Chapter 2, Problem 45AP

To determine

Prepare the transactions in general ledger accounts under the accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets}=\text{ Liabilities}+\text{Stockholders' equity}$

Prepare general ledger accounts under the accounting equation as given below:

Table (1)

Working Note:

Determine the amount of depreciation expense for Year 2016.

$\begin{array}{c}\text{Depreciation expense}=\frac{\text{Cost of asset}-\text{Salvage value}}{\text{Estimated useful life}}\\ =\frac{\$22,000-\$2,000}{4}\\ =\frac{\$20,000}{4}\\ =\$5,000\end{array}$ (1)

Determine the amount of total interest payable.

$\begin{array}{c}\text{Interest payable}=\text{ Note payable}\times \frac{\text{Rate of interest}}{\text{100}}\\ =\$12,000\times \frac{9}{100}\\ =\$1,080\end{array}$ (2)

Determine the amount of interest payable on note that would be recognized.

$\begin{array}{c}\begin{array}{l}\text{Interest payable }\\ \text{to be recognized}\end{array}\}=\text{ Interest expense }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$1,080\left(2\right)\times \frac{11}{12}\\ =\$990\end{array}$ (3)

Determine the amount of prepaid rent to be recognized.

$\begin{array}{c}\text{Prepaid rent}=\text{ Rent expense }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$3,000\times \frac{11}{12}\\ =\$2,750\end{array}$ (4)

Determine the amount of recognized revenue.

$\begin{array}{c}\text{Recognized revenue}=\text{ Revenue income }\times \frac{\text{Number of months}}{\text{Months in year}}\\ =\$5,400\times \frac{6}{12}\\ =\$2,700\end{array}$ (5)

Determine the amount of interest earned:

$\begin{array}{c}\text{Interest earned}=\text{Principal amount}\times \text{Interest rate}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$50,000\times 6\%\times \frac{2}{12}\\ =\$500\end{array}$ (6)

a.

To determine

Identify the four additional adjustments and explain them.

Explanation of Solution

The five additional adjustments are as follows:

1. 1. Company P has acquired a truck on January 01 for that acquired truck depreciation expense.
2. 2. On February 01, Company P issued note payable. Accrued interest expense on note payable should be recognized using adjusting entry.
3. 3. On February 01, Company P paid rent in advance. Rent paid in advance should be recognized as rent expense for 11 months using adjusting entry.
4. 4. On July 01, Company P received cash in advance. Unearned revenue should be recognized as revenue for 6 months using adjusting entry.
5. 5. On November 01, Company P purchased a certificate of deposit with an interest of 7%. Hence, interest expense should be recognized for 7% using the adjusting entry

b.

To determine

Identify the amount of interest expense that would be reported on the income statement.

Explanation of Solution

The amount of interest expense would be reported on the income statement is $990 (3).

c.

To determine

Identify the amount of net cash flow from operating activities that would be reported on the statement of cash flows.

Explanation of Solution

The net cash flow from operating activities would be reported on the statement of cash flows amounts to $38,400 (6).

Determine the amount of net cash flow from operating activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash }\\ \text{flows from }\\ \text{operating }\\ \text{activities}\end{array}\}=\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{receivable}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Increase in }\\ \text{unearned }\\ \text{revenue}\end{array}\right)-\left(\begin{array}{l}\text{Increase in }\\ \text{prepaid }\\ \text{rent}\end{array}\right)+\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts }\\ \text{payable}\end{array}\right)\\ =\$40,000+\$5,400-\$3,000-\$4,000\\ =\$38,400\end{array}$ (6)

d.

To determine

Identify the amount of rent expense that would be reported on the income statement.

Explanation of Solution

The amount of rent expense that would be reported on the income statement is $2,750 (4).

e.

To determine

Identify the amount of total liabilities that would be reported on the balance sheet.

Explanation of Solution

The amount of total liabilities would be reported on the balance sheet $32,890$\left(\$12,000+\$5,200+\$12,000+\$2,700+990\right)$.

f.

To determine

Identify the amount of supplies expense that would be reported on the balance sheet.

Explanation of Solution

The amount of supplies expense that would be reported on the income statement is $4,800$\left(\$5,000-\$200\right)$.

g.

To determine

Identify the amount of unearned revenue that would be reported on the balance sheet.

Explanation of Solution

The amount of unearned revenue that would be reported on the balance sheet is $2,700 (5).

h.

To determine

Identify the amount of net cash flow from investing activities that would be reported on the statement of cash flows.

Explanation of Solution

The net cash flow from investing activities that would be reported on the statement of cash flows is ($8,000) (7).

Determine the amount of net cash flow from investing activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flows }\\ \text{from investing }\\ \text{activities}\end{array}\}=\left(\begin{array}{l}\text{Purchase of truck+Purchase of land}+\\ \text{Sale of land}+\text{Purchase of certificate of deposit}\end{array}\right)\\ =\left(\$22,000\right)+\left(\$28,000\right)+\$42,000+\left(\$50,000\right)\\ =(\$58,000)\end{array}$ (7)

i.

To determine

Identify the amount of interest payable that would be reported on the balance sheet.

Explanation of Solution

The amount of interest payable that would be reported on the balance sheet is $990 (3).

j.

To determine

Identify the amount of total expense that would be reported on the income statement.

Explanation of Solution

The amount of total expense that would be reported on the income statement is $24,740$\left(\$6,000+\$5,200+\$4,800+\$2,750+\$5,000+\$990\right)$.

k.

To determine

Identify the amount of retained earnings that would be reported on the balance sheet.

Explanation of Solution

The retained earnings that would be reported on the balance sheet amounts to $62,460 (8).

Determine the amount of retained earnings.

$\begin{array}{c}\begin{array}{l}\text{Ending retained}\\ \text{ earnings}\end{array}\}=\left(\begin{array}{l}\text{Beginning }\\ \text{retained }\\ \text{earnings}\end{array}\right)+\left(\begin{array}{l}\text{Net }\\ \text{Income}\end{array}\right)-\left(\begin{array}{l}\text{Dividends }\\ \text{paid}\end{array}\right)\\ =\$44,000+\$20,460-\$2,000\\ =\$62,460\end{array}$ (8)

l.

To determine

Identify the amount of service revenue that would be reported on the income statement.

Explanation of Solution

The amount of service revenue that would be reported on the income statement is $44,700$\left(\$42,000+\$2,700\right)$.

m.

To determine

Identify the amount of net cash flow from financing activities that would be reported on the statement of cash flows.

Explanation of Solution

The net cash flow from financing activities that would be reported on the statement of cash flows is $25,000 (9).

Determine the amount of net cash flow from financing activities.

$\begin{array}{c}\begin{array}{l}\text{Cash flows from}\\ \text{ financing activities}\end{array}\}=\left(\begin{array}{l}\text{Issue of }\\ \text{common stock}\end{array}\right)+\left(\begin{array}{l}\text{Issue of }\\ \text{note payable}\end{array}\right)-\left(\begin{array}{l}\text{Dividend }\\ \text{paid}\end{array}\right)\\ =\$12,000+\$15,000-\$2,000\\ =\$25,000\end{array}$ (9)

n.

To determine

Identify the amount of net income that would be reported on the income statement.

Explanation of Solution

The net income that would be reported on the income statement is $20,460$\left(\$44,700-\$25,240\right)$.