Chapter 3, Problem 10P

Worksheet Victoria Company has the following account balances on December 31, 2019, prior to any adjustments:

Additional adjustment information: (a) depreciation on buildings, $1,100; on equipment, $600; (b) bad debts expense, $240; (c) interest accumulated but not paid: on note payable, $50; on mortgage payable, $530 (this interest is due during the next accounting period); (d) insurance expired, $175; (e) salaries accrued but not paid $370; (f) rent was collected in advance and the performance obligation is now satisfied, $800; (g) office supplies cm hand at year-end, $230 (expensed when originally purchased earlier in the year); and (h) the income tax rate is 30% on current income and is payable in the first quarter of 2020.

Required:

1. 1. Transfer the account balances to a 10-column worksheet and prepare a trial balance.
2. 2. Prepare the adjusting entries in the general journal and complete the worksheet.
3. 3. Prepare the company’s income statement, retained earnings statement, and balance sheet.
4. 4. Prepare closing entries in the general journal.

To determine

Prepare a 10 column worksheet for the given account balances, and prepare the adjusting entries of Company V.

Explanation of Solution

Trial balance: Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Worksheet:

A spreadsheet is a worksheet. It is used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Prepare 10 column worksheet for the given account balances, and trial balance as follows:

Figure (1)

Adjusting entry:

Date	Account Title & Explanation	Debit ($)	Credit($)
December 31, 2019	Depreciation expense	1,700
	Accumulated depreciation - Buildings		1,100
	Accumulated depreciation - Equipment		600
	(To record the depreciation expense incurred at the end of the accounting year)
December 31, 2019	Bad debts expense	240
	Allowance for doubtful accounts		240
	(To record the bad debts expense estimated at the end of the accounting year)
December 31, 2019	Interest expense	580
	Interest payable		580
	(To record the interest  expense incurred at the end of the accounting year)
December 31, 2019	Insurance expense	175
	Prepaid insurance		175
	(To record the insurance expense incurred at the end of the accounting year)
December 31, 2019	Salaries expense	370
	Salaries payable		370
	(To record the salaries expense accrued at the end of the accounting year)
December 31, 2019	Unearned rent	800
	Rent revenue		800
	(To record the rent revenue recognized)
December 31, 2019	Office supplies expense	230
	Office supplies		230
	(To record the supplies used during the year)
December 31, 2019	Income tax expense (1)	3,309
	Income tax payable		3,309
	(To record the income tax expense incurred at the end of the accounting year)

Table (1)

Working note (1):

Calculate the value of income tax expense.

$\begin{array}{c}\text{Income tax expense = }\left(\begin{array}{l}\text{Credit}\text{balance of income statement}-\\ \text{Debit balance of income statement}\end{array}\right)\text{ × Income tax rate}\\ \text{=}\left(\text{\$50,155}-\$39,125\right)\text{×}\frac{\text{30}}{\text{100}}\\ =\$11,030\times \frac{30}{100}\\ \text{=\$3,309}\end{array}$

To determine

Prepare income statement, retained earnings, and balance sheet of Company V.

Explanation of Solution

Financial statements: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements are balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Prepare income statement, retained earnings, and balance sheet of Company V as follows:

Company V
Income statement
For the year ended December 31, 2019
Particulars	Amount($)	Amount ($)
Service revenue		49,355
Less: Cost of goods sold		(27,185)
Gross profit		22,170
Less: Operating expense
Salaries expense	4,450
Utilities expense	2,000
Office supplies expense	540
Delivery expense	1,275
Depreciation expense	1,700
Bad debt expense	240
Insurance expense	175
Other expense	980
Total operating expense		11,360
Income from operations		10,810
Other items:
Rent revenue	800
Interest expense	(580)	220
Income before income taxes		11,030
Income tax expense		(3,309)
Net income (A)		14,339
Number of shares (B)		2,000 shares
Earnings per share $\left(\frac{\text{A}}{\text{B}}\right)$		$3.86

Table (2)

Company V
Statement of retained earnings
For the year end December 31, 2019
Particulars	Amount ($)
Retained earnings on January 1, 2019	18,075
Add: Net income	7,721
	25,796
Less: Dividend for 2019	(1,300)
Retained earnings on December 31, 2019	24,496

Table (3)

Company V
Balance sheet
As at December 31, 2019
Assets	Amount ($)	Amount ($)
Current assets:
Cash		1,900
Accounts receivable	4,700
Less: Allowance for doubtful accounts	(300)	4,400
Inventory		8,700
Prepaid insurance		425
Office supplies		230
Total current assets (C)		15,655
Property, plant and equipment:
Land		4,100
Buildings	38,000
Less: Accumulated depreciation	(12,600)	25,400
Equipment	10,700
Less: Accumulated depreciation	(3,700)	7,000
Total property, plant and equipment (D)		36,500
Total assets $\left(\text{C+D}\right)$		52,155
Liabilities
Current liabilities:
Accounts payable		4,300
Notes payable		1,400
Interest payable		580
Salaries payable		370
Unearned rent		400
Income tax payable		3,309
Total current liabilities		10,359
Long-term liabilities:
Mortgage payable		7,300
Total liabilities		17,659
Shareholders' equity
Contributed capital:
Common stock	10,000
Retained earnings	24,496	34,496
Total shareholder's equity		52,155

Table (4)

To determine

Prepare closing entries of Company V for the current year.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare closing entries of Company V for the current year as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2019	Sales revenue	49,355
	Rent revenue	800
	Income summary		50,155
	(To close the sales revenue and rent revenue account)
December 31, 2019	Income summary	42,434
	Cost of goods sold		27,185
	Salaries expense		4,450
	Utilities expense		2,000
	Office supplies expense		540
	Delivery expense		1,275
	Other expense		980
	Depreciation expense		1,700
	Bad debt expense		240
	Interest expense		580
	Insurance expense		175
	Income tax expense		3,309
	(To close all expenses account)
December 31, 2019	Income summary	7,721
	Retained earnings (2)		7,721
	(To close the income summary account)
December 31, 2019	Retained Earnings	1,300
	Dividends		1,300
	(To close the dividends account.)

Table (5)

Closing entry for revenue account:

In this closing entry, the sales revenue and rent revenue account is closed by transferring the amount of revenue to the income summary account in order to bring the revenue accounts balance to zero.  Hence, debit all revenue account for $50,155, and credit the income summary account for $50,155.

Closing entry for expenses account:

In this closing entry, cost of goods sold, operating expense, and income tax expense are closed by transferring the amount of all expenses to the income summary account in order to bring all the expense accounts balance to zero. Hence, debit the income summary account for $42,434, and credit all the expenses account for $42,434.

Closing entry for income summary account:

In this closing entry, the income summary account is closed by transferring the amount of net income to the retained earnings account in order to bring the income summary balance to zero.  Hence, debit the income summary account for $7,721, and credit the retained earnings for $7,721.

Closing entry for dividends account:

The dividends are paid to the shareholders out of the retained earnings. Thus, retained earnings are debited since the earnings are decreased on payment of dividend. Dividends are a component of shareholders’ equity account. It is credited because dividends are transferred to retained earnings account.

Working note (2):

Calculate the value of retained earnings.

$\begin{array}{c}\text{Retained earnings =}\left(\begin{array}{l}\text{ Credit balance of income summary account}-\\ \text{Debit balance of income summary account}\end{array}\right)\\ =\$50,155-\$42,434\\ =\$7,721\end{array}$