Chapter 3, Problem 32AP

a.

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Journal entry:

Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Ø  Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Ø  Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare journal entry to record the given transactions.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January 30	Cash	45,000
	Common stock		45,000
	(To record the capital amount received on issuance of common )
February 1	Prepaid rent	24,000
	Cash		24,000
	(To record the prepaid rent)
April 10	Supplies	3,200
	Accounts payable		3,200
	(To record the purchase of supplies account)
July 1	Cash	24,000
	Unearned revenue		24,000
	(To record the cash received in advance for the service provided)
July 20	Accounts payable	1,500
	Cash		1,500
	(To record the payment made on accounts payable )
August 15	Accounts receivable	18,000
	Service revenue		18,000
	(To record the bill provided to the customer for the service provided)
September 15	Cash	8,400
	Service revenue		8,400
	(To record the cash received on service rendered)
October 1	Salaries expense	12,000
	Cash		12,000
	(To record the salaries paid to the employees)
October 15	Cash	15,000
	Accounts receivable		15,000
	(To record the cash received from accounts receivable)
November 16	Accounts receivable	42,000
	Service revenue		42,000
	(To record the bill provided to the customer for the service provided)
December 1	Dividend	15,000
	Cash		15,000
	(To record the cash dividend paid)
December 31	Unearned revenue (1)	12,000
	Service revenue		12,000
	(To record the adjusting entry to recognize the service provided on the contract of July 1)
December 31	Salaries expense	3,600
	Salaries payable		3,600
	(To record the accrued salaries on December 31)
December 31	Rent expense (2)	11,000
	Prepaid rent		11,000
	(To record the rent expense for the year)
December 31	Supplies Expense (3)	2,920
	Supplies		2,920
	(To adjust the supplies account)

(Table 1)

Working Notes:

Calculate the amount that was stated at the time of adjusting the unearned revenue account

$\begin{array}{c}\text{Unearned Revenue = }\left(\begin{array}{l}\text{Cash received on }\\ \text{service provided}\end{array}\right)\times \text{Time period}\\ =\$24,000\times \frac{6\text{(July to December})}{12}\\ =\$12,000\end{array}$ (1)

Calculate the amount of rent expense for the year.

$\begin{array}{c}\text{Rent expense = }\frac{\text{Prepaid rent}}{\left(\begin{array}{l}\text{Number of months prepaid}\\ \text{ rent was paid}\end{array}\right)}\times \text{ Time period }\\ \text{=}\frac{\$24,000}{\text{24 years }}\times \text{ 11 ( February to December)}\\ \text{=\$11,000}\end{array}$ (2)

Calculate the amount of supplies expense for the year.

$\begin{array}{c}\text{Supplies Expense = Supplies purchased on account }-\left(\begin{array}{l}\text{Supplies on hand at the }\\ \text{end of the period}\end{array}\right)\\ =\$3,200-\$280\\ =\$2,920\end{array}$ (3)

b.

To determine

Post the transactions to T-accounts and calculate the account balances.

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 accounts are posted.

	Cash
30-Jan	45,000	2-Jan	24,000
1-July	24,000	20-Jul	1,500
15-Sep	8,400	10-Jan	12,000
15-Oct	15,000	12-Jan	15,000
Bal.	39,900

	Accounts receivable
15-Aug	18,000	15-Oct	15,000
16-Nov	42,000
Bal.	45,000

	Prepaid rent
1-Feb	24,000	31-Dec	11,000
Bal.	13,000

	Supplies
10-Apr	3,200	31-Dec	2,920
Bal.	280

	Accounts Payable
20-Jul	1,500	10-Apr	3,200
		Bal.	1,700

	Unearned revenue
31-Dec	12,000	1-Jul	24,000
		Bal.	12,000

	Salaries payable
		31-Dec	3,600
		Bal.	3,600

	Common Stock
		30-Jan	45,000
		Bal.	45,000

	Retained earnings
		Bal.	0

	Dividends
1-Dec	15,000
Bal.	15,000

	Service revenue
		15-Aug	18,000
		15-Sep	8,400
		16-Nov	42,000
		31-Dec	12,000
		Bal.	80,400

	Rent expense
31-Dec	11,000
Bal.	11,000

	Salaries expense
1-Oct	12,000
31-Dec	3,600
Bal.	15,600

	Supplies expense
31-Dec	2,920
Bal.	2,920

c.

