Chapter 3, Problem 21E

1.

To determine

Record the journal entries for given transactions of Company D.

Explanation of Solution

Journal entries for given transactions are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2021	Prepaid rent	6,000
January 2	Cash		6,000
	(To record advance rent received for one year)
2021	Supplies	3,500
January 9	Accounts payable		3,500
	(To record purchase of additional supplied)
2021	Accounts receivable	25,500
January 13	Service revenue		25,500
	(To record service provided on account)
2021	Cash	3,700
January 17	Deferred revenue		3,700
	(To record cash received from customer for future service)
2021	Salaries expense	11,500
January 20	Cash		11,500
	(To record incurred of salaries expense)
2021	Cash	24,100
January 22	Accounts receivable		24,100
	(To record cash received from customer)
2021	Accounts payable	4,000
January 29	Cash		4,000
	(To record cash paid to suppliers)

Table (1)

2.a.

To determine

Record the adjusting entry for prepaid rent.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Adjusting entry for prepaid rent is as follows:

Date	Accounts title and explanation	Debit ($)	Credit ($)
January 31, 2021	Rent expense	500
	Prepaid rent		500
	(To record the rent expense incurred at the end of the accounting year)

Table (2)

Following is the rules of debit and credit of above transaction:

• Rent expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Prepaid rent is an asset account. There is a decrease in assets, therefore it is credited.

b.

To determine

Record the adjusting entry for supplies expense.

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2021	Supplies expense (1)		3,800
	Supplies			3,800
	(To record the supplies expense incurred at the end of the accounting year)

Table (3)

Following is the rules of debit and credit of above transaction:

• Supplies expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Supplies are an asset account. There is a decrease in assets, therefore it is credited.

Working note:

Calculate the value of supplies expense at end of the October month

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{The amount of beginning}\\ \text{ balance of supplies}\end{array}\right)\text{ +}\\ \left(\begin{array}{l}\text{The}\text{amount}\text{of supplies }\\ \text{purchased}\end{array}\right)\end{array}\right)-\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\text{on}\\ \text{hand at}\text{the}\text{end}\text{of}\text{the month}\end{array}\right)\\ =\left(\$3,100+\$3,500\right)-\$2,800\\ =\$3,800\end{array}$ (1)

c.

To determine

Record the adjusting entry for service revenue recognized at the end of the accounting year.

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2021	Deferred revenue		3,200
	Service revenue			3,200
	(To record the service revenue recognized at the end of the accounting year)

Table (4)

• Deferred revenue is a liability account. There is a decrease in liability, therefore it is debited.
• Service revenue is revenue, and it increased the value of stockholder’s equity. Therefore, it is credited.

d.

To determine

Record the adjusting entry for salaries expense.

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2021	Salaries expense		5,800
	Salaries payable			5,800
	(To record the salaries expense incurred at the end of the accounting year)

Table (5)

• Salaries expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Salaries payable is a liability account. There is a decrease in liability, therefore it is credited.

3.

To determine

Prepare the adjusted trial balance of Company D.

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.

The adjusted trial balance of Company D is as follows:

Company D
Adjusted Trial Balance
January 31, 2021
Accounts (Refer working note (2) )	Debit in $	Credit in $
Cash	30,100
Accounts Receivable	6,600
Supplies	2,800
Prepaid Rent	5,500
Land	50,000
Accounts Payable		2,700
Deferred Revenue		500
Salaries Payable		5,800
Common Stock		65,000
Retained Earnings		13,900
Service Revenue		28,700
Salaries Expense	17,300
Rent Expense	500
Supplies Expense	3,800
Totals	116,600	116,600

Table (6)

Working note:

Calculate the ending balance of all accounts:

Accounts		Beginning balance +Adjustment		Ending balance
Cash	=	$\left(\begin{array}{l}23,800-6,000+3,700-\\ 11,500+24,100-4,000\end{array}\right)$	=	30,100
Accounts Receivable	=	$\left(5,200+25,500-24,100\right)$	=	6,600
Supplies	=	$\left(3,100+3,500-3,800\right)$	=	2,800
Prepaid Rent	=	$\left(6,000-500\right)$	=	5,500
Land	=	$\left(50,000\right)$	=	50,000
Accounts Payable	=	$\left(3,200+3,500-4,000\right)$	=	2,700
Deferred Revenue	=	$\left(3,700-3,200\right)$	=	500
Salaries Payable	=	$\left(5,800\right)$	=	5,800
Common Stock	=	$\left(65,000\right)$	=	65,000
Retained Earnings	=	$\left(13,900\right)$	=	13,900
Service Revenue	=	$\left(25,500+3,200\right)$	=	28,700
Salaries Expense	=	$\left(11,500+5,800\right)$	=	17,300
Rent Expense	=	$\left(500\right)$	=	500
Supplies Expense	=	$\left(3,800\right)$	=	3,800

Table (7)

(2)

Thus, the total of debit, and credit columns of an adjusted trial balance is $116,600.

4.

To determine

Prepare the income statement of Company D for the year ended January 31, 2021.

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.

The income statement of Company D for the year ended January 31, 2021 is as follows:

Company D
Income statement
For the year ended January 31, 2021
Particulars	Amount in $	Amount in $
Service revenue (A)		28,700
Expenses:
Salaries expense	17,300
Rent expense	500
Supplies expense	3,800
Total expense (B)		21,600
Net income		7,100

Table (8)

Conclusion

Therefore, the net income of Company D is $7,100.

5.

To determine

Prepare the classified balance sheet of Company D at January 31, 2021.

Explanation of Solution

The classified balance sheet of Company D at January 31, 2021 is as follows:

Figure (2)

Working Note:

Calculate the retained earnings:

$\begin{array}{c}\text{Retained Earnings = Beginning retained earnings+ Net income +Dividends}\\ \text{=\$13,900+\$7,100}-\$0\\ =\$21,000\end{array}$ (3)

Conclusion

Therefore, the total assets of Company D are $95,000, and the total liabilities and stockholders’ equity are $95,000.

6.

To determine

Record the closing entries of Company D.

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.

The closing entries of Company D are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2021	Service revenue	28,700
January 31	Retained earnings		28,700
	(To close revenue account)
2021	Retained earnings	21,600
January 31	Salaries expense		17,300
	Rent expense		500
	Supplies expense		3,800
	(To close all expense account)

Table (7)

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.

7.a.

To determine

Calculate the amount of profit reported for the month of January.

Explanation of Solution

The amount of reported profit is $7,100 .

b.

To determine

Calculate the ratio of current assets to current liabilities at the end of January.

Explanation of Solution

Current ratio of the Company D is as follows:

Here,

Current assets is $45,000

Current liabilities is $9,000

$\begin{array}{c}\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ =\frac{\$45,000}{\$9,000}\\ =5.00\end{array}$

Conclusion

Therefore, the current ratio of Company D is 5.00.

c.

To determine

Indicate whether Company D appears good or bad in financial condition.

Explanation of Solution

Financial condition of Company D is good, because profit is greater than zero and current assets is greater than its current liability. So, the company can earn revenue from its customer and able to pay obligation.