Chapter 3, Problem 12P

Comprehensive On November 30, 2016, Davis Company had the following account balances:

During the month of December, Davis entered into the following transactions:

Required:

1. 1. Prepare general journal entries to record the preceding transactions.
2. 2. Post to general ledger T-accounts.
3. 3. Prepare a year-end trial balance on a worksheet and complete the worksheet using the following information: (a) accrued salaries at year-end total $1,200; (b) for simplicity, the building and equipment are being depreciated using the straight-line method over an estimated life of 20 years with no residual value; (c) supplies on hand at the end of the year total $630; (d) bad debts expense for the year totals $830; and (e) the income tax rate is 30%; income taxes are payable in the first quarter of 2017.
4. 4. Prepare the company’s financial statements for 2016.
5. 5. Prepare the 2016 (a) adjusting and (b) closing entries in the general journal.

To determine

Prepare the journal entries to record the given transactions.

Explanation of Solution

Accounting rules for journal entries:

• To record the increase of balance in account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record the decrease of balance in account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare the journal entries to record the given transactions:

Date	Account Title and Explanation	Debit($)	Credit($)
December 4	Cash	3,000
	Sales Revenue		3,000
	(To record the cash sales)
December 4	Cost of Goods Sold	1,800
	Inventory		1,800
	(To record  the cost of ale)
December 7	Inventory	2,400
	Accounts Payable		2,400
	(To record the purchase of inventory on account)
December 14	Cash	900
	Accounts Receivable		900
	(To record amount of accounts receivable collected)
December 18	Cash	7,800
	Gain on sale of land		2,800
	Land		5,000
	(To record the gain on sale of land)
December 20	Accounts Receivable	4,000
	Sales Revenue		4,000
	(To record the credit sales)
December 20	Cost of goods sold	2,400
	Inventory		2,400
	(To record  the cost of goods sold)
December 21	Accounts Payable	360
	Inventory		360
	(To record the returned defective merchandise for credit)
December 27	Inventory	1,250
	Cash		1,250
	(To record purchased inventory for cash)
December 28	Accounts payable	1,100
	Cash		1,100
	(To record accounts payable amount paid)
December 31	Land	6,000
	Cash		1,000
	Notes Payable		5,000
	(To record the purchase of land by paying cash and issuing 12% of note)

Table (1)

To determine

Post the part 1 entries to general ledger T-Accounts.

Explanation of Solution

T-account: T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

Post the part 1 entries to general ledger T-Accounts:

To determine

Prepare the worksheet with the given information.

Explanation of Solution

Prepare the worksheet with the given information:

Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form, having multiple columns and it is used in the adjustment process.

Table (2)

To determine

Prepare the financial statements of Company D.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare income statement:

Company D
Income statement
For the Year Ended December 31, 2016
Particulars	Amount($)	Amount($)
Sales revenue	76,700
Less: Cost of goods sold	(41,060)
Gross profit		35,640
Less: Operating expenses:
Salaries expense	13,700
Advertising expense	8,100
Depreciation expense	2,100
Supplies expense	770
Bad debt expense	830
Other expenses	4,500
Total operating expense		(30,000)
Income from operations		5,640
Other items:
Gain on sale of land		2,800
Income before income taxes		8,440
Less: Income tax expense		(2,532)
Net income		$5,908
Earnings per share		$2.95

Table (3)

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare statement of retained earnings:

D Company
Statement of Retained Earnings
For the Year Ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Retained earnings, January 1, 2016	42,400
Add: Net income	5,908
Subtotal		48,308
Less: Dividends		(2,000)
Retained earnings at December  31, 2016		$46,308

Table (4)

Balance Sheet:   Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet:

Company D
Balance Sheet
At December 31, 2016
Assets
Current assets:	Amount ($)	Amount ($)
Cash		11,440
Accounts receivable	13,000
Less: Allowance for doubt accounts	(930)	12,070
Inventory		16,840
Supplies		630
Total current assets		40,980
Property, plant and equipment:
Land		10,000
Building and equipment	42,000
Less: Accumulated depreciation	(6,300)	35,700
Net property, plant and equipment		45,700
Total assets		$86,680
Liabilities
Current liabilities:
Accounts payable	11,640
Salaries payable	1,200
Income taxes payable	2,532
Total liabilities
Long-term liabilities:		15,372
Notes payable due 31/12/18		5,000
Shareholders’ Equity
Contributed Capital:
Common stock	20,000
Retained earnings	46,308
Total shareholders’ equity		66,308
Total liabilities and shareholders’ equity		$86,680

Table (5)

To determine

Prepare adjusting entries for the year 2016.

Explanation of Solution

Adjusting entries:  Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare adjusting entries for the year 2016:

Date	Accounts title and explanation	Debit ($)	Credit ($)
2016	Salaries  Expense	1,200
December 31	Salaries Payable		1,200
	(To record the amount of accrued salaries for the period)
2016	Depreciation Expense	2,100
December 31	Accumulated Depreciation     -    Building and Equipment		2,100
	(To record the amount of depreciation expense for the period)
2016	Supplies Expense	770
December 31	Supplies		770
	(To record the amount of supplies used during the period)
2016	Bad debt expense	830
December 31	Allowance for Doubtful     Accounts		830
	(To record the bad debt expense for the period)
2016	Income Tax  Expense	2,532
December 31	Income Tax Payable		2,532
	(To record the income tax liability on earnings

Table (6)

To determine

Prepare the closing entries for December 31, 2016.

Explanation of Solution

Closing entries: Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entries for December 31, 2016.

Date	Accounts title and explanation	Debit	Credit
		($)	($)
December 31, 2016	Sales Revenue	76,700
	Gain on Sale of Land	2,800
	Income Summary		79,500
	(To close the revenue accounts)
December 31, 2016	Income Summary	73,592
	Cost of Goods Sold		41,060
	Salaries Expense		13,700
	Advertising Expense		8,100
	Depreciation Expense		2,100
	Supplies Expense		770
	Bad Debt Expense		830
	Other Expense		4,500
	Income Tax Expense		2,532
	(To close the expense accounts)
December 31, 2016	Income Summary	5,908
	Retained Earnings		5,908
	(To close the income summary account)
December 31, 2016	Retained Earnings	2,000
	Dividends		2,000
	(To close the dividends account)

Table (7)