Chapter 3, Problem 1CP

1.

To determine

Prepare journal entries for the given transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entries for the given transactions.

Transaction on June 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	1	Cash		111	15,000
			AV, Capital	311		15,000
		(Record cash invested in the business by AV)

Table (1)

Description:

• Cash is an asset account. Since cash is invested in the business, asset account increased, and an increase in asset is debited.
• AV, Capital is an equity account. Since cash is contributed as capital by the owner, equity value increased, and an increase in equity is credited.

Transaction on June 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	1	Spa Equipment		128	3,158
			AV, Capital	311		3,158
		(Record equipment invested in the business by AV)

Table (2)

Description:

• Spa Equipment is an asset account. Since equipment is invested in the business, asset account increased, and an increase in asset is debited.
• AV, Capital is an equity account. Since equipment is contributed as capital by the owner, equity value increased, and an increase in equity is credited.

Transaction on June 3:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	3	Prepaid Insurance		117	960
			Cash	111		960
		(Record payment of insurance in advance)

Table (3)

Description:

• Prepaid Insurance is an asset account. Since insurance is paid in advance, it is recorded as asset until it is consumed. So, asset value is increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	3	Spa Equipment		128	4,235
			Cash	111		2,000
			Accounts Payable	211		2,235
		(Record purchase of equipment)

Table (4)

Description:

• Spa Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	3	Rent Expense		612	1,650
			Cash	111		1,650
		(Record payment of rent expense)

Table (5)

Description:

• Rent Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	3	Spa Supplies		115	492
			Accounts Payable	211		492
		(Record purchase of supplies)

Table (6)

Description:

• Spa Supplies is an asset account. Since supplies are bought, asset account increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Office Supplies		114	248
			Cash	111		248
		(Record purchase of supplies)

Table (7)

Description:

• Office Supplies is an asset account. Since supplies are bought, asset account increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Promotional Expense		630	112
			Cash	111		112
		(Record payment for promotional items)

Table (8)

Description:

• Promotional Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Office Equipment		124	318
			Accounts Payable	211		318
		(Record purchase of equipment)

Table (9)

Description:

• Office Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Advertising Expense		616	397
			Accounts Payable	211		397
		(Record receipt of advertising expense bill)

Table (10)

Description:

• Advertising Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Office Equipment		124	832
			Accounts Payable	211		832
		(Record purchase of equipment)

Table (11)

Description:

• Office Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	5	Office Supplies		114	120
			Accounts Payable	211		120
		(Record purchase of supplies)

Table (12)

Description:

• Office Supplies is an asset account. Since supplies are bought, asset account increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 7:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	7	Wages Expense		611	1,847.50
			Cash	111		1,847.50
		(Record payment of wages expense)

Table (13)

Description:

• Wages Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 7:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	7	Cash		111	2,630
			Income from Services	411		2,630
		(Record services performed for cash)

Table (14)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 7:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	7	Accounts Receivable		113	325
			Income from Services	411		325
		(Record services performed on account)

Table (15)

Description:

• Accounts Receivable is an asset account. The amount is increased because amount to be received increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 11:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	11	Accounts Payable		211	873
			Cash	111		873
		(Record cash paid on account)

Table (16)

Description:

• Accounts Payable is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 14:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	14	Cash		111	3,703
			Income from Services	411		3,703
		(Record services performed for cash)

Table (17)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 14:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	14	Accounts Receivable		113	486
			Income from Services	411		486
		(Record services performed on account)

Table (18)

Description:

• Accounts Receivable is an asset account. The amount is increased because amount to be received increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 14:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	14	Wages Expense		611	1,847.50
			Cash	111		1,847.50
		(Record payment of wages expense)

Table (19)

Description:

• Wages Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 18:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	18	Accounts Payable		211	1,200
			Cash	111		1,200
		(Record cash paid on account)

Table (20)

Description:

