Chapter 3, Problem 3.7AP

Complete the accounting cycle after adjusting entries (LO3–4, 3–5, 3–6, 3–7)

Refer to P3–4A.

Required:

Complete the following steps:

  1.    Enter the unadjusted balances from the trial balance into T-accounts.

  2.    Post the adjusting entries prepared in P3–4A to the accounts.

  3.    Prepare an adjusted trial balance.

  4.    Prepare an income statement and a statement of shareholders’ equity for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. Assume that no common stock is issued during the year.

  5.    Record closing entries.

  6.    Post closing entries to the accounts.

  7.    Prepare a post-closing trial balance.

To determine

To Post: The unadjusted balances and the adjusting entries into 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

Post the unadjusted balances and the adjusting entries into T-accounts.

Cash account:

Cash
	10,300
Balance	10,300

Accounts Receivable account:

Accounts Receivable
	9,500
Balance	9,500

Supplies account:

Supplies
	2,000
			1,300
Balance	700

Prepaid rent account:

Prepaid rent
	7,200
			5,400
Balance	1,800

Equipment account:

Equipment
	90,000
Balance	90,000

Accumulated Depreciation account:

Accumulated Depreciation
			12,000
			6,000
		Balance	18,000

Accounts Payable account:

Accounts Payable
			7,700
		Balance	7,700

Salaries Payable account:

Salaries Payable
			0
			2,100
		Balance	2,100

Interest Payable account:

Interest Payable
			0
			800
		Balance	800

Utilities Payable account:

Utilities Payable
			0
			200
		Balance	200

Notes Payable account:

Notes Payable
			20,000
		Balance	20,000

Common Stock account:

Common Stock
			45,000
			0
		Balance	45,000

Retained Earnings account:

Retained Earnings
			19,000
		Balance	19,000

Service Revenue account:

Service Revenue
			42,200
		Balance	42,200

Salaries Expense account:

Salaries Expense
	24,500
	2,100
Balance	26,600

Interest Expense account:

Interest Expense
	0
	800
Balance	800

Rent Expense account:

Rent Expense
	0
	5,400
Balance	5,400

Supplies Expense account:

Supplies Expense
	0
	1,300
Balance	1,300

Utilities Expense account:

Utilities Expense
	2,400
	200
Balance	2,600

Depreciation Expense account:

Depreciation Expense
	0
	6,000
Balance	6,000

To determine

To Prepare: An adjusted trial balance.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare an adjusted trail balance for the year ending December 31, 2018:

CT Music Academy Adjusted Trial Balance For the Year Ending December 31, 2018
Accounts	Debit ($)	Credit ($)
Cash	10,300
Accounts Receivable	9,500
Supplies	700
Prepaid Rent	1,800
Equipment	90,000
Accumulated Depreciation		18,000
Accounts Payable		7,700
Salaries Payable		2,100
Interest Payable		800
Utilities Payable		200
Notes Payable		20,000
Common Stock		45,000
Retained Earnings		19,000
Service Revenue		42,200
Salaries  Expense	26,600
Interest Expense	800
Rent Expense	5,400
Supplies Expense	1,300
Utilities Expense	2,600
Depreciation Expense	6,000
Total	155,000	155,000

Table (1)

To determine

To Prepare: An income statement, statement of shareholders’ equity, and a classified balance sheet for the year ended December 31, 2018.

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. It is prepared to find out the net income of an organization.

Prepare an income statement for the year ended December 31, 2018:

CT Music Academy Income statement For the Year Ending December 31, 2018
Details	Amount ($)	Amount ($)
Revenues:
Service revenue		42,200
Less: Expenses
Salaries  Expense	26,600
Interest  Expense	800
Rent Expense	5,400
Supplies Expense	1,300
Utilities Expense	2,600
Depreciation Expenses	6,000
Total Expenses		(42,700)
Net Income (Loss)		$(500)

Table (2)

Statement of Stockholders’ Equity:

Stockholders’ equity statement shows the changes made in the stockholders’ equity account and in the total stockholders’ equity during the accounting period. It is otherwise known as statements of shareholder’s investment.

