Chapter 2, Problem 6APSA

1.

To determine

To Prepare: A trial balance for Min Engineering as of the end of May.

Answer to Problem 6APSA

Solution:

The trial balance for Min Engineering as of the end of May is prepared as follows:

MIN ENGINEERING Trial Balance As of May 31
Account Title	Debit Balance (in $)	Credit Balance (in $)
Cash	37,641
Office Supplies	890
Prepaid Insurance	4,600
Office Equipment	12,900
Accounts Payable		12,900
Y. Min, Capital		18,000
Y. Min, Withdrawals	3,329
Engineering fees earned		36,000
Rent Expense	7,540
Total	66,900	66,900

Explanation of Solution

Given:

Yi Min who is the owner of Min Engineering completed seven transactions in May and after those seven transactions, the company’s ledger included the following accounts with normal balances:

Account Title	Balance Amount (in $)
Cash	37,641
Office Supplies	890
Prepaid Insurance	4,600
Office Equipment	12,900
Accounts Payable	12,900
Y. Min, Capital	18,000
Y. Min, Withdrawals	3,329
Engineering fees earned	36,000
Rent Expense	7,540

Cash is an asset of a company. Therefore, it normally has a debit balance.

Office Supplies are assets of a company. Therefore, it normally has a debit balance.

Prepaid Insurance is an asset of a company. Therefore, it normally has a debit balance.

Office Equipment is an asset of a company. Therefore, it normally has a debit balance.

Accounts Payable is a liability of a company. Therefore, it normally has a credit balance.

Y. Min, Capital is a part of owner’s equity. Therefore, it normally has a credit balance.

Y. Min, Withdrawals decreases the owner’s equity. Therefore, it normally has a debit balance.

Engineering fees earned is the revenue earned by the company. Therefore, it normally has a credit balance.

Rent Expense is the expense incurred by the company. Therefore, it normally has a debit balance.

The total debit and credit balances of Min Engineering’s trial balance as of May 31 are calculated as follows:

Formula used:

$TotalDebitBalance=SumofAllDebitBalances$

$TotalCreditBalance=SumofAllCreditBalances$

Calculation:

On adding all the debit balances, we get the following:

$\begin{array}{l}TotalDebitBalance=\$37,641+\$890+\$4,600+\$12,900+\$3,329+\$7,540\\ TotalDebitBalance=\$66,900\end{array}$

On adding all the credit balances, we get the following:

$\begin{array}{l}TotalCreditBalance=\$12,900+\$18,000+\$36,000\\ TotalCreditBalance=\$66,900\end{array}$

Therefore, the total debit and credit balances of Min Engineering’s trial balance as of May 31 are equal. The total debit or credit balance is $66,900.

2.

To determine

To Prepare: A list that describes each of the seven most likely transactions and their amounts by analyzing the accounts and their balances.

Answer to Problem 6APSA

Solution:

A list that describes each of the seven most likely transactions and their amounts by analyzing the accounts and their balances includes the following:

1. Yi Min made an investment of $18,000 cash. The accounts impacted are cash account and Y. Min, capital account.
2. The company purchased office equipment for $12,900 on account. The accounts impacted are office equipment account and accounts payable account.
3. The company purchased office supplies for $890 on cash. The accounts impacted are office supplies account and cash account.
4. The company paid $4,600 cash in advance for insurance premium. The accounts impacted are prepaid insurance account and cash account.
5. Y. Min (owner) withdrew $3,329 cash from the company. The accounts impacted are Y. Min, Withdrawals account and cash account.
6. The company received $36,000 cash for the engineering fees earned. The accounts impacted are cash account and engineering fees earned account.
7. The company paid $7,540 cash for the rent expense incurred. The accounts impacted are rent expense account and cash account.

Explanation of Solution

Given:

Yi Min who is the owner of Min Engineering completed seven transactions in May and after those seven transactions, the company’s ledger included the following accounts with normal balances:

Account Title	Balance Amount (in $)	Normal Balance (debit or credit)
Cash	37,641	Debit
Office Supplies	890	Debit
Prepaid Insurance	4,600	Debit
Office Equipment	12,900	Debit
Accounts Payable	12,900	Credit
Y. Min, Capital	18,000	Credit
Y. Min, Withdrawals	3,329	Debit
Engineering fees earned	36,000	Credit
Rent Expense	7,540	Debit

The first transaction is given in the question itself. This transaction says that Yi Min invested $18,000 cash in the business. In this transaction, cash is debited with $18,000 and Y. Min, Capital is credited with $18,000. As we can see in the above table, Y. Min, Capital account has a credit balance amounting to $18,000.

