Chapter 3, Problem 3.1APCP

You may refer to the opening story of Tony and Suzie and their decision to start Great Adventures in AP 1–1. More of their story and the first set of transactions for the company in July are presented in AP 2–1 and repeated here.

July 1	Sell $10,000 of common stock to Suzie.
1	Sell $10,000 of common stock to Tony.
1	Purchase a one-year insurance policy for $4,800 ($400 per month) to cover injuries to participants during outdoor clinics.
2	Pay legal fees of $1,500 associated with incorporation.
4	Purchase office supplies of $1,800 on account.
7	Pay for advertising of $300 to a local newspaper for an upcoming mountain biking clinic to be held on July 15. Attendees will be charged $50 the day of the clinic.
8	Purchase 10 mountain bikes, paying $12,000 cash.
15	On the day of the clinic, Great Adventures receives cash of $2,000 from 40 bikers. Tony conducts the mountain biking clinic.
22	Because of the success of the first mountain biking clinic, Tony holds another mountain biking clinic and the company receives $2,300.
24	Pay for advertising of $700 to a local radio station for a kayaking clinic to be held on August 10. Attendees can pay $100 in advance or $150 on the day of the clinic.
30	Great Adventures receives cash of $4,000 in advance from 40 kayakers for the upcoming kayak clinic.

  The following transactions occur over the remainder of the year.

Aug. 1	Great Adventures obtains a $30,000 low-interest loan for the company from the city council, which has recently passed an initiative encouraging business development related to outdoor activities. The loan is due in three years, and 6% annual interest is due each year on July 31.
Aug. 4	The company purchases 14 kayaks, paying $28,000 cash.
Aug. 10	Twenty additional kayakers pay $3,000 ($150 each), in addition to the $4,000 that was paid in advance on July 30, on the day of the clinic. Tony conducts the first kayak clinic.
Aug. 17	Tony conducts a second kayak clinic, and the company receives $10,500 cash.
Aug. 24	Office supplies of $1,800 purchased on July 4 are paid in full.
Sep. 1	To provide better storage of mountain bikes and kayaks when not in use, the company rents a storage shed, purchasing a one-year rental policy for $2,400 ($200 per month).
Sep. 21	Tony conducts a rock-climbing clinic. The company receives $13,200 cash.
Oct. 17	Tony conducts an orienteering clinic. Participants practice how to understand a topographical map, read an altimeter, use a compass, and orient through heavily
Dec. 1	Tony decides to hold the company’s first adventure race on December 15. Four-person teams will race from checkpoint to checkpoint using a combination of mountain biking, kayaking, orienteering, trail running, and rock-climbing skills. The first team in each category to complete all checkpoints in order wins. The entry fee for each team is $500.
Dec. 5	To help organize and promote the race, Tony hires his college roommate, Victor. Victor will be paid $50 in salary for each team that competes in the race. His salary will be paid after the race.
Dec. 8	The company pays $1,200 to purchase a permit from a state park where the race will be held. The amount is recorded as a miscellaneous expense.
Dec. 12	The company purchases racing supplies for $2,800 on account due in 30 days. Supplies include trophies for the top-finishing teams in each category, promotional shirts, snack foods and drinks for participants, and field markers to prepare the racecourse.
Dec. 15	The company receives $20,000 cash from a total of forty teams, and the race is held.
Dec. 16	The company pays Victor’s salary of $2,000.
Dec. 31	The company pays a dividend of $4,000 ($2,000 to Tony and $2,000 to Suzie).
Dec. 31	Using his personal money, Tony purchases a diamond ring for $4,500. Tony surprises Suzie by proposing that they get married. Suzie accepts and they get married!

