Chapter 2, Problem 2.9P

Accounting cycle; unadjusted trial balance through closing

• LO2–3, LO2–5, LO2–7

The unadjusted trial balance as of December 31, 2018, for the Bagley Consulting Company appears below. December 31 is the company’s fiscal year-end.

Account Title	Debits	Credits
Cash	8,000
Accounts receivable	9,000
Prepaid insurance	3,000
Land	200,000
Buildings	50,000
Accumulated depreciation—buildings		20,000
Office equipment	100,000
Accumulated depreciation—office equipment		40,000
Accounts payable		35,050
Salaries and wages payable		–0–
Deferred rent revenue		–0–
Common stock		200,000
Retained earnings		56,450
Sales revenue		90,000
Interest revenue		3,000
Rent revenue		7,500
Salaries and wages expense	37,000
Depreciation expense	–0–
Insurance expense	–0–
Utility expense	30,000
Maintenance expense		15,000
Totals	452,000	452,000

Required:

1. Enter the account balances in T-accounts.

2. From the trial balance and information given, prepare adjusting entries and post to the accounts.

a. The buildings have an estimated useful life of 50 years with no salvage value. The company uses the straight-line depreciation method.

b. The office equipment is depreciated at 10 percent of original cost per year.

c. Prepaid insurance expired during the year, $1,500.

d. Accrued salaries and wages at year-end, $1,500.

e. Deferred rent revenue at year-end should be $1,200.

3. Prepare an adjusted trial balance.

4. Prepare closing entries.

5. Prepare a post-closing trial balance.

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
   1. b) The left or debit side
   1. c) The right or credit side

Adjusting entries:

Adjusting entries are the journal entries, which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

Accounting rules for journal/adjusting 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.

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.

To Enter: The account balances in T-accounts.

Explanation of Solution

Enter account balances in T-accounts.

Cash Account:

Cash Account

December 31		$8,000
December 31		$8,000

Accounts Receivable:

Accounts Receivable Account

December 31		$9,000
December 31		$9,000

Prepaid Insurance:

Prepaid Insurance Account

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

Land:

Land Account

December 31		$200,000
December 31		$200,000

Building:

Building Account

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

Office Equipment:

Office Equipment Account

December 31		$100,000
December 31		$100,000

Accumulated Depreciation - building:

Accumulated Depreciation - building Account

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

Accumulated Depreciation – office equipment:

Accumulated Depreciation – office equipment Account

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

Accounts Payable:

Accounts Payable Account

			December 31		$35,050
			December 31		$35,050

Salaries and Wages Payable:

Salaries and Wages Payable Account

			December 31		0
			December 31		0

Deferred Rent Revenue:

Deferred Rent Revenue Account

			December 31		0
			December 31		0

Common Stock:

Common Stock Account

			December 31		$200,000
			December 31		$200,000

Retained Earnings:

Retained Earnings Account

			December 31		$56,450
			December 31		$56,450

Sales Revenue:

Sales Revenue Account

			December 31		$90,000
			December 31		$90,000

Interest Revenue:

Interest Revenue Account

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

Rent Revenue:

Rent Revenue Account

			December 31		$7,500
			December 31		$7,500

Salaries and Wages Expense:

Salaries and Wages Expense Account

December 31		$37,000
December 31		$37,000

Depreciation Expense:

Depreciation Expense Account

December 31		0
December 31		0

Insurance Expense:

Insurance Expense Account

December 31		0
December 31		0

Utility Expense:

Utility Expense Account

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

Maintenance Expense:

Maintenance Expense Account

December 31		$15,000
December 31		$15,000

To determine

To Prepare: The adjusting entries, and post them to the accounts.

Explanation of Solution

Prepare the adjusting journal entry at December 31, 2018.

Date	Account Title and Explanation	Post Ref	Debit($)	Credit($)
a.	Depreciation Expense (E–)		1,000
	Accumulated Depreciation (A–) buildings			1,000
	(To record the amount of depreciation for the year)
b.	Depreciation Expense (E–)		10,000
	Accumulated Depreciation (A–) office equipment			10,000
	(To record the amount of depreciation for the year)
c.	Insurance Expense (E–)		1,500
	Prepaid Insurance (A–)			1,500
	(To record the amount of prepaid insurance expired during the period)
d.	Salaries and Wages Expense (E –)		1,500
	Salaries and Wages Payable (L+)			1,500
	(To record the amount of accrued salaries for the month.)
e.	Rent Revenue (E+)		1,200
	Deferred Rent Revenue (L–)			1,200
	(To record the amount of Deferred service revenue earned during the period.)

