Chapter 3, Problem 3.3CP

1.

To determine

To prepare: The journal entries for each transaction.

Explanation of Solution

Journal:

Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Accounting Equation:

The accounting equation implies the relationship between the assets, liabilities, and the stockholders equity. The balance of both the assets and the liabilities, stockholders equity must be equally balanced. The accounting equation is as follows;

$\boxed{\text{Assets = Liabilities + Stockholders Equity}}$

1. 1. Journalize the issuance of common stock.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 1	Cash (A+)	16,000
	Common stock (SE+)		16,000
	(To record the issuance of common stock to investors)

Table (1)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $16,000.
• Common stock is a component of stockholder equity account. Thus, an increase in common stock increases the stockholders equity account. Hence, common stock account is being credited to increase its balance by $16,000.

1. 2. Journalize the payment of rent in advance.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 2	Prepaid rent (A+)	2,400
	Cash (A–)		2,400
	(To record the payment of rent in advance)

Table (2)

• Prepaid rent is an asset account. Thus, an increase in prepaid rent increases the asset account. Hence, debit prepaid rent account by $2,400.
• Cash is an asset account. Thus, a decrease in cash decreases the asset account. Hence, credit cash account by $2,400.

1. 3. Journalize the purchase of supplies.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 3	Supplies (A+)	300
	Cash (A–)		300
	(To record the purchase of supplies)

Table (3)

• A supply is an asset account. Thus, an increase in supplies increases the asset account. Hence, debit supplies account by $300.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $300.

1. 4. Journalize the amount deposited in bank by signing a note.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 4	Cash (A+)	10,000
	Notes payable (L+)		10,000
	(To record the amount received by signing a note)

Table (4)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $10,000.
• Notes payable is a liability account. Thus, an increase in notes payable increases the liability account. Hence, notes payable account is being credited to increase its balance by $10,000.

1. 5. Journalize the purchase of equipment and land.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 5	Equipment (A+)	2,500
	Land (A+)	7,500
	Cash (A–)		10,000
	(To record the purchase of equipment and the purchase of land)

Table (5)

• Equipment is an asset account. Thus, an increase in equipment increases the asset account. Hence, debit equipment account by $2,500.
• Land is an asset account. Thus, an increase in land increases the asset account. Hence, debit land account by $7,500.
• Accounts payable is a liability account. Thus, an increase in accounts payable increases the liability account. Hence, account payable account is being credited to increase its balance by $10,000.

1. 6. Journalize the advertisement expenses.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 6	Advertisement expenses (E+, SE-)	425
	Cash (A-)		425
	(To record the advertisement expenses )

Table (6)

• Advertisement expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in advertisement expense account decreases the stockholder’s equity account. Hence, advertisement expenses account is being debited to increase its balance by $425.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $425.

1. 7. Journalize the sales made partly for cash and partly on account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 7	Cash (A+)	1,525
	Accounts receivable (A+)	275
	Service revenue (R+, SE+)		1,800
	(To record the sales made partly for cash and partly on account)

Table (7)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $1,525.
• Accounts receivable is an asset account. Thus, an increase in accounts receivable increases the asset account. Hence, debit accounts receivable account by $275.
• Sales revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $1,800.

1. 8. Journalize the amount received from customer.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 8	Cash (A+)	50
	Accounts receivable (A–)		50
	(To record the cash receipt for the service performed on account)

Table (8)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $50.
• Accounts receivable is an asset account. Thus, a decrease in accounts receivable decreases the asset account. Hence, credit accounts receivable account by $50.

1. 9. Journalize the payment made for repair.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 9	Repairs and maintenance expense (E+, SE–)	120
	Cash (A-)		120
	(To record the payment made for the repair charges)

Table (9)

• Repairs and maintenance expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in repairs and maintenance expense account decreases the stockholder’s equity account. Hence, Repairs and maintenance expense account is being debited to increase its balance by $120.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $120.

1. 10. Journalize the payment made for the wages.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 28	Wages expense (E+, SE–)	420
	Cash (A–)		420
	(To record the payment made for the employee wages)

Table (10)

• Wages expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in wages expense account decreases the stockholder’s equity account. Hence, wages expense account is being debited to increase its balance by $420.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $420.

2.

To determine

To show: The unadjusted ending balances in T-accounts.

Explanation of Solution

T-account:

An account is referred to as a 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:

• The title of the account
• The left or debit side
• The right or credit side

The posting of the journal entries to the T accounts are as follows:

Cash (A)
Beginning Balance	$0		2.		$2400
1.	$ 16,000		3.		$300
4.	$10,000		5.		$10,000
7.	$1,525		6.		$425
8.	$50		9.		$120
			10.		$420
Total	$ 27,575		Total		$13,665
Ending Balance	$13,910
Supplies (A)
Beginning Balance		$0
3.		300
Ending Balance		$300

Accounts Receivable (A)
Beginning Balance	$0
7.	275	8.	$50
Ending Balance	$225
Prepaid Rent(A)
Beginning Balance	$0
2.	$2,400
Ending Balance	$2,400
Land (A)
Beginning Balance	$0
5.	$7,500
Ending Balance	$7,500

Equipment (A)
Beginning Balance	$0
5.	$2,500
Ending Balance	$2,500

Advertising expense (E)
Beginning Balance	$0
6.	$425
Ending Balance	$425

Wages expense(E)
Beginning Balance	$0
10.	$420
Ending Balance	$420
Repairs expense (E)
Beginning Balance	$0
9.	$120
Ending Balance	$120

Notes Payable (L)
		Beginning Balance	$0
		4.	$10,000
		Ending Balance	$10,000
Common Stock (SE)
		Beginning Balance	$0
		16.	$16,000
		Ending Balance	$16,000

Sales Revenue (R)
		Beginning Balance	$
		7.	$1,800
		Ending Balance	$425

3.

To determine

To prepare: The unadjusted Trial balance at the end of February.

Explanation of Solution

Unadjusted trial balance:

Unadjusted trial balance is that statement which contains complete list of accounts with their unadjusted balances. This statement is prepared at the end of every financial period.

The unadjusted Trial balance of Company B at the end of February is prepared as follows:

Company B
Unadjusted Trial Balance
At February 28
Particulars	Debit	Credit
Cash	$  13,910
Accounts Receivable	225
Supplies	300
Prepaid Rent	2,400
Land	7,500
Equipment	2,500
Notes Payable		10,000
Common Stock		16,000
Sales Revenue		1,800
Advertising Expense	425
Salaries and Wages Expense	420
Repairs and Maintenance Expense	120
Total	$  27,800	$  27,800

Table (11)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $27,800.

4.

To determine

To calculate: The preliminary net income and net profit margin and determine whether the net profit is better or worse than the competitor.

Explanation of Solution

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

The preliminary net income of the company is determined as follows:

Particulars	Amount ($)	Amount ($)
Revenues:
Sales Revenue	$1,800
Total Revenues		1,800
Less: Expenses:
Repair Expense	120
Wages Expense	420
Advertising Expense	425
Total Expenses		965
Net Income		$835

Table (8)

The net profit margin of the Company is determined as follows:

$\begin{array}{c}\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Revenues}}\times 100\\ =\frac{\$835}{\$1,800}\times 100\\ =46.4\%\end{array}$

Conclusion

Company B is performing better than its competitor with a net profit margin of 46.4%.