 The following information relates to year-end adjusting entries as of December 31, 2018.

  a.    Depreciation of the mountain bikes purchased on July 8 and kayaks purchased on August 4 totals $8,000.

 b.    Six months’ worth of insurance has expired.

  c.    Four months’ worth of rent has expired.

  d.    Of the $1,800 of office supplies purchased on July 4, $300 remains.

  e.    Interest expense on the $30,000 loan obtained from the city council on August 1 should be recorded.

 f.    Of the $2,800 of racing supplies purchased on December 12, $200 remains.

 g.    Suzie calculates that the company owes $14,000 in income taxes.

Required:

 1.    Record transactions from July 1 through December 31.

 2.    Record adjusting entries as of December 31, 2018.

  3.    Post transactions from July 1 through December 31 and adjusting entries on December 31 to T-accounts.

  4.    Prepare an adjusted trial balance as of December 31, 2018.

  5.    For the period July 1 to December 31, 2018, prepare an income statement and statement of stockholders’ equity. Prepare a classified balance sheet as of December 31, 2018.

 6.    Record closing entries as of December 31, 2018.

 7.    Post closing entries to T-accounts.

 8.    Prepare a post-closing trial balance as of December 31, 2018.

To determine

To record: The journal entries for given transactions from July 1 to December 31.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

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.

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

Date	Account Title and Explanation	PostRef.	Debit($)	Credit($)
2018	Cash		10,000
July 1	Common stock			10,000
	(To record the issuance of common stock in cash to Company S)
2018	Cash		10,000
July, 2	Common stock			10,000
	(To record the issuance of common stock in cash to Company T)
2018	Prepaid insurance		4,800
July 1	Cash			4,800
	(To record the purchase of one year insurance policy in cash)
2018	Legal fees expense		1,500
July, 2	Cash			1,500
	(To record the payment of legal fees)
2018	Supplies (office)		1,800
July, 4	Accounts payable			1,800
	(To record purchase of office supplies on account)
2018	Advertising expense		300
July, 7	Cash			300
	(To record payment of advertising expense)
2018	Equipment (Bikes)		12,000
July, 7	Cash			12,000
	(To record the purchase of mountain bike)
2018	Cash		2,000
July, 15	Service revenue (Clinic)			2,000
	( To record the cash received for service revenue)
2018	Cash		2,300
July, 22	Service revenue (Clinic)			2,300
	( To record the cash received for service revenue)
2018	Advertising expense		700
July, 22	Cash			700
	(To record the payment of advertising expense in cash)
2018	Cash		4,000
July, 30	Deferred revenue			4,000
	(To record advance cash received from customer)
2018	Cash		30,000
August, 1	Notes payable			30,000
	(To record loan received from city council)
2018	Equipment (Kayaks)		28,000
August, 4	Cash			28,000
	(To record the purchase of equipment in cash)
2018	Cash		3,000
August, 10	Deferred revenue		4,000
	Service revenue			7,000
	(To record the cash received from service revenue and recognized service revenue)
2018	Cash		10,500
August, 17	Service revenue			10,500
	(To record cash received from service revenue)
2018	Accounts payable		1,800
August, 24	Cash			1,800
	( To record payment of cash to creditors)
2018	Prepaid rent		2,400
September 1	Cash			2,400
	(To record the payment of one year advance rent)
2018	Cash		13,200
September 21	Service revenue (Clinic)			13,200
	(To record the cash received from customer)
2018	Cash		17,900
October 17	Service revenue (Clinic)			17,900
	(To record the cash received from customer)
2018	Miscellaneous expense		1,200
December 8	Cash			1,200
	(To record the payment of miscellaneous expense)
2018	Supplies (Racing)		2,800
December 12	Accounts payable			2,800
	(To record purchase of supplies on account)
2018	Cash		20,000
December 15	Service revenue (Racing)			20,000
	(To record cash received from service revenue)
2018	Salaries expense		2,000
December 16	Cash			2,000
	(To record the supplies expense incurred)
2018	Dividend		4,000
December 31	Cash			4,000
	(To record the payment of cash dividends)

Table (1)

To determine

To record: The adjusting journal entries on December 31.

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.

