	Salary Expense (SE+)			42,000
	Miscellaneous Expense			24,000
	Depreciation Expense (SE+)			2,000
	(To close the expense accounts)
December 31, 2016	Income Summary (SE-)		32,000
	Retained Earnings (SE+)			32,000
	(To close the income summary account)

Table (8)

Post the closing entries in T-accounts.

Retained Earnings:

Retained Earnings Account

			January 1		$9,500
g.		$2,500
			December 31		$32,000(Closing)
			December 31		$39,000

Post the closing entries in T-accounts for income statement accounts:

Salaries Expense:

Salaries Expense Account

January 1		0
d.		$41,000
December 31		$1,000 (Adjusting)	December 31		$42,000(Closing)
December 31		0

Miscellaneous Expense:

Miscellaneous Expense Account

January 1		0
e.		$24,000	December 31		$24,000(Closing)
December 31		0

Depreciation Expense:

Depreciation Expense Account

January 1		0
December 31		$2,000 (Adjusting)	December 31		$2,000(Closing)
December 31		0

Income Summary:

Income Summary Account

			December 31		$100,000(Closing)
December 31		$68,000(Closing)
December 31		$32,000(Closing)
December 31		0

9.

To determine

To Prepare: A post-closing trial balance.

Explanation of Solution

Prepare a post-closing trial balance.

Account Title	Debit ($)	Credit ($)
Cash	45,800
Accounts Receivable	17,700
Equipment	35,000
Accumulated depreciation		8,000
Salaries payable		1,000
Common stock		50,500
Retained earnings		39,000
Totals	$98,500	$98,500

Table (9)