Prepare statement of stockholders’ equity the year ended December 31, 2018.

CT Music Academy Statement of Stockholders’ Equity For the Year Ended December 31, 2018
Particulars	Common Stock	Retained Earnings	Total Stockholders’ Equity
Beginning balance	$45,000	$19,000	$64,000
Issuance of common stock	$0		$0
Less: Net income		$(500)	$(500)
Less: Dividends		$(0)	$(0)
Ending balance	$45,000	$18,500	$63,500

Table (3)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and claims of 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.

Prepare the balance sheet as of December 31, 2018.

CT Music Academy Balance Sheet As of December 31, 2018
Assets	Amount	Liabilities and Stockholders’ Equity	Amount
Assets:		Liabilities:
Cash	$10,300	Accounts payable	$7,700
Accounts receivable	$9,500	Salaries payable	$2,100
Supplies	$700	Interest payable	800
Prepaid rent	$1,800	Utilities payable	200
Total current assets	$22,300	Total current liabilities	$10,800
Equipment	$90,000	Notes payable	$20,000
Accumulated depreciation	$(18,000)	Total liabilities	$30,800
		Stockholders’ Equity:
		Common stock	$45,000
		Retained earnings	$18,500
		Total Stockholders’ Equity	$63,500
Total assets	$94,300	Total liabilities and stockholders’ equity	$94,300

Table (4)

To determine

To Record: The closing entries.

Explanation of Solution

Closing Entries:

Closing entries are those journal entries which are passed to transfer the balances of temporary accounts to the permanent accounts. These are passed at the end of the period, to transfer the final balance.

Prepare journal entry to record closing entries at December 31, 2015.

The following is the closing entry for revenue accounts:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Service Revenues		42,200
	Retained Earnings			42,200
	(To close the revenues account)

Table (5)

• Revenue is decreased. Therefore, debit revenue account.
• Retained earnings are a component of Stockholders’ Equity, and it is increased. Therefore, credit retained earnings account.

The following is the closing entry for the expenses account:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Retained Earnings		42,700
	Salaries expense			26,600
	Interest expense			800
	Rent expense			5,400
	Supplies expense			1,300
	Utilities expense			2,600
	Depreciation expense			6,000
	(To close the expenses account)

Table (6)

• Retained Earnings is a component of Stockholders’ Equity, and it is decreased. Therefore, debit retained earnings account.
• Expenses are decreased. Therefore, credit expenses account.

To determine

To Post: The closing entries to the accounts.

Explanation of Solution

Post closing entries to the account.

Retained Earnings account:

Retained Earnings
			19,000
	42,700		42,200
		Balance	18,500

Service Revenue account:

Service Revenue
			42,200
	42,200
		Balance	0

Salaries Expense account:

Salaries Expense
	24,500
	2,100		26,600
Balance	0

Interest Expense account:

Interest Expense
	0
	800		800
Balance	0

Rent Expense account:

Rent Expense
	0
	5,400		5,400
Balance	0

Supplies Expense account:

Salaries Expense
	0
	1,300		1,300
Balance	0

Utilities Expense account:

Utilities Expense
	2,400
	200		2,600
Balance	0

Depreciation Expense account:

Depreciation Expense
	0
	6,000		6,000
Balance	0

To determine

To Prepare: A post-closing trial balance.

Explanation of Solution

Post-closing trial balance: It is a trial balance that is prepared after the closing entries are recorded. It includes only the balance sheet accounts as the income statement accounts are closed to the income summary.

Prepare a post-closing trial balance.

CT Music Academy Post-Closing Trial Balance For the Year Ended December 31, 2018
Accounts	Debit ($)	Credit ($)
Cash	10,300
Accounts receivable	9,500
Supplies	700
Prepaid rent	1,800
Equipment	90,000
Accumulated depreciation		18,000
Accounts payable		7,700
Salaries payable		2,100
Interest payable		800
Utilities payable		200
Notes payable		20,000
Common stock		45,000
Retained earnings		18,500
Total	$112,300	$112,300

Table (7)