Chapter 2, Problem 2PB

Journal entries and trial balance

On August 1, 20Y7, Rafael Masey established Planet Realty, which completed the following transactions during the month:

a. Rafael Masey transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $17,500.

b. Purchased supplies on account, $2,300.

c. Earned sales commissions, receiving cash, $13,300.

d. Paid rent on office and equipment for the month, $3,000.

e. Paid creditor on account, $1,150.

f. Paid dividends, $1,800.

g. Paid automobile expenses (including rental charge) for month, $1,500, and miscellaneous expenses, $400.

h. Paid office salaries, $2,800.

i. Determined that the cost of supplies used was $1,050.

Instructions

1. Journalize entries for transactions (a) through (i), using the following account titles: Cash, Supplies, Accounts Payable, Common Stock, Dividends, Sales Commissions, Rent Expense, Office Salaries Expense, Automobile Expense, Supplies Expense, Miscellaneous Expense. Journal entry explanations may be omitted.

2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance.

3. Prepare an unadjusted trial balance as of August 31, 20Y7.

4. Determine the following:

a. Amount of total revenue recorded in the ledger.

b. Amount of total expenses recorded in the ledger.

c. Amount of net income for August.

5. Determine the increase or decrease in retained earnings for August.

To determine

Journalize the transactions of Company R for the month of August.

Explanation of Solution

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”.

Journalize the transactions of Company R for the month of August.

Date		Description	Post.Ref.	Debit ($)	Credit ($)
20Y7	a.	Cash		17,500
August		Common stock			17,500
		(To record the issuance of common stock)
	b.	Supplies		2,300
		Accounts payable			2,300
		(To record the purchase of supplies on account)
	c.	Cash		13,300
		Sales commission			13,300
		(To record the receipt of sales commission)
	d.	Rent expense		3,000
		Cash			3,000
		(To record the rent paid for the month)
	e.	Accounts payable		1,150
		Cash			1,150
		(To record the payment of cash to creditors )
	f.	Dividends		1,800
		Cash			1,800
		(To record the payment of dividends)
	g.	Automobile expense		1,500
		Miscellaneous expense		400
		Cash			1,900
		(To record the payment of automobile and miscellaneous expense)
	h.	Salaries expense		2,800
		Cash			2,800
		(To record the payment of office salaries )
	i.	Supplies expenses		1,050
		Supplies			1,050
		(To record the supplies that are used)

Table (1)

To determine

Prepare the T-accounts and post the respective journal entries.

Explanation of Solution

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

Prepare the T-accounts:

To determine

Prepare an unadjusted trial balance of Company R on August 31, 20Y7.

Explanation of Solution

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.

Prepare an unadjusted trial balance of Company R as at August 31, 20Y7.

Company R Unadjusted Trial Balance August 31, 20Y7
Particulars	Debit $	Credit $
Cash	20,150
Supplies	1,250
Accounts payable		1,150
Common stock		17,500
Dividends	1,800
Sales commission		13,300
Rent expense	3,000
Salaries expense	2,800
Automobile expense	1,500
Supplies expense	1,050
Miscellaneous expense	400
Total	31,950	31,950

Table (2)

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $31,950.

To determine

Determine the following:

1. (a) Amount of total revenue recorded in the ledger.
2. (b) Amount of total expenses recorded in the ledger.
3. (c) Amount of net income for August.

Explanation of Solution

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

1. (a) The total amount of revenue (sales commission) recorded in the ledger is $13,300.
2. (b) The total amount of expenses $\left(\text{\$3,000 + \$2,800 + \$1,500+ \$1,050}+\text{ \$400}\right)$ recorded in the ledger is $8,750.
3. (c)  The amount of net income $\left(\text{\$13,300 –\$8,750}\right)$ recorded for August is $4,550.

To determine

Determine the increase or decrease in retained earnings for August.

Explanation of Solution

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

The increase or decrease in retained earnings for August is as follows:

Particulars	Amount ($)
Add: Net income	4,550
Less: Dividends	1,800
Retained earnings	2,750

Table (3)

Conclusion

Thus, the retained earnings for August is $2,750.