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 October 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	1	Cash		111	25,000
			AV, Capital	311		25,000
		(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 October 1:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	1	Spa Equipment		128	3,575
			AV, Capital	311		3,575
		(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 October 3:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	3	Prepaid Insurance		117	840
			Cash	111		840
		(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 October 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	3	Spa Equipment		128	5,550
			Cash	111		3,000
			Accounts Payable	211		2,550
		(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 October 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	3	Rent Expense		612	1,000
			Cash	111		1,000
		(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 October 3:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	3	Spa Supplies		115	685
			Accounts Payable	211		685
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Office Supplies		114	230
			Cash	111		230
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Promotional Expense		630	115
			Cash	111		115
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Office Equipment		124	520
			Accounts Payable	211		520
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Advertising Expense		616	415
			Accounts Payable	211		415
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Office Equipment		124	825
			Accounts Payable	211		825
		(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 October 5:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	5	Office Supplies		114	125
			Accounts Payable	211		125
		(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 October 7:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	7	Wages Expense		611	2,075
			Cash	111		2,075
		(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 October 7:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	7	Cash		111	3,465
			Income from Services	411		3,465
		(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 October 7:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	7	Accounts Receivable		113	350
			Income from Services	411		350
		(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 October 11:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	11	Accounts Payable		211	1,000
			Cash	111		1,000
		(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 October 14:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	14	Cash		111	3,307
			Income from Services	411		3,307
		(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 October 14:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	14	Accounts Receivable		113	468
			Income from Services	411		468
		(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 October 14:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	14	Wages Expense		611	2,075
			Cash	111		2,075
		(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 October 18:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	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 October 21:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	21	Cash		111	4,587
			Income from Services	411		4,587
		(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 October 21:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	21	Accounts Receivable		113	345
			Income from Services	411		345
		(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 October 21:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	21	Wages Expense		611	2,075
			Cash	111		2,075
		(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 October 25:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	25	Accounts Payable		211	350
			Cash	111		350
		(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 October 28:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	28	Wages Expense		611	2,075
			Cash	111		2,075
		(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 October 28:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	28	Laundry Expense		615	105
			Cash	111		105
		(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 October 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	31	Cash		111	6,588
			Income from Services	411		6,588
		(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 October 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	31	Accounts Receivable		113	110
			Income from Services	411		110
		(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 October 31:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	31	AV, Drawing		312	1,500
			Cash	111		1,500
		(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 October 31:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	31	Utilities Expense		617	325
			Cash	111		325
		(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 October 31:

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
October	31	Utilities Expense		617	385
			Cash	111		385
		(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 ($)	Credit ($)
October	1		1	25,000		25,000
	3		1		840	24,160
	3		1		3,000	21,160
	3		1		1,000	20,160
	5		1		230	19,930
	5		1		115	19,815
	7		1		2,075	17,740
	7		1	3,465		21,205
	11		1		1,000	20,205
	14		1	3,307		23,512
	14		1		2,075	21,437
	18		1		1,200	20,237
	21		1	4,587		24,824
	21		1		2,075	22,749
	25		1		350	22,399
	28		1		2,075	20,324
	28		1		105	20,219
	31		1	6,588		26,807
	31		1		1,500	25,307
	31		1		325	24,982
	31		1		385	24,597

Table (30)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	350		350
	14		1	468		818
	21		1	345		1,163
	31		1	110		1,273

Table (31)

ACCOUNT    Office Supplies                                              ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	230		230
	5		1	125		355

Table (32)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	685		685

Table (33)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	840		840

Table (34)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	520		520
	5		1	825		1,345

Table (35)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1	3,575		3,575
	3		1	5,550		9,125

Table (36)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1		2,550		2,550
	3		1		685		3,235
	5		1		520		3,755
	5		1		415		4,170
	5		1		825		4,995
	5		1		125		5,120
	11		1	1,000			4,120
	18		1	1,200			2,920
	25		1	350			2,570

Table (37)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1		25,000		25,000
	1		1		3,575		28,575

Table (38)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	1,500		1,500

Table (39)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1		3,465		3,465
	7		1		350		3,815
	14		1		3,307		7,122
	14		1		468		7,590
	21		1		4,587		12,177
	21		1		345		12,522
	31		1		6,588		19,110
	31		1		110		19,220

Table (40)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	2,075		2,075
	14		1	2,075		4,150
	21		1	2,075		6,225
	28		1	2,075		8,300

Table (41)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	1,000		1,000

Table (42)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	28		1	105		105

Table (43)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	415		415

Table (44)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	325		325
	31		1	385		710430

Table (45)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	115		115

Table (46)

3.

To determine

Prepare the trial balance for ABY Spa as at October 31, 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 October 31, 20--, based on the account balances derived in Part (2).

ABY Spa
Trial Balance
October 31, 20--
Account Title	Debit ($)	Credit ($)
Cash	$24,597
Accounts Receivable	1,273
Office Supplies	355
Spa Supplies	685
Prepaid Insurance	840
Office Equipment	1,345
Spa Equipment	9,125
Accounts Payable		$2,570
AV, Capital		28,575
AV, Drawing	1,500
Income from Services		19,220
Wages Expense	8,300
Rent Expense	1,000
Laundry Expense	105
Advertising Expense	415
Utilities Expense	710
Promotional Expense	115
Total	$50,365	$50,365

Table (47)

Conclusion

Hence, the debit and credit total of trial balance of ABY Spa at October 31, 20-- is $50,365.

4.

To determine

Prepare an income statement of ABY Spa for the month ended October 31, 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 October 31, 20--.

ABY Spa
Income Statement
For the Month Ended October 31, 20--
Revenues:
Income from Services		$19,220
Expenses:
Wages Expense	$8,300
Rent Expense	1,000
Laundry Expense	105
Advertising Expense	415
Utilities Expense	710
Promotional Expense	115
Total expenses		10,645
Net income		$8,575

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 October 31, 20--.

ABY Spa
Statement of Owners’ Equity
For the Month Ended October 31, 20--
AV, Capital, October 1, 20--		$0
Investments during October	$28,575
Net income for October	8,575
	37,150
Less: Withdrawals for October	1,500
Increase in capital		35,650
AV, Capital, October 31, 20--		$35,650

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 October 31, 20--.

ABY Spa
Balance Sheet
October 31, 20--
Assets
Cash	$24,597
Accounts Receivable	1,273
Office Supplies	355
Spa Supplies	685
Prepaid Insurance	840
Office Equipment	1,345
Spa Equipment	9,125
Total assets		$38,220
Liabilities
Accounts Payable		$2,570
Owners’ Equity
AV, Capital		35,650
Total liabilities and owners’ equity		$38,220

Table (50)