Chapter 2, Problem 5GLP

To determine

Journal Entry:

Journal entry is a medium of recording the business transactions carried during a particular accounting period.

Trial Balance:

A trial balance is a statement consisting of all the ledger accounts which is prepared at the end of accounting period.

Four Column Accounts:

The four column accounts keeps track of the balance as transactions takes place. In case of assets and expense accounts, the increase in the expenses and assets are shown in the debit column and vice-versa. When there is increase in liabilities and revenues, it is shown on the credit side and vice-versa.

Income Statement:

The statement which shows the revenues earned and expenses incurred during a particular year is called Income statement.

Statement of Owner’s Equity:

Statement of owner’s equity is concerned with portion of owner’s equity.

Balance Sheet:

A financial statement which shows the financial position of a company during specified accounting period is called a balance sheet.

To determine:

Prepare journal entries to record the transactions, create financial statements, and assess the impact of each transaction on financial statements.

Answer to Problem 5GLP

Solution:

Journal entries

Date	Accounts	Debit	Credit
a.	Cash	$100,000
	Office Equipment	$5,000
	Drafting Equipment	$60,000
	J. Aracel, Capital		$165,000
b.	Land	$49,000
	Cash		$6,300
	Note Payable		$42,700
c.	Building	$55,000
	Cash		$55,000
d.	Prepaid Insurance	$3,000
	Cash		$3,000
e.	Cash	$6,200
	Engineering Fees Earned		$6,200
f.	Drafting Equipment	$20,000
	Cash		$9,500
	Notes Payable		$10,500
g.	Accounts Receivable	$14,000
	Engineering Fees Earned		$14,000
h.	Office Equipment	$1,150
	Accounts Payable		1,150
i.	Accounts Receivable	$22,000
	Engineering Fees Earned		$22,000
j.	Equipment Rental Expense	$1,333
	Accounts Payable		$1,333
k.	Cash	$7,000
	Accounts Receivable		$7,000
l.	Wages Expense	$1,200
	Cash		$1,200
m.	Accounts Payable	$1,150
	Cash		$1,150
n.	Repairs Expense	$925
	Cash		$925
o.	J. Aracel, Withdrawals	$9,480
	Cash		$9,480
p.	Wages Expense	$1,200
	Cash		$1,200
q.	Advertising Expense	$2,500
	Cash		$2,500

Financial Statements

ARACEL ENGINEERING COMPANY Income Statement Month Ended June 30.
Revenues:
Engineering Fee Earned		$42,200
Expenses:
Wages Expense	$2,400
Equipment Rental Expense	$1,333
Advertising Expense	$2,500
Repairs Expense	$925
Total Expense		$7,158
Net Income		$35,042

ARACEL ENGINEERING COMPANY Statement of Owner’s Equity Month Ended June 30
J. Aracel, Capital, June 1	$0
Owner’s contribution during the month	$165,000
Net income for the month	$35,042
Subtotal	$200,042
Owner’s withdrawal	($9,480)
J. Aracel, Capital, June 30.	$190,562

ARACEL ENGINEERING COMPANY Balance Sheet Month Ended June 30.
Assets
Current Asset:
Cash	$22,945
Accounts Receivable	$29,000
Prepaid Insurance	$3,000
Total Current Assets	$54,945
Plant, Property and Equipment
Office Equipment	$6,150
Drafting Equipment	$80,000
Building	$55,000
Land	$49,000
Total Plant, Property and Equipment	$190,150
Total Assets	$245,095
Liabilities
Current Liabilities
Accounts Payable	$1,333
Long-Term Liabilities
Notes Payable	$53,200
Total Liabilities	$54,533
Owner’s Equity
J. Aracel, Capital	$190,562
Total Liabilities and Owner’s Equity	$245,095