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

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
2018	Depreciation expense		8,000
December 31	Accumulated depreciation			8,000
	(To record depreciation expense incurred at the end of the accounting year)
2018	Insurance expense		2,400
December 31	Prepaid insurance			2,400
	(To record the insurance expense incurred at the end of the accounting period)
2018	Rent expense		800
December 31	Prepaid rent			800
	(To record the rent expense incurred at the end of the accounting year)
2018	Supplies expense (Office)		1,500
December 31	Supplies			1,500
	(To record supplies expense incurred at the end of the accounting year)
2018	Interest expense		750
December 31	Interest payable			750
	(To record interest expense incurred at the end of the accounting year)
2018	Supplies expense (Racing)		2,600
December 31	Supplies			2,600
	(To record supplies expense incurred at the end of the accounting year)
2018	Income tax expense		14,000
December 31	Income tax payable			14,000
	(To record the income tax expense incurred at the end of the accounting year)

Table (2)

To determine

To post: The Transactions to T-accounts of Company G.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

T-accounts for above transactions are as follows:

Cash
10,000	4,800
10,000	1,500
2,000	300
2,300	12,000
4,000	700
30,000	28,000
3,000	1,800
10,500	2,400
13,200	1,200
17,900	2,000
20,000	4,000
64,200

Prepaid Insurance
4,800	2,400
2,400

Supplies (Racing)
2,800	2,600
200

Prepaid Rent
2,400	800
1,600

Supplies (Office)
1,800	1,500
300

Equipment (Bikes)
12,000
12,000

Equipment (Kayaks)
28,000
28,000

Accumulated  Depreciation
	8,000
	8,000

Accounts Payable
1800	1,800
	2,800
	2,800

Deferred Revenue
4,000	4,000
	0

Interest Payable
	750
	750

Income Tax Payable
	14,000
	14,000

Notes Payable
	30,000
	30,000

Common Stock
	10,000
	10,000
	20,000

Dividends
4,000
4,000

Service Revenue (Clinic)
	2,000
	2,300
	7,000
	10,500
	13,200
	17,900
	52,900

Service Revenue (Racing)
	20,000
	20,000

Legal Fees Expense
1,500
1,500

Advertising Expense
300
700
1,000

Rent Expense
800
800

Salaries Expense
2,000
2,000

Depreciation Expense
8,000
8,000

Insurance Expense
2,400
2,400

Supplies Expense (Office)
1,500
1,500

Supplies Expense (Racing)
2,600
2,600

Interest Expense
750
750

Income Tax Expense
14,000
14,000

Miscellaneous Expense
1,200
1,200

To determine

To prepare: The adjusted trial balance of Company G.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Adjusted trial balance of Company G is as follows:

Company G
Adjusted Trial Balance
December 31, 2018
Accounts	Debit ($)	Credit ($)
Cash	64,200
Prepaid Insurance	2,400
Prepaid Rent	1,600
Supplies (Office)	300
Supplies (Racing)	200
Equipment (Bikes)	12,000
Equipment (Kayaks)	28,000
Accumulated Depreciation		$8,000
Accounts Payable		2,800
Income Tax Payable		14,000
Interest Payable		750
Notes Payable		30,000
Common Stock		20,000
Dividends	4,000
Service Revenue (Clinic)		52,900
Service Revenue (Racing)		20,000
Advertising Expense	1,000
Depreciation Expense	8,000
Income Tax Expense	14,000
Insurance Expense	2,400
Interest Expense	750
Legal Fees Expense	1,500
Miscellaneous Expense	1,200
Rent Expense	800
Salaries Expense	2,000
Supplies Expense (Office)	1,500
Supplies Expense (Racing)	2,600
Totals	148,450	148,450

Table (3)

To determine

To prepare: The income statement and classified balance sheet of Company G.

