Chapter 2, Problem 2PSA

1.

To determine

Journal Entries:

A journal records a transaction by debiting one account and giving credit to another account. All the transactions affecting the business entity are passed through the journal recording.

To Prepare:

Journal entries to record the transactions that occurred for April in the books of AE.

Answer to Problem 2PSA

When assets are invested into the business, all assets are debited, and the capital account is credited.

Asset purchase on cash requires the asset accounts to be debited and the cash account is credited.

Expenses paid in advance before they are accrued represents asset and hence debited and cash is credited.

Income earned in cash requires the cash account to be debited and income or revenue account is credited. Similarly, for income earned but not received in cash, an asset for receivable is debited and revenue is credited.

For asset purchase on credit, the asset account is debited, and the liability account is credited.

When trade payable is settled through payment, liability account is debited, and cash account is credited.

When cash is collected from the receivable asset, cash is debited, and the receivable is credited.

In case the owner withdraws cash from the business, the withdrawals account is debited, and cash is credited.

For expenses paid in cash, the expense account is debited, and cash is credited.

Explanation of Solution

AE
Journal
Sr. No.	Account Titles & Explanations	Account No.	Debit	Credit
a	Cash	101	$100,000
	Office Equipment	163	$5,000
	Drafting Equipment	164	$60,000
	JA, Capital	301		$165,000
	(to record cash &equipment invested into the business)
b	Land	172	$49,000
	Cash	101		$6,300
	Notes Payable	250		$42,700
	(To record land purchased partly by cash payment and
	signing a note payable)
c	Building	170	$55,000
	Cash	101		$55,000
	(To record building purchased for cash)
d	Prepaid Insurance	108	$3,000
	Cash	101		$3,000
	(to record insurance paid for 18 months in advance)
e	Cash	101	$6,200
	Engineering Fees Earned	402		$6,200
	(To record services rendered in cash)
f	Drafting Equipment	201	$20,000
	Cash	101		$9,500
	Notes Payable	250		$10,500
	(To record equipment purchased by cash and issuinga note payable)
g	Accounts Receivable	106	$14,000
	Engineering Fees Earned	402		$14,000
	(To record services rendered on credit)
h	Office Equipment	163	$1,150
	Accounts Payable	201		$1,150
	(To record equipment purchased on credit)
i	Accounts Receivable	106	$22,000
	Engineering Fees Earned	402		$22,000
	(To record services rendered on credit)
j	Equipment Rental Expense	602	$1,333
	Accounts Payable	201		$1,333
	(To record rental expense accrued)
k	Cash	101	$7,000
	Accounts Receivable	106		$7,000
	(To record cash collection in part payment)
l	Wages Expense	601	$1,200
	Cash	101		$1,200
	(to record wages paid in cash)
m	Accounts Payable	201	$1,150
	Cash	101		$1,150
	(To record cash paid to settle dues)
n	Repairs Expense	604	$925
	Cash	101		$925
	(To record cash paid for maintenance)
o	JA, Withdrawals	201	$9,480
	Cash	101		$9,480
	(To record cash withdrawn for personal use)
p	Wages Expense	601	$1,200
	Cash	101		$1,200
	(To record wages paid in cash)
q	Advertising Expense	603	$2,500
	Cash	101		$2,500
	(To record cash paid for advertisement)

Under the date column, the transaction date is entered. In account titles and explanations tab, the respective accounts are recorded and the corresponding amount in debit or credit is entered in their respective column. Account numbers are maintained to identify a particular account.

2.

To determine

Posting to Ledger:

After the journal entries are passed, the accounts are posted to the ledger and the balances in each ledger arecalculated. Ledger preparation can have different formats depending on the business needs.

To Post:

Journal entries to the ledger accounts and computation of balances for each of those ledger accounts.

