Chapter 3, Problem 3.7BP

1. and 2.

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
	22,000
Balance	22,000

Accounts Receivable account:

Accounts Receivable
	15,000
Balance	15,000

Supplies account:

Supplies
	27,000
			22,000
Balance	5,000

Prepaid Insurance account:

Prepaid Insurance
	24,000
			20,000
Balance	4,000

Equipment account:

Equipment
	95,000
Balance	95,000

Accumulated Depreciation account:

Accumulated Depreciation
			37,000
			10,000
		Balance	47,000

Accounts Payable account:

Accounts Payable
			12,000
		Balance	12,000

Salaries Payable account:

Salaries Payable
			0
			4,000
		Balance	4,000

Interest Payable account:

Interest Payable
			0
			1,050
		Balance	1,050

Utilities Payable account:

Utilities Payable
			0
			2,200
		Balance	2,200

Notes Payable account:

Notes Payable
			35,000
		Balance	35,000

Common Stock account:

Common Stock
			35,000
			0
		Balance	35,000

Retained Earnings account:

Retained Earnings
			10,000
		Balance	10,000

Dividends account:

Dividends
	3,000
Balance	3,000

Service Revenue account:

Service Revenue
			227,000
		Balance	227,000

Salaries Expense account:

Salaries Expense
	158,000
	4,000
Balance	162,000

Interest Expense account:

Interest Expense
	0
	1,050
Balance	1,050

Insurance Expense account:

Insurance Expense
	0
	20,000
Balance	20,000

Supplies Expense account:

Supplies Expense
	0
	22,000
Balance	22,000

Utilities Expense account:

Utilities Expense
	12,000
	2,200
Balance	14,200

Depreciation Expense account:

Depreciation Expense
	0
	10,000
Balance	10,000

3.

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, 2015:

J Auto Company Adjusted Trial Balance For the Year Ending December 31, 2015
Accounts	Debit ($)	Credit ($)
Cash	22,000
Accounts Receivable	15,000
Supplies	5,000
Prepaid Insurance	4,000
Equipment	95,000
Accumulated Depreciation		47,000
Accounts Payable		12,000
Salaries Payable		4,000
Interest Payable		1,050
Utilities Payable		2,200
Notes Payable		35,000
Common Stock		35,000
Retained Earnings		10,000
Dividends	3,000
Service Revenue		227,000
Salaries  Expense	162,000
Interest Expense	1,050
Insurance Expense	20,000
Supplies Expense	22,000
Utilities Expense	14,200
Depreciation Expense	10,000
Total	$373,250	$373,250

Table (1)

4.

To determine

To Prepare: An income statement, statement of shareholders’ equity, and a classified balance sheet for the year ended December 31, 2015.

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, 2015:

J Auto Company Income statement For the Year Ending December 31, 2015
Details	Amount ($)	Amount ($)
Revenues:
Service revenue		227,000
Less: Expenses
Salaries  Expense	162,000
Interest  Expense	1,050
Insurance Expense	20,000
Supplies Expense	22,000
Utilities Expense	14,200
Depreciation Expenses	10,000
Total Expenses		(229,250)
Net Income (Loss)		$ (2,250)

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, 2015.

J Auto Company Statement of Stockholders’ Equity For the Year Ended December 31, 2015
Particulars	Common Stock	Retained Earnings	Total Stockholders’ Equity
Beginning balance	$35,000	$10,000	$45,000
Issuance of common stock	$0		$0
Add: Net income (Loss)		$(2,250)	$(2,250)
Less: Dividends		$(3,000)	$(3,000)
Ending balance	$35,000	$4,750	$39,750

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, 2015.

J Auto Company Balance Sheet As of December 31, 2015
Assets	Amount	Liabilities and Stockholders’ Equity	Amount
Assets:		Liabilities:
Cash	$22,000	Accounts payable	$12,000
Accounts receivable	$15,000	Salaries payable	$4,000
Supplies	$5,000	Interest payable	1,050
Prepaid insurance	$4,000	Utilities payable	2,200
Total current assets	$46,000	Total current liabilities	$19,250
Equipment	$95,000	Notes payable	$35,000
Accumulated depreciation	$(47,000)	Total liabilities	$54,250
		Stockholders’ Equity:
		Common stock	$35,000
		Retained earnings	$4,750
		Total Stockholders’ Equity	$39,750
Total assets	$94,000	Total liabilities and stockholders’ equity	$94,000

Table (4)

5.

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, 2015	Service Revenues		227,000
	Retained Earnings			227,000
	(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, 2015	Retained Earnings		229,250
	Salaries expense			162,000
	Interest expense			1,050
	Insurance expense			20,000
	Supplies expense			22,000
	Utilities expense			14,200
	Depreciation expense			10,000
	(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.

6.

To determine

To Post: The closing entries to the accounts.

Explanation of Solution

Post closing entries to the account.

Retained Earnings account:

Retained Earnings
			10,000
	229,250		227,000
	3,000
		Balance	4,750

Dividends account:

Dividends Expense
	3,000
			3,000
Balance	0

Service Revenue account:

Service Revenue
			227,000
	227,000
		Balance	0

Salaries Expense account:

Salaries Expense
	158,000
	4,000		162,000
Balance	0

Interest Expense account:

Interest Expense
	0
	1,050		1,050
Balance	0

Insurance Expense account:

Insurance Expense
	0
	20,000		20,000
Balance	0

Supplies Expense account:

Salaries Expense
	0
	22,000		22,000
Balance	0

Utilities Expense account:

Utilities Expense
	12,000
	2,200		14,200
Balance	0

Depreciation Expense account:

Depreciation Expense
	0
	10,000		10,000
Balance	0

7.

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.

J Auto Company Post-Closing Trial Balance For the Year Ended December 31, 2015
Accounts	Debit ($)	Credit ($)
Cash	22,000
Accounts receivable	15,000
Supplies	5,000
Prepaid insurance	4,000
Equipment	95,000
Accumulated depreciation		47,000
Accounts payable		12,000
Salaries payable		4,000
Interest payable		1,050
Utilities payable		2,200
Notes payable		35,000
Common stock		35,000
Retained earnings		4,750
Total	$141,000	$141,000

Table (7)