Chapter 3, Problem 20E

1.

To determine

Record the journal entries for the given transaction occurred during the year.

Explanation of Solution

The journal entries for given transactions of Company R are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2021	Cash		20,000
February 15	Common stock			20,000
	(To record the common stock issued)
2021	Cash		35,000
May, 20	Account receivable		30,000
	Service revenue			65,000
	(To record the service revenue provided to customer on account and in cash)
2021	Salaries expense		23,000
August 31	Cash			23,000
	(To record the cash received from issuance of common stock)
2021	Prepaid rent		12,000
October 1	Cash			12,000
	(To record payment of one-year advance rent)
2021	Supplies		22,000
November 17	Accounts payable			22,000
	(To record the purchase of supplies on account)
2021	Dividends		2,000
December 30	Cash			2,000
	(To record the payment of dividend to stockholder)

Table (1)

2.

To determine

Record the adjusting entry for prepaid insurance.

Explanation of Solution

Adjusting entries:

Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

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.

Adjusting entries of Company R are as follows:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2021	Salaries expense		4,000
December 31	Salaries payable			4,000
	(To record salaries expense incurred at the end of accounting year)
2021	Rent expense (1)		3,000
December 31	Prepaid rent			3,000
	(To record the rent expense incurred at the end of the accounting period)
2021	Supplies expense (2)		25,000
December 31	Supplies			25,000
	(To record supplies expense incurred at the end of the accounting year)
2021	Deferred revenue		5,000
December 31	Service revenue			5,000
	(To record service revenue recognized at the end of the accounting year)

Table (2)

Working Note:

Calculate the rent expense:

$\begin{array}{c}\text{Rent expense = Cost of rental space }\times \text{ Time period}\\ \text{=\$12,000}\times \frac{\left(\text{October to December}\right)}{12}\\ =\$12,000\times \frac{3}{12}\\ =\$3,000\end{array}$ (1)

Calculate the supplies expense:

$\begin{array}{c}\text{Supplies expense = }\left(\begin{array}{l}\text{Supplies expense during January1, 2021+}\\ \text{Purchase of supplies expense on account}\end{array}\right)-\text{Remaining suppplies expense }\\ =\$8,000+\$22,000-\$5,000\\ =\$25,000\end{array}$ (2)

3.

To determine

Prepare an adjusted trial balance of Company R.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is that statement which contains complete list of accounts with their adjusted balances, after all relevant adjustments have been made. This statement is prepared at the end of every financial period.

Adjusted trial balance of Company R is as follows:

Company R
Adjusted Trial Balance
December 31, 2021
Accounts	Debit ($)	Credit ($)
Cash	$30,000
Accounts Receivable	30,000
Supplies	5,000
Prepaid Rent	9,000
Land	60,000
Accounts Payable		$22,000
Salaries Payable		4,000
Common Stock		70,000
Retained Earnings		25,000
Dividends	2,000
Service Revenue		70,000
Salaries Expense	27,000
Rent Expense	3,000
Supplies Expense	25,000
Total	$191,000	$191,000

Table (3)

Conclusion

Therefore, the total of debit, and credit columns of adjusted trial balance is $191,000.

4.

To determine

Prepare the income statement, stockholder’s equity and classified balance sheet of Company R.

Explanation of Solution

Income statement:

Income statement of Company R is as follows:

Company R
Income Statement
For the year ended December 31, 2021
Particulars	($)	($)
Revenues:
Service revenue		70,000
Total revenues		70,000
Expenses:
Rent expense	3,000
Salaries expense	27,000
Supplies expense	25,000
Total expenses		55,000
Net income		15,000

Table (4)

Therefore, the net income of Company R is $15,000.

Statement of stockholder’s equity:

The statement of stockholder’s equity of Company R for the year ended December 31, 2021 is as follows:

Company R
Statement of Stockholders’ Equity
For the period ended December 31, 2021
	Common stock ($)	Retained earnings ($)	Total stockholders' equity ($)
Balance at January 1	50,00	$25,000	$75,000
Issuance of common stock	20,000		20,000
Add: Net income for 2021		15,000	15,000
Less: Dividends		(2,000)	(2,000)
Balance at December 31	$70,000	$38,000	$108,000

Table (5)

Therefore, the total stockholder’s equity of Company R for the year ended December 31, 2021 is $108,000.

Classified balance sheet:

Classified balance sheet of Company R is as follows:

Figure (1)

Therefore, the total assets of Company R are equal to the total liabilities and stockholders’ equity by $134,000.

5.

To determine

Prepare the closing entries of Company R.

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.

Closing entries of Company R is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2021	Service revenue		70,000
December 31	Retained earnings			70,000
	(To close all revenue account)
2021	Retained earnings		55,000
December 31	Salaries expense			27,000
	Rent expense			3,000
	Supplies expense			25,000
	(To close all the expenses account)
2021	Retained earnings		2,000
December 31	Dividends			2,000
	(To close the dividends account)

Table (6)

Closing entry for revenue account:

In this closing entry, the service revenue account is closed by transferring the amount of service revenue to the retained earnings in order to bring the revenue accounts balance to zero.

Closing entry for expenses account:

In this closing entry, salaries expense, rent expense, and supplies expense are closed by transferring the amount of all expenses to the retained earnings in order to bring all the expense accounts balance to zero.