Answer to Problem 2PSA

When the journal entries are posted to the ledger accounts, the following balances will appear:

Cash: $22,945

Accounts Receivable: $29,000

Prepaid Insurance: $3,000

Office Equipment: $6,150

Drafting Equipment: $80,000

Building: $55,000

Land: $49,000

Accounts Payable: $1,333

Notes Payable: $53,200

JA, Capital: $165,000

JA, Withdrawals: $9,480

Engineering Fees Earned: $42,200

Wages Expense: $2,400

Equipment Rental Expense: $1,333

Advertising Expense: $2,500

Repairs Expense: $925

Explanation of Solution

Cash			Account No: 101
Sr. No.	Debit	Credit	Balance
a	$100,000		$100,000
b		$6,300	$93,700
c		$55,000	$38,700
d		$3,000	$35,700
e	$6,200		$41,900
f		$9,500	$32,400
k	$7,000		$39,400
l		$1,200	$38,200
m		$1,150	$37,050
n		$925	$36,125
o		$9,480	$26,645
p		$1,200	$25,445
q		$2,500	$22,945
Accounts Receivable		Account No: 106
Sr. No.	Debit	Credit	Balance
g	$14,000		$14,000
i	$22,000		$36,000
k		$7,000	$29,000
Prepaid Insurance		Account No: 108
Sr. No.	Debit	Credit	Balance
d	$3,000		$3,000
Office Equipment		Account No: 163
Sr. No.	Debit	Credit	Balance
a	$5,000		$5,000
h	$1,150		$6,150
Drafting Equipment		Account No: 164
Sr. No.	Debit	Credit	Balance
a	$60,000		$60,000
f	$20,000		$80,000
Building			Account No: 170
Sr. No.	Debit	Credit	Balance
c	$55,000		$55,000
Land			Account No: 172
Sr. No.	Debit	Credit	Balance
b	$6,300		$6,300
B	$42,700		$49,000
Wages Expense		Account No: 601
Sr. No.	Debit	Credit	Balance
l	$1,200		$1,200
p	$1,200		$2,400
Equipment Rental Expense	Account No: 602
Sr. No.	Debit	Credit	Balance
j	$1,333		$1,333
Advertising Expense		Account No: 603
Sr. No.	Debit	Credit	Balance
q	$2,500		$2,500
Repairs Expense		Account No: 604
Sr. No.	Debit	Credit	Balance
n	$925		$925
JA, Withdrawals		Account No: 302
Sr. No.	Debit	Credit	Balance
o	$9,480		$9,480
Accounts Payable		Account No: 201
Sr.No.	Debit	Credit	Balance
h		$1,150	$1,150
J		$1,333	$2,483
M	$1,150		$1,333
Notes Payable		Account No: 250
Sr. No.	Debit	Credit	Balance
b		$42,700	$42,700
f		$10,500	$53,200
JA, Capital		Account No: 301
Sr. No.	Debit	Credit	Balance
a		$165,000	$165,000
Engineering Fees Earned	Account No: 402
Sr. No.	Debit	Credit	Balance
e		$6,200	$6,200
g		$14,000	$20,200
I		$22,000	$42,200

Ledger entries are recorded in accordance with the journal chronologically and at each date balances are drawn.

3.

To determine

Trial Balance:

A trial balance is prepared to show the arithmetical accuracy of the ledgers so posted. However, this does not guarantee that accounts are prepared correctly. The trial balance serves as the prima facie document to show that the ledger balances are properly recorded from the journal.

To Prepare:

A trial balance as at June 30.

Answer to Problem 2PSA

The debit and credit side of the trial balance are matched with the amount of $261,733.

Explanation of Solution

AE Trial Balance As at June 30
Cash	101	$22,945
Accounts Receivable	106	$29,000
Prepaid Insurance	108	$3,000
Office Equipment	163	$6,150
Drafting Equipment	164	$80,000
Building	170	$55,000
Land	172	$49,000
Accounts Payable	201		$1,333
Notes Payable	250		$53,200
JA, Capital	301		$165,000
JA, Withdrawals	302	$9,480
Engineering Fees Earned	402		$42,200
Wages Expense	601	$2,400
Equipment Rental Expense	602	$1,333
Advertising Expense	603	$2,500
Repairs Expense	604	$925
Total		$261,733	$261,733

The total of the debit side must be equal to the total of the credit side to prove the arithmetical accuracy of the ledger accounts posted.