Chapter 2, Problem 2.7AP

1.

To determine

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.

To Record: Each transaction of U Sewing machine for the month of March.

Answer to Problem 2.7AP

Journalize the transactions of U Sewing machine for the month of March.

Date	Account Title and Explanation	Debit($)	Credit($)
March 1	Cash	3,000
	Common Stock		3,000
	(To record common stock issued for cash)
March 3	Equipment	2,700
	Notes Payable		2,700
	(To record purchase of equipment in exchange of accounts payable.)
March 5	Rent Expense	600
	Cash		600
	(To record the rent payment made.)
March 7	No entry
March 12	Supplies	130
	Accounts Payable		130
	(To record purchase of supplies on account)
March 15	Cash	800
	Service revenue		800
	(To record the payment received for the altered dresses.)
March 19	Cash	700
	Deferred Revenue		700
	(To record the receipt of cash in advance.)
March 25	Deferred revenue	700
	Service Revenue		700
	(To record the amount of unearned service revenue earned during the year)
March 30	Utility Expense	95
	Cash		95
	(To record utility expense payment)
March 31	Dividends	150
	Cash		150
	(To record the payment of dividends)

Table (1)

Explanation of Solution

Issued Common stock for cash:

• Cash is an asset account and the amount has increased because cash is invested in the business. Therefore, debit Cash account with $3,000.
• Common Stock is a stockholders’ equity account and the amount has increased because of receipt of stock in exchange of cash. Therefore, credit Common Stock account with $3,000.

Purchased equipment of $2,700, by signing a note:

• Equipment is an asset account and the amount has increased because equipment is purchased. Therefore, debit Equipment account with $2,700.
• Notes payable is a liability account. The liability has increased because equipment is purchased. Therefore, credit Notes Payable account with $2,700.

Payment of rent for the month of March:

• Rent Expense is an expense account. Expenses reduce the amount of stockholders’ equity. Therefore, debit Rent Expense account with $600.
• Cash is an asset account. Since rent is paid, cash amount has decreased. Therefore, credit Cash account with $600.

Payment for alterations after the completion of work:

No entry required.

Purchase of supplies on account:

• Supplies are an asset account and the amount has increased because supplies are purchased. Therefore, debit Supplies Inventory account with $130.
• Accounts Payable is a liability account. Since the amount of supplies is due within a month, the amount to be paid has increased. Therefore, credit Accounts Payable account with $130.

Delivery of altered dresses and received payment:

• Cash is an asset account and it increases by $800. Therefore, debit cash account by $800.
• Service revenue increases the value of equity by $800. Therefore, credit service revenue account by $800.

Receipt of payment in advance:

• Cash is an asset and increased due to receipt of cash in advance. Therefore, is debited.
• Unearned revenue is a liability. There is a increase in liabilities, and therefore it is credited.

Delivery of altered dresses:

• Unearned revenue is a liability. There is a decrease in liabilities, and therefore it is debited.
• Service revenue is a component of Equity account. There is an increase in Equity, and therefore it is credited.

Payment made for the utilities:

• Utility Expense is an expense account. Expenses reduce the amount of stockholders’ equity. Therefore, debit Consulting Expense account with $95.
• Cash is an asset account. Since consulting expense is paid, cash amount has decreased. Therefore, credit Cash account with $95.

Payment of dividends:

• Dividends are an expense and decrease the value of equity. Therefore, debit expense account with $150.
• Cash is an asset and decreases the value of asset due to payment made. Therefore, credit Cash account with $150.

2. and 3.

To determine

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

To Calculate: The balance of each account at March 31 by posting each transaction to the T-accounts.

Explanation of Solution

Post the journal entries into T-accounts and determine the balance of each account.

Cash Account

Cash
Date	Details	Debit ($)		Date	Details	Credit ($)
March 1	Common stock	3,000		March 6	Rent expense	600
March 15	Service revenue	800		March 30	Utility expense	95
March 19	Unearned revenue	700		March 31	Dividends	150
				March 31	Balance c/d	3,655
		4,500				4,500
April 1	Balance b/d	3,655

Table (2)

Common Stock Account

Common Stock
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance c/d	3,000		March 1	Cash	3,000
	Total	3,000			Total	3,000
				April 1	Balance	3,000

Table (3)

Equipment Account

Equipment
Date	Details	Debit ($)		Date	Details	Credit ($)
March 3	Notes Payable	2,700		March 31	Balance c/d	2,700
	Total	2,700			Total	2,700
April 1	Balance b/d	2,700

Table (4)

Supplies Account

Supplies
Date	Details	Debit ($)		Date	Details	Credit ($)
March 12	Accounts payable	130		March 31	Balance c/d	130
	Total	130			Total	130
April 1	Balance b/d	130

Table (5)

Accounts Payable Account

Accounts Payable
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance c/d	130		March 12	Supplies	130
	Total	130			Total	130
				April1	Balance b/d	130

Table (6)

Unearned Revenue Account

Unearned Revenue
Date	Details	Debit ($)		Date	Details	Credit ($)
March 25	Service Revenue	700		March 15	Cash	700
	Total	700			Total	700

Table (7)

Service Revenue Account

Sales Revenue
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance c/d	1,500		March 15	Cash	800
				March 25	Unearned Revenue	700
	Total	1,500			Total	1,500
				April 1	Balance b/d	1,500

Table (8)

Notes Payable
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance c/d	2,700		March 3	Equipment	2,700
	Total	2,700			Total	2,700
				April1	Balance b/d	2,700

Table (9)

Utility Expense Account

Utility Expense
Date	Details	Debit ($)		Date	Details	Credit ($)
March 30	Cash	95		March 31	Balance c/d	95
	Total	95			Total	95
April 1	Balance b/d	95

Table (10)

Rent Expense Account

Utility Expense
Date	Details	Debit ($)		Date	Details	Credit ($)
March 5	Cash	600		March 31	Balance c/d	600
	Total	600			Total	600
April 1	Balance b/d	600

Table (11)

Dividends Account

Dividends
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Cash	150		March 31	Balance c/d	150
	Total	150			Total	150
April 1	Balance b/d	150

Table (12)

4.

To determine

Trial balance:

A trial balance is the summary of all the ledger accounts. Debit balances are listed in left column and credit balances are listed in right column of the trial balance. The totals of debit and credit column should be equal. The trial balance is usually prepared to check the accuracy of ledger accounts balances, before the preparation of financial statements.

To Prepare: A trial balance as of March 31.

Explanation of Solution

Prepare the trial balance of U Sewing machine for the month of March 31.

U Sewing Machine Trial Balance March 31
Account Titles	Debit ($)	Credit ($)
Cash	3,655
Supplies	130
Equipment	2,700
Accounts payable		1300
Unearned revenue		0
Notes payable		2,700
Common stock		3,000
Dividends	150
Service revenue		1,500
Rent expense	600
Utilities expense	95
Total	7,330	7,330

Table (13)

Conclusion

Hence, the trial balance is prepared, and the debit column and credit column of the trial balance are agreed, both having balance of $7,330.