It is noted that the balance amounts of office equipment and accounts payable are equal i.e. $12,900 and also, their normal balances are debit and credit respectively. Therefore, this makes one most likely transaction which says that office equipment amounting to $12,900 is purchased on account.

The remaining five transactions must have impacted Office supplies account, prepaid insurance account, Y. Min, Withdrawals account, Engineering fees earned account, Rent expense account and cash account. Here, except cash account, all the other five accounts could not have any transaction with one another. Therefore, all these five accounts that are Office supplies account, prepaid insurance account, Y. Min, Withdrawals account, Engineering fees earned account and Rent expense account must be having separate transactions with cash account and thereby the balance amounts of these five accounts are fully taken for carrying out these five transactions.

For office supplies account and cash account to be impacted, the transaction would be the company purchased office supplies for $890 on cash. Here, the office supplies account is debited with $890 and cash account is credited with $890.

For prepaid insurance account and cash account to be impacted, the transaction would be company paid $4,600 cash in advance for insurance premium. Here, prepaid insurance account is debited with $4,600 and cash account is credited with $4,600.

For Y. Min, Withdrawals account and cash account to be impacted, the transaction would be Y. Min (owner) withdrew $3,329 cash from the company. Here, Y. Min, Withdrawals account is debited with $3,329 and cash account is credited with $3,329.

For engineering fees earned account and cash account to be impacted, the transaction would be the company received $36,000 cash for the engineering fees earned. Here, cash account is debited with $36,000 and engineering fees earned account is credited with $36,000.

For rent expense account and cash account to be impacted, the transaction would be the company paid $7,540 cash for the rent expense incurred. Here, rent expense account is debited with $7,540 and cash account is credited with $7,540.

3.

To determine

To Prepare: A report of cash received and cash paid showing how the seven transactions in part 2 yield the $37,641 ending cash balance.

Answer to Problem 6APSA

Solution:

The report of cash received and cash paid showing how the seven transactions in part 2 yield the $37,641 ending cash balance is prepared as follows:

Report of Cash Received and Cash Paid
Particulars	Amount (in $)	Total Amount (in $)
Cash Received
Owner’s Investment	18,000
Engineering fees earned	36,000
Total Cash Received		54,000
Cash Paid
Office Supplies	890
Prepaid Insurance	4,600
Y. Min, Withdrawals	3,329
Rent Expense	7,540
Total Cash Paid		16,359
Ending Debit Balance		37,641

Explanation of Solution

Given:

As shown in part 2, cash is received by the company in two transactions. In one transaction, the owner (Yi Min) invested $18,000 cash in the business. In other transaction, the company received $36,000 cash for the engineering fees earned (by providing engineering services). Cash is debited in these two transactions.

As shown in part 2, cash is paid by the company in four transactions. Cash is credited in these four transactions. These are as follows:

1. The company paid $890 cash for office supplies purchased.
2. The company paid $4,600 cash in advance for insurance premium.
3. The owner withdrew $3,329 cash from the company.
4. The company paid $7,540 cash for the rent expense incurred.

Cash being an asset normally has an ending debit balance i.e. its total debit balance is more than its total credit balance.

The total cash received, total cash paid and ending debit balance of cash are calculated as follows:

Formula used:

$TotalCash\mathrm{Re}ceived=AmountofOwner\text{'}sInvestment+AmountofEngineeringFeesEarned$

$\begin{array}{l}TotalCashPaid=AmountofOfficeSupplies+Amountof\mathrm{Pr}epaidInsurance+AmountofOwner\text{'}sWithdrawals\\ +Amountof\mathrm{Re}ntExpense\end{array}$

$EndingDebitBalanceofCash=TotalCash\mathrm{Re}ceived-TotalCashPaid$

Calculation:

We will put the given values in the above mentioned formulae as follows:

$\begin{array}{l}TotalCash\mathrm{Re}ceived=\$18,000+\text{}\$36,000\\ TotalCash\mathrm{Re}ceived=\$54,000\end{array}$

$\begin{array}{l}TotalCashPaid=\$890+\$4,600+\$3,329+\$7,540\\ TotalCashPaid=\$16,359\end{array}$

$\begin{array}{l}EndingDebitBalanceofCash=\$54,000-\$16,359\\ EndingDebitBalanceofCash=\$37,641\end{array}$

Therefore, total cash received and total cash paid by Min Engineering are $54,000 and $16,359 respectively.