To determine

Prepare a trial balance.

Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given time.  It is usually prepared at end of the accounting period.  Debit balances are listed in left   column and credit balances are listed in right column.  The totals of debit and credit column should be equal.  Trial balance is useful in the preparation of the financial statements.

Prepare a trial balance.

Company S
Trial Balance
December 31, Year 1
Account Titles	Debit  $	Credit $
Cash	39,900
Accounts Receivable	45,000
Prepaid Rent	13,000
Supplies	280
Accounts Payable		1,700
Unearned Revenue		12,000
Salaries Payable		3,600
Common Stock		45,000
Dividends	15,000
Service Revenue		80,400
Salaries Expense	15,600
Rent Expense	11,000
Supplies Expense	2,920
Totals	142,700	142,700

(Table 2)

d.

To determine

Prepare the income statement, statement of stockholder’s equity, balance sheet and the statement of cash flows.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses of business operations and the result of those operations is reported as net income or net loss for a particular time period is referred to as income statement.

Statement of changes in stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’  equity during the end of an accounting period by explaining about the increase or  decrease in the capital reserves of shares.

Balance sheet:

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

Statement of cash flows:

This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the income statement.

Company S
Income statement
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in $
Service Revenue		80,400
Expenses:
Salaries Expense	15,600
Rent Expense	11,000
Supplies Expense	2,920
Total Expenses		(29,520)
Net Income		50,880

(Table 3)

Therefore, Company S reported an amount of $50,880 in its income statement for the year ended, December31, Year 1.

Prepare the statement changes in of stockholder’s equity.

Company S
Statement of Changes in Stockholders’ Equity
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in $
Beginning Common Stock	0
Add: Stock Issued	45,000
Ending Common Stock		45,000
Beginning Retained Earnings	0
Add: Net Income	50,880
Less: Dividends	(15,000)
Ending Retained Earnings		35,880
Total Stockholders’ Equity		80,880

(Table 4)

Therefore, Company S reported an amount of $80,880 as its total stockholders’ equity for the year ended, December31, Year 1.

Prepare the balance sheet.

Company S
Balance sheet
As of December 31, Year 1
Particulars	Amount in $	Amount in $
Assets:
Cash	39,900
Accounts Receivable	45,000
Prepaid Rent	13,000
Supplies	280
Total Assets		98,180
Liabilities:
Accounts Payable	1,700
Unearned Revenue	12,000
Salaries Payable	3,600
Total Liabilities		17,300
Stockholders’ Equity:
Common Stock	45,000
Retained Earnings	35,880
Total Stockholders’ Equity		80,880
Total Liabilities and Stockholders’ Equity		98,180

(Table 5)

Therefore, Company S reported an amount of $98,180 as total assets and total liabilities and stockholders’ equity in its balance sheet for the year ended, December31, Year 1.

Prepare the statement of cash flows.

Company S
Statement  of cash flow
for the year ended December 31, Year 1
Particulars	Amount in $	Amount in$
Cash Flows From Operating Activities:
Received cash from Customers (4)	47,400
Paid cash for Expenses (5)	(37,500)
Net Cash Flow from Operating Activities		9,900
Cash Flows From Investing Activities:		0
Cash Flows From Financing Activities:
Received cash from Stock Issue	45,000
Paid cash for Dividends	(15,000)
Net Cash Flow from Financing Activities		30,000
Net Change in Cash		39,900
Add: Beginning Cash Balance		0
Ending Cash Balance		39,900

(Table 6)

Therefore, an amount of $39,900 was reported as ending cash balance in the Company S’s statement of cash flow for the year ended, December31, Year 1.