Table (1)

Working notes:

Calculate the amount of depreciation expense - Building:

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{Amount for building}}{\text{Life of the buildings}}\\ =\frac{\$50,000}{50\text{years}}\\ =\$1,000\end{array}$

Calculate the amount of depreciation expense – Office equipment:

$\begin{array}{c}\text{Office Equipment =}\left(\begin{array}{l}\text{ Amount for }\\ \text{office equipment}\times \text{Rate of depreciation}\end{array}\right)\\ =\$100,000\times 10\%\\ =\$10,000\end{array}$

Post the adjusting entries in T-accounts.

Cash Account:

Cash Account

December 31		$8,000
December 31		$8,000

Accounts Receivable:

Accounts Receivable Account

December 31		$9,000
December 31		$9,000

Prepaid Insurance:

Prepaid Insurance Account

December 31		$3,000
			c.		$1,500 (Adjusting)
December 31		$1,500

Land:

Land Account

December 31		$200,000
December 31		$200,000

Building:

Building Account

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

Office Equipment:

Office Equipment Account

December 31		$100,000
December 31		$100,000

Accumulated Depreciation - building:

Accumulated Depreciation - building Account

			December 31		$20,000
			a.		$1,000 (Adjusting)
			December 31		$21,000

Accumulated Depreciation – office equipment:

Accumulated Depreciation – office equipment Account

			December 31		$40,000
			b.		$10,000 (Adjusting)
			December 31		$50,000

Accounts Payable:

Accounts Payable Account

			December 31		$35,050
			December 31		$35,050

Salaries and Wages Payable:

Salaries and Wages Payable Account

			December 31		0
			d.		$1,500 (Adjusting)
			December 31		$1,500

Deferred Rent Revenue:

Deferred Rent Revenue Account

			December 31		0
			e.		$1,200 (Adjusting)
			December 31		$1,200

Common Stock:

Common Stock Account

			December 31		$200,000
			December 31		$200,000

Retained Earnings:

Retained Earnings Account

			December 31		$56,450
			December 31		$56,450

Sales Revenue:

Sales Revenue Account

			December 31		$90,000
			December 31		$90,000

Interest Revenue:

Interest Revenue Account

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

Rent Revenue:

Rent Revenue Account

			December 31		$7,500
e.		$1,200 (Adjusting)
			December 31		$6,300

Salaries and Wages Expense:

Salaries and Wages Expense Account

December 31		$37,000
d.		$1,500 (Adjusting)
December 31		$38,500

Depreciation Expense:

Depreciation Expense Account

December 31		0
a.		$1,000 (Adjusting)
b.		$10,000 (Adjusting)
December 31		$11,000

Insurance Expense:

Insurance Expense Account

December 31		0
c.		$1,500 (Adjusting)
December 31		$1,500

Utility Expense:

Utility Expense Account

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

Maintenance Expense:

Maintenance Expense Account

December 31		$15,000
December 31		$15,000

To determine

To Prepare: An adjusted trial balance.

Explanation of Solution

Prepare an adjusted trial balance for the year ended December 31, 2018.

Account Title	Debit ($)	Credit ($)
Cash	8,000
Accounts Receivable	9,000
Prepaid insurance	1,500
Land	200,000
Building	50,000
Accumulated depreciation – building		21,000
Office equipment	100,000
Accumulated depreciation – office equipment		50,000
Accounts payable		35,050
Salaries and wages payable		1,500
Deferred rent revenue		1,200
Common stock		200,000
Retained earnings		56,450
Sales revenue		90,000
Interest revenue		3,000
Rent revenue		6,300
Salaries and wages expense	38,500
Depreciation expense	11,000
Insurance expense	1,500
Utility expense	30,000
Maintenance expense	15,000
Totals	$464,500	$464,500

Table (2)

To determine

To Prepare: 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-)		90,000
	Interest Revenue (SE-)		3,000
	Rent Revenue (SE-)		6,300
	Income Summary (SE+)			99,300
	(To close the revenue accounts)
December 31 2018	Income Summary (SE-)		96,000
	Salaries and Wages Expense (SE+)			38,500
	Depreciation Expense (SE+)			11,000
	Insurance Expense (SE+)			1,500
	Utility Expense (SE+)			30,000
	Maintenance Expense (SE+)			15,000
	(To close the expense accounts)
December 31 2018	Income Summary (SE-)		3,300
	Retained Earnings (SE+)			3,300
	(To close the income summary account)

Table (3)

To determine

To Prepare: A post-closing trial balance.

Explanation of Solution

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

Account title	Debit ($)	Credit ($)
Cash	8,000
Accounts receivable	9,000
Prepaid insurance	1,500
Land	200,000
Buildings	50,000
Accumulated depreciation - Buildings		21,000
Office equipment	100,000
Accumulated depreciation – Office equipment		50,000
Accounts payable		35,050
Salaries and wages payable		1,500
Deferred rent revenue		1,200
Common stock		200,000
Retained earnings		59,750
Totals	$368,500	$368,500

Table (4)