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Statement of stockholders’ equity:

This statement reports the beginning stockholder’s equity and all the changes, which led to ending stockholder’s’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholder’s equity to arrive at the result of closing balance of stockholders’ equity.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Income statement:

Income statement of Company G is as follows:

Company G
Income Statement
For the year ended December 31, 2018
	($)	($)
Revenues:
Service revenue (clinic)	52,900
Service revenue (racing)	20,000
Total revenues		72,900
Expenses:
Advertising expense	1,000
Depreciation expense	8,000
Income tax expense	14,000
Insurance expense	2,400
Interest expense	750
Legal fees expense	1,500
Miscellaneous expense	1,200
Rent expense	800
Salaries expense	2,000
Supplies expense (office)	1,500
Supplies expense (racing)	2,600
Total expenses		35,750
Net income		37,150

Table (4)

Therefore, the net income of Company G is $37,150.

Statement of stockholder’s equity:

The statement of stockholder’s equity of Company G for the year ended December 31, 2018 is as follows:

Company G
Statement of Stockholders’ Equity
For the period ended December 31, 2018
	Common stock ($)	Retained  earnings ($)	Total stockholders' equity ($)
Balance at July 1	$0	$0	$0
Issuance of common stock	20,000		20,000
Add: Net income for 2018		37,150	37,150
Less: Dividends		-4,000	-4,000
Balance at December 31	$20,000	$33,150	$53,150

Table (5)

Therefore, the total stockholder’s equity of Company G for the year ended December 31, 2018 is $53,150.

Classified balance sheet:

Classified balance sheet of Company G is as follows:

Figure (1)

Therefore, the total assets of Company G are $100,700, and the total liabilities and stockholders’ equity are $100,700.

To determine

To record: The necessary closing entries of Company G.

Explanation of Solution

Closing entries:

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

Closing entries of Company G is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Service revenue (Clinic)		52,900
December 31	Service revenue (Racing)		20,000
	Retained earnings			72,900
	(To close all revenue account)
2018	Retained earnings		37,750
December 31	Advertising expense			1,000
	Depreciation expense			8,000
	Income tax expense			14,000
	Insurance expense			2,400
	Interest expense			750
	Legal fees expense			1,500
	Miscellaneous expense			1,200
	Rent expense			800
	Salaries expense			2,000
	Supplies expense (office)			1,500
	Supplies expense (Racing)			2,600
	(To close all the expenses account)
2018	Retained earnings		4,000
December 31	Dividends			4,000
	(To close the dividends account)

Table (6)

To determine

To post: The closing entries to the T-accounts.

Explanation of Solution

Service Revenue (Clinic)
	2,000
	2,300
	7,000
	10,500
	13,200
52,900	17,900
	0

Service Revenue (Racing)
20,000	20,000
	0

Legal Fees Expense
1,500	1,500
0

Advertising Expense
300
700	1,000
0

Rent Expense
800	800
0

Salaries Expense
2,000	2,000
0

Depreciation Expense
8,000	8,000
0

Insurance Expense
2,400	2,400
0

Supplies Expense (Office)
1,500	1,500
0

Supplies Expense (Racing)
2,600	2,600
0

Interest Expense
750	0
750

Income Tax Expense
14,000	14,000
0

Miscellaneous Expense
1,200	1,200
0

Dividends
4,000	4,000
0

Retained Earnings
35,750	72,900
4,000
	33,150

To determine

To prepare: A post-closing trial balance of Company G.

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted. The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Post-closing trial balance of Company G is as follows:

Company G
Post-closing Trial Balance
For the year ended December 31, 2018
Accounts	Debit ($)	Credit ($)
Cash	$64,200
Prepaid Insurance	2,400
Prepaid Rent	1,600
Supplies (Office)	300
Supplies (Racing)	200
Equipment (Bikes)	12,000
Equipment (Kayaks)	28,000
Accumulated Depreciation		$8,000
Accounts Payable		2,800
Income Tax Payable		14,000
Interest Payable		750
Notes Payable		30,000
Common Stock		20,000
Retained Earnings		33,150
Total	$108,700	$108,700

Table (7)

Therefore, the total of debit, and credit columns of post-closing trial balance is $108,700 and agree.