Chapter 2, Problem 3PB

Journal entries and trial balance

On October 1, 20Y4, Jay Pryor established an interior decorating business, Pioneer Designs. During the month, Jay completed the following transactions related to the business:

Oct. 1. Jay transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $18,000.

4. Paid rent for period of October 4 to end of month, $3,000.

10. Purchased a used truck for $23,750, paying $3,750 cash and giving a note payable for the remainder.

13. Purchased equipment on account, $10,500.

14. Purchased supplies for cash, $2,100.

Oct. 15. Paid annual premiums on property and casualty insurance, $3,600. 15. Received cash for job completed, $8,950.

Enter the following transactions on Page 2 of the two-column journal:

21. Paid creditor a portion of the amount owed for equipment purchased on October 13, $2,000.

24. Recorded jobs completed on account and sent invoices to customers, $14,150.

26. Received an invoice for truck expenses, to be paid in November, $700.

27. Paid utilities expense, $2,240.

27. Paid miscellaneous expenses, $1,100.

29. Received cash from customers on account, $7,600.

30. Paid wages of employees, $4,800.

31. Paid dividends, $3,500.

Instructions

1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Journal entry explanations may be omitted.

11 Cash

12 Accounts Receivable

13 Supplies

14 Prepaid Insurance

16 Equipment

18 Truck

21 Notes Payable

22 Accounts Payable

31 Common Stock

33 Dividends

41 Fees Earned

51 Wages Expense

53 Rent Expense

54 Utilities Expense

55 Truck Expense

59 Miscellaneous Expense

2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted.

3. Prepare an unadjusted trial balance for Pioneer Designs as of October 31, 20Y4.

4. Determine the excess of revenues over expenses for October.

5. Can you think of any reason why the amount determined in (4) might not be the net income for October?

To determine

Journalize the transactions in a two column journal beginning on Page 1.

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 each transaction in a two column journal beginning on Page 1.

Journal                                           Page1
Date		Description	Post. Ref	Debit ($)	Credit ($)
20Y4		Cash	11	18,000
October	1	Common stock	31		18,000
		(To record the transfer of cash from personal bank account to business account in exchange for common stock)
	4	Rent expense	53	3,000
		Cash	11		3,000
		(To record the payment of rent for the month of June)
	10	Truck	18	23,750
		Cash	11		3,750
		Notes payable	21		20,000
		(To record the purchase of truck by cash and on account)
	13	Equipment	16	10,500
		Accounts payable	22		10,500
		(To record the purchase of equipment on account)
	14	Supplies	13	2,100
		Cash	11		2,100
		(To record the purchase of supplies)
	15	Prepaid insurance	14	3,600
		Cash	11		3,600
		(To record the payment made for insurance premiums)
	15	Cash	11	8,950
		Fees earned	41		8,950
		(To record the receipt of cash for the completed job)

Table (1)

Journal                                           Page 2
Date		Description	Post. Ref	Debit ($)	Credit ($)
20Y4	21	Accounts payable	22	2,000
October		Cash	11		2,000
		(To record the payment made to creditor on account)
	24	Accounts receivable	12	14,150
		Fees earned	41		14,150
		(To record the invoices sent to customers for the jobs completed)
	26	Truck expense	55	700
		Accounts payable	22		700
		(To record the receipt of invoices for truck expenses)
	27	Utilities expense	54	2,240
		Cash	11		2,240
		(To record the payment of utilities expense)
	27	Miscellaneous expense	59	1,100
		Cash	11		1,100
		(To record the payment of miscellaneous expense)
	29	Cash	11	7,600
		Accounts receivable	12		7,600
		(To record the receipt of cash from customers on account)
	30	Wages expense	51	4,800
		Cash	11		4,800
		(To record the payment of wages expense)
	31	Dividends	33	3,500
		Cash	11		3,500
		(To record the withdrawal of cash for personal use)

Table (2)

To determine

Post the journal to a ledger of four-column accounts with appropriate post references, and the balances after each transaction is posted.

