Chapter 3, Problem 3.4CP

1.

To determine

To indicate: The effects of the accounting equation for the August and September events using a table.

Explanation of Solution

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;

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

The effects of the accounting equation for the August and September events using a table are indicated as follows:

Date	Assets		=	Liabilities		+	Stockholders’ Equity
August 31	Cash	1,500	=	Unearned Revenue	1,500		NE
September 11	Cash	3,800	=	NE			Service Revenue (+R)	3,800
September 13	Supplies	200	=	Accounts Payable	200		NE
September 15	Cash	-1,500	=	NE			Salaries & Wages Expense (+E)	-1,500
September 25	Cash	7,200	=	NE			Service Revenue (+R)	7,200
September 26	Accounts Receivable	210	=	NE			Service Revenue (+R)	210
September 27	Prepaid Advertising	300	=	NE			NE
	Cash	-300
September 29	Cash	210	=	NE			NE
	Accounts Receivable	-210
September 30	NE		=	Accounts Payable	300		Utilities Expense (+E)	-300

Table (1)

2.

To determine

To prepare: Journal entries for August and September events.

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.

Journal entries for August and September events are prepared as follows:

Date		Account Title and Explanation	Debit ($)	Credit ($)
August 31		Cash  (A+)	1,500
		Unearned Revenue (L+)		1,500
		(To record the cash received for the service yet to provide)
September 11		Cash  (A+)	3,800
		Service Revenue  (R+, SE+)		3,800
		(To record the cash received from the rental service)
September 13		Supplies  (A+)	200
		Accounts Payable (L+)		200
		(To record the supplies purchased on accounts)
September 15		Salaries and Wages Expense (E+, SE–)	1,500
		Cash  (A–)		1,500
		(To record the payment of wages expenses to employees)
September 25		Cash  (A+)	7,200
		Service Revenue  (R+, SE+)		7,200
		(To record cash received for the service provided)
September 26		Accounts Receivable (A+)	210
		Service Revenue  (R+, SE+)		210
		(To record the service provide on account)
September 27		Prepaid Advertising  (A+)	300
		Cash (A–)		300
		(To record the cash paid in advance for the advertisement expenses)
September 29		Cash  (A+)	210
		Accounts Receivable   (A–)		210
		(To record the cash received for the service provided on account)
September 30		Utilities Expense(E+, SE–)	300
		Accounts Payable  (L+)		300
		(To record the utilities expenses incurred which are to be paid later)

Table (2)

3.

To determine

To calculate: The preliminary net income for September and also describe whether Company L is profitable based on its net income.

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:
Service Revenue $\left(\text{\$3,800}+\$\text{7,200}+\$\text{210}\right)$	$11,210
Total Revenues		11,210
Less: Expenses:
Utilities Expense	300
Salaries and Wages Expense	1,500
Total Expenses		1,800
Net Income		$9,410

Table (3)

Conclusion

Based on the preliminary net income of $9,410, it is clear that Company L is profitable since it has higher net income than zero.

4.

To determine

To identify: AnyTwo adjustments thatCompany L will be required to make, before it prepare a final income statement for September.

Explanation of Solution

Adjusting entries:

An adjusting entry is prepared when the trial balance is not up-to-date, and complete, and they are usually prepared at the end of the accounting period, to reflect the unearned revenues and accrued expenses that occurred during the current year. This adjusting entry is essential for preparing the financial statements of the business.

Adjustments thatCompany L will be required to make, before it can prepare a final income statement for September are identified as follows:

• The supplies used in September are not yet recorded.
• The wages and salaries expenses incurred in the month of September, which are not yet recorded.
• The cash earned for the service yet to provide are to be reported in September.
• The revenue earned from the Rental service is not yet recorded.
• The income taxes on the net income of the company for the month of September are not yet recorded.