Working Notes:

Calculate the amount of cash received from the customers:

$\begin{array}{c}\begin{array}{l}\text{Cash received from }\\ \text{the customers}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received }\\ \text{from service provided}\\ \text{ on July 1}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Cash received from }\\ \text{service rendered }\\ \text{on September 15}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Cash received}\\ \text{ on October 15}\end{array}\right)\\ =\$24,000+\$8,400+\$15,000\\ =\$47,400\end{array}$ (4)

Calculate the amount of cash paid for expense:

$\begin{array}{c}\text{Cash paid for expense}\}\text{ = }\left(\begin{array}{l}\text{Prepaid rent paid}\\ \text{ on February 1}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Acounts payable}\\ \text{ on July 20}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Salaries expense}\\ \text{ on October 1}\end{array}\right)\\ =\$24,000+\$1,500+\$12,000\\ =\$37,500\end{array}$ (5)

e.

To determine

Prepare the closing entries at December 31.

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 account. Closing entries produce a zero balance in each temporary account.

Prepare the closing entry for revenue account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Service revenue	80,400
	Retained earnings		80,400
	(To record the closing entry for the service revenue account on December 31)

(Table 7)

• In this closing entry, the service revenue account balance is being transferred to the retained earnings account, to bring the revenues account balance to zero.
• Thereby, the retained earnings account balance gets increased by $80,400 and, the revenue account balance gets decreased by $80,400.

Prepare the closing entry for expense accounts.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Retained earnings	29,520
	Salaries expense		15,600
	Rent expense		11,000
	Supplies expense		2,920
	(To record the closing entry for the expense account on December 31)

(Table 8)

• In this closing entry, all the expenses account balances are transferred to the income retained earnings account, to bring the expenses account balances to zero.
• Thereby, both the retained earnings account, and the expenses account balances get decreased by $29,520.

Prepare the closing entries to close the dividend account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Retained earnings	15,000
	Dividends		15,000
	(To record the closing entry for cash dividend)

(Table 9)

• In this closing entry, the dividend account balance is being transferred to the retained earnings account, to bring the dividend account balance to zero.
• Thereby, the retained earnings account balance gets decreased by $15,000 and, the dividend account balance gets decreased by $15,000.

Posting the closing entries to the T-account:

Cash
Bal.39,900

Accounts Receivable
Bal.45,000

Prepaid Rent
Bal.13,000

Supplies
Bal.280

Accounts Payable
	Bal.1,700

Unearned Revenue
	Bal.12,000

Salaries Payable
	Bal.3,600

Common Stock
	Bal.45,000

Retained Earnings
Cl.29,520	cl.80,400
Cl.15,000
	Bal.35,880

Dividends
Bal.15,000	cl.15,000
Bal.0

Service Revenue
Cl.80,400	Bal.80,400
	Bal.0

Salaries Expense
Bal.15,600	cl.15,600
Bal.

Rent Expense
Bal.11,000	cl.11,000
Bal.0

Supplies Expense
Bal.2,920	cl.2,920
Bal.0

f.

To determine

Prepare a trial balance after the closing entries are posted.

Explanation of Solution

Prepare a post-closing trial balance.

Company S
Post-Closing Trial Balance
December 31, Year 1
Account Titles	Debit	Credit
Cash	39,900
Accounts Receivable	45,000
Prepaid Rent	13,000
Supplies	280
Accounts Payable		1,700
Unearned Revenue		12,000
Salaries Payable		3,600
Common Stock		45,000
Retained Earnings		35,880
Totals	98,180	98,180

(Table 10)

Therefore, the post –closing trial balance of Company S reported a total amount of $98,180 on its debit and credit column.