• Accounts Payable is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 21:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	21	Cash		111	4,758
			Income from Services	411		4,758
		(Record services performed for cash)

Table (21)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 21:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	21	Accounts Receivable		113	344
			Income from Services	411		344
		(Record services performed on account)

Table (22)

Description:

• Accounts Receivable is an asset account. The amount is increased because amount to be received increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 21:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	21	Wages Expense		611	1,847.50
			Cash	111		1,847.50
		(Record payment of wages expense)

Table (23)

Description:

• Wages Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 25:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	25	Accounts Payable		211	73
			Cash	111		73
		(Record cash paid on account)

Table (24)

Description:

• Accounts Payable is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 28:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	28	Wages Expense		611	1,847.50
			Cash	111		1,847.50
		(Record payment of wages expense)

Table (23)

Description:

• Wages Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 28:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	28	Laundry Expense		615	84
			Cash	111		84
		(Record payment of laundry expense)

Table (24)

Description:

• Laundry Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 30:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	30	Cash		111	5,992
			Income from Services	411		5,992
		(Record services performed for cash)

Table (25)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 30:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	30	Accounts Receivable		113	109
			Income from Services	411		109
		(Record services performed on account)

Table (26)

Description:

• Accounts Receivable is an asset account. The amount is increased because amount to be received increased, and an increase in asset is debited.
• Income from Services is a revenue account. Since gains and revenues increase equity, and an increase in equity is credited, Income from Services account is credited.

Transaction on June 30:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	AV, Drawing		312	1,850
			Cash	111		1,850
		(Record cash withdrawn by AV for personal use)

Table (27)

Description:

• AV, Drawing is a contra-capital account. The contra-capital accounts decrease the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is withdrawn, asset account decreased, and a decrease in asset is credited.

Transaction on June 30:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Utilities Expense		617	225
			Cash	111		225
		(Record payment of utilities expense)

Table (28)

Description:

• Utilities Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 31:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	31	Utilities Expense		617	248
			Cash	111		248
		(Record payment of utilities expense)

Table (29)

Description:

• Utilities Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

2.

To determine

Post the journalized transactions in the ledger accounts of the general ledger.

Explanation of Solution

Ledger: Ledger is a book in which the accounts are summarized and grouped from the transactions recorded in the journal.

Post the journalized transactions in the ledger accounts of the general ledger.

ACCOUNT    Cash                                                                 ACCOUNT NO. 111
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1	15,000.00		15,000.00
	3		1		960.00	14,040.00
	3		1		2,000.00	12,040.00
	3		1		1,650.00	10,390.00
	5		1		248.00	10,142.00
	5		1		112.00	10,030.00
	7		1		1,847.50	8,182.50
	7		1	2,630.00		10,812.50
	11		1		873.00	9,939.50
	14		1	3,703.00		13,642.50
	14		1		1,847.50	11,795.00
	18		1		1,200.00	10,595.00
	21		1	4,758.00		15,353.00
	21		1		1,847.50	13,505.50
	25		1		73.00	13,432.50
	28		1		1,847.50	11,585.00
	28		1		84.00	11,501.00
	30		1	5,992.00		17,493.00
	30		1		1,850.00	15,643.00
	30		1		225.00	15,418.00
	30		1		248.00	15,170.00

Table (30)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1	325.00		325.00
	14		1	486.00		811.00
	21		1	344.00		1,155.00
	30		1	109.00		1,264.00

Table (31)

ACCOUNT    Office Supplies                                             ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	248		248
	5		1	120		368

Table (32)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	492		492

Table (33)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	960		960

Table (34)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	318		318
	5		1	832		1,150

Table (35)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1	3,158		3,158
	3		1	4,235		7,393

Table (36)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1		2,235		2,235
	3		1		492		2,727
	5		1		318		3,045
	5		1		397		3,442
	5		1		832		4,274
	5		1		120		4,394
	11		1	873			3,521
	18		1	1,200			2,321
	25		1	73			2,248