Transactions	Impact on financial statements
a.	The cash, office equipment and drafting equipment brought in by J. Aracel are assets to the company, so these assets will debited and the capital account of J. Aracel will be credited for the contribution made by him.
b.	The land purchased by the company is debited as it increases assets and the cash account and note payable account are credited as it results in decrease of cash and increase of liabilities.
c.	Company bought a portable building which debited as to increase the assets and cash account is credited which will decrease the cash balance of the company.
d.	Insurance premium for 18 months is paid in advance increases the assets as it is a prepaid insurance and the outflow of cash will result in decrease of cash.
e.	Services performed for the client for cash will increase the cash balance and revenue in the income statement of the company.
f.	The purchase of drafting equipment will increase the assets of the company and at the same time, the cash accounts will decrease by the amount paid in cash and increase the liabilities by the amount of note payable sign.
g.	Service performed on account increases the assets by debiting the accounts receivable and revenue by crediting the engineering fees earned.
h.	Purchase of additional office equipment on credit increases the assets “Office Equipment” and liabilities “Accounts Payable” at the same time.
i.	Debiting the Accounts Receivable increases the assets and crediting the Engineering Fees Earned increases the revenue of the company in the income statement.
j.	Accrued equipment rental expense increases the expenses in the income statement and liabilities in the balance sheet of the company.
k.	Collections on accounts will decrease the assets of accounts receivable and increases the assets of cash accounts simultaneously.
l.	Wages expense incurred increases the expenses in the income statement and decreases the assets of cash accounts as it results in outflow of cash.
m.	Payment on accounts payable decreases the liabilities “Accounts Payable” and assets “Cash Account” at the same time.
n.	Repair expense is an expense which decreases the net income in the income statement and cash balance in the balance sheet.
o.	Withdrawal by the owner will result in decrease of equity and cash balance of the company.
p.	Wages expense incurred increases the expenses in the income statement and decreases the assets of cash accounts as it results in outflow of cash.
q.	The advertising expense is an expense which decreases the net income in the income statement and cash balance in the balance sheet.

Explanation of Solution

Explanation:

Ledger Accounts

Cash Account no. 101
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
a.	J. Aracel, Capital	$100,000		$100,000
b.	Land		$6,300	$93,700
c.	Building		$55,000	$38,700
d.	Prepaid Insurance		$3,000	$35,700
e.	Engineering Fee Earned	$6,200		$41,900
f.	Drafting Equipment		$9,500	$32,400
k.	Accounts Receivable	$7,000		$39,400
l.	Wages Expense		$1,200	$38,200
m.	Accounts Payable		$1,150	$37,050
n.	Repairs Expense		$925	$36,125
o.	J. Aracel, Withdrawals		$9,480	$26,645
p.	Wages Expense		$1,200	$25,445
q.	Advertising Expense		$2,500	$22,945

Accounts Receivable Account no. 106
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
g.	Engineering Fee Earned	$14,000		$14,000
i.	Engineering Fee Earned	$22,000		$36,000
k.	Cash		$7,000	$29,000

Prepaid Insurance Account no. 108
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
d.	Cash	$3,000		$3,000

Office Equipment Account no. 163
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
a.	J. Aracel, Capital	$5,000		$5,000
h.	Accounts Payable	$1,150		$6,150

Drafting Equipment Account no. 164
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
a.	J. Aracel, Capital	$60,000		$60,000
f.	Cash	$9,500		$69,500
	Notes Payable	$10,500		$80,000

Building Account no. 170
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
c.	Cash	$55,000		$55,000

Land Account no. 172
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
b.	Cash	$6,300		$6,300
	Note Payable	$42,700		$49,000

Accounts Payable Account no. 201
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
h.	Office Equipment		$1,150	$1,150
j.	Equipment Rental Expense		$1,333	$2,483
m.	Cash		$1,150	$1,333

Notes Payable Account no. 250
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
b.	Land		$42,700	$42,700
f.	Drafting Equipment		$10,500	$53,200

J. Aracel, Capital Account no. 301
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
a.	Cash		$100,000	$100,000
	Office Equipment		$5,000	$105,000
	Drafting Equipment		$60,000	$165,000

J. Aracel, Withdrawals Account no. 302
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
o.	Cash	$9,480		$9,480

Engineering Fee Earned Account no. 402
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
e.	Cash		$6,200	$6,200
g.	Accounts Receivable		$14,000	$20,200
i.	Accounts Receivable		$22,000	$42,200

Wages Expense Account no. 601
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
l.	Cash	$1,200		$1,200
p.	Cash	$1,200		$2,400

Equipment Rental Expense Account no. 602
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
j.	Accounts Payable	$1,333		$1,333

Advertising Expense Account no. 603
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
q.	Cash	$2,500		$2,500

Repairs Expense Account no. 604
Date	Description	Debit	Credit	Balance
	Beginning Balance			-
n.	Cash	$925		$925

Trial Balance

ARACEL ENGINEERING COMPANY Trial Balance For the Month Ended June 30
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
J. Aracel, Capital		$165,000
J. Aracel, Withdrawals	$9,480
Engineering Fees Earned		$42,200
Wages Expense	$2,400
Equipment Rental Expense	$1,333
Advertising Expense	$2,500
Repairs Expense	$925
Total	$261,733	$261,733

Conclusion

Conclusion:

Aracel Engineering Company’s net income for the month ended June 30 is $35,042 and the total assets, liabilities and owners’ equity amounts to $245,095.