Explanation of Solution

General ledger: General ledger is a record of all accounts of assets, liabilities, and stockholders’ equity, necessary to prepare financial statements.

General Ledger

Account:         Cash                                                              Account no.        11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	1		1	18,000		18,000
	4		1		3,000	15,000
	10		1		3,750	11,250
	14		1		2,100	9,150
	15		1		3,600	5,550
	15		1	8,950		14,500
	21		2		2,000	12,500
	27		2		2,240	10,260
	27		2		1,100	9,160
	29		2	7,600		16,760
	30		2		4,800	11,960
	31		2		3,500	8,460

Table (3)

Account:    Accounts Receivable                                             Account no. 12
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	24		2	11,900		14,150
	29		2		7,600	6,550

Table (4)

Account:          Supplies                                                         Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	14		1	2,100		2,100

Table (5)

Account:    Prepaid Insurance                                             Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	15		1	3,600		3,600

Table (6)

Account:    Equipment                                                Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	13		1	10,500		10,500

Table (7)

Account:     Truck                                                     Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	10		1	23,750		23,750

Table (8)

Account:     Notes Payable                                                     Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	10		1		20,000		20,000

Table (9)

Account:     Accounts Payable                                                   Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	13		1		10,500		10,500
	21		2	2,000			8,500
	26		2		700		9,200

Table (10)

Account:     Common Stock                                                         Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	1		1		18,000		18,000

Table (11)

Account:       Dividends                                                      Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	31		2	3,500		3,500

Table (12)

Account:          Fees earned                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	15		1		8,950		8,950
	24		2		14,150		23,100

Table (13)

Account:   Wages expense                                                       Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	30		2	4,800		4,800

Table (14)

Account:   Rent expense                                                 Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	4		1	3,000		3,000

Table (15)

Account:  Utilities expense                                                                  Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	27		2	2,240		2,240

Table (16)

Account:   Truck expense                                                            Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	26		2	700		700

Table (17)

Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
October	27		2	1,100		1,100

Table (18)

To determine

Prepare an unadjusted trial balance for Company PD for the year ended October 31, 20Y4.

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 P Designs as of October 31, 20Y4 as follows:

P Designs Unadjusted Trial Balance October 31, 20Y4
Particulars	Account No.	Debit $	Credit $
Cash	11	8,460
Accounts receivable	12	6,550
Supplies	13	2,100
Prepaid insurance	14	3,600
Equipment	16	10,500
Truck	18	23,750
Notes payable	21		20,000
Accounts payable	22		9,200
Common stock	31		18,000
Dividends	33	3,500
Fees earned	41		23,100
Wages expense	51	4,800
Rent expense	53	3,000
Utilities expense	54	2,240
Van expense	55	700
Miscellaneous expense	59	1,100
Total		70,300	70,300

Table (19)

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $70,300.

To determine

Determine the excess of revenues over expenses for the month of October.

Answer to Problem 3PB

The excess of revenues over expenses for the month of October is $11,260.

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.

Working note:

Calculate the excess of revenues over expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Excess of revevnues}\\ \text{over expenses}\end{array}\right)\text{=}\left(\text{Fees earned}\right)-\left(\begin{array}{l}\text{Wages expense+Rent Expense}\\ \text{+Utilities expense +Van Expense}\\ \text{+Miscellaneous Expense}\end{array}\right)\\ \text{=}\left(\text{\$23,100}\right)-\left(\$4,800+\$3,000+\$2,240+\$700+\$1,100\right)\\ =\$11,260\end{array}$

Conclusion

Hence, the excess of revenues over expenses for the month of October is $11,260.

To determine

Discuss the reason behind the amount determined in (4) might not be the net income for October.

Explanation of Solution

The amount determined in (4) might not be the net income for October, because adjusting entries for supplies used, insurance expired, and depreciation should be passed at the end of the accounting period in order to bring the accounts up to date.