Table (37)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1		15,000		15,000
	1		1		3,158		18,158

Table (38)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30		1	1,850		1,850

Table (39)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1		2,630		2,630
	7		1		325		2,955
	14		1		3,703		6,658
	14		1		486		7,144
	21		1		4,758		11,902
	21		1		344		12,246
	30		1		5,992		18,238
	30		1		109		18,347

Table (40)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1	1,847.50		1,847.50
	14		1	1,847.50		3,695.00
	21		1	1,847.50		5,542.50
	28		1	1,847.50		7,390.00

Table (41)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	1,650		1,650

Table (42)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	28		1	84		84

Table (43)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	397		397

Table (44)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30		1	225		225
	30		1	248		473

Table (45)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	112		112

Table (46)

3.

To determine

Prepare the trial balance for ABY Spa as at June 30, 20--, based on the account balances derived in Part (2).

Explanation of Solution

Trial balance: Trial balance is a summary of all the asset, liability, and equity accounts and their balances.

Prepare the trial balance for ABY Spa as at June 30, 20--, based on the account balances derived in Part (2).

ABY Spa
Trial Balance
October 31, 20--
Account Title	Debit ($)	Credit ($)
Cash	$15,170
Accounts Receivable	1,264
Office Supplies	368
Spa Supplies	492
Prepaid Insurance	960
Office Equipment	1,150
Spa Equipment	7,393
Accounts Payable		$2,248
AV, Capital		18,158
AV, Drawing	1,850
Income from Services		18,347
Wages Expense	7,390
Rent Expense	1,650
Laundry Expense	84
Advertising Expense	397
Utilities Expense	473
Promotional Expense	112
Total	$38,753	$38,753

Table (47)

Conclusion

Hence, the debit and credit total of trial balance of ABY Spa at June 30, 20-- is $38,753.

4.

To determine

Prepare an income statement of ABY Spa for the month ended June 30, 20--, based on the account balances derived in Part (2).

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 an income statement of ABY Spa for the month ended June 30, 20--.

ABY Spa
Income Statement
For the Month Ended June 30, 20--
Revenues:
Income from Services		$18,347
Expenses:
Wages Expense	$7,390
Rent Expense	1,650
Laundry Expense	84
Advertising Expense	397
Utilities Expense	473
Promotional Expense	112
Total expenses		10,106
Net income		$8,241

Table (48)

5.

To determine

Prepare a statement of owners’ equity of ABY Spa, based on the account balances derived in Part (2), and net income computed in Part (4).

Explanation of Solution

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owners’ equity. Additional capital, net income from income statement is added to, and drawings is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement of owners’ equity for ABY Spa for the month ended June 30, 20--.

ABY Spa
Statement of Owners’ Equity
For the Month Ended June 30, 20--
AV, Capital, June 1, 20--		$0
Investments during June	$18,158
Net income for June	8,241
	26,399
Less: Withdrawals for June	1,850
Increase in capital		24,549
AV, Capital, June 30, 20--		$24,549

Table (49)

6.

To determine

Prepare a balance sheet for ABY Spa, based on the account balances derived in Part (2), and capital of the owner from the statement of owners’ equity prepared in Part (5).

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and owners (owners’ equity) over those resources. The resources of the company are assets which include money contributed by owners and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and owners’ equity.

Prepare the balance sheet for ABY Spa as at June 30, 20--.

ABY Spa
Balance Sheet
June 30, 20--
Assets
Cash	$15,170
Accounts Receivable	1,264
Office Supplies	368
Spa Supplies	492
Prepaid Insurance	960
Office Equipment	1,150
Spa Equipment	7,393
Total assets		$26,797
Liabilities
Accounts Payable		$2,248
Owners’ Equity
AV, Capital		24,549
Total liabilities and owners’ equity		$26,797

Table (50)