Chapter 3, Problem 3.8AP

The general ledger of Red Storm Cleaners at January 1, 2018, includes the following account balances:

Accounts	Debits	Credits
Cash	$20,000
Accounts Receivable	8,000
Supplies	4,000
Equipment	15,000
Accumulated Depreciation		$ 5,000
Salaries Payable		7,500
Common Stock		25,000
Retained Earnings		9,500
Totals	$47,000	$47,000

 The following is a summary of the transactions for the war:

     a.    March 12    Provide services to customers, $60,000, of which $21,000 is on account.

     b.    May 2    Collect on accounts receivable, $18,000.

     c.    June 30    Issue shares of common stock in exchange for $6,000 cash.

     d.    August 1    Pay salaries, $26,000 (of which $7,500 is for salaries payable in 2017).

     e.    September 25    Pay repairs and maintenance expenses. $13,000.

     f.    October 19    Purchase equipment for $8,000 cash.

     g.    December 30    Pay $1,100 cash dividends to stockholders.

Required:

  1.    Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company also has accounts for Dividends, Service Revenue, Salaries Expense, Repairs and Maintenance Expense, Depreciation Expense, and Supplies Expense.

  2.    Record each of the summary transactions listed above.

  3.    Post the transactions to the accounts.

  4.    Prepare an unadjusted trial balance.

  5.    Record adjusting entries. Accrued salaries at war-end amounted to $1,100. Depreciation for the war on the equipment is $5,000. Office supplies remaining on hand at the end of the war equal $1,200.

  6.    Post adjusting entries.

  7.    Prepare an adjusted trial balance.

  8.    Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018.

  9.    Record closing entries.

  10.    Post closing entries.

  11.    Prepare a post-closing trial balance.

To determine

To prepare: The T-accounts and enter the beginning balance from the trial balance.

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 items are recorded.

This account is referred to as the 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:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

The T-accounts of given item in trial balance are as follows:

Cash
Jan. 1	$20,000
Bal.	$20,000

Equipment
Jan. 1	$15,000
Bal.	$15,000

Common stock
		Jan. 1	$25,000
		Bal.	$25,000
Accounts receivables
Jan. 1	$8,000
Bal.	$8,000

Supplies
Jan. 1	$4,000
Bal.	$4,000

Salaries payable
		Jan. 1	$7,500
		Bal.	$7,500

Accumulated Depreciation
		Jan. 1	$5,000
		Bal.	$5,000

Retained earnings
		Jan. 1	$9,500
		Bal.	$9,500

To determine

To record: The journal entries for given transactions.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

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

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

The journal entries for given transactions of Company R are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Accounts receivable	21,000
March 12	Cash	39,000
	Service revenue		60,000
	(To record the recognized service revenue on account and cash)
2018	Cash	18,000
May, 2	Accounts receivable		18,000
	(To record cash collection from customer)
2018	Cash	6,000
June 30	Common stock		6,000
	(To record the cash received from issuance of common stock)
2018	Salaries payable	7,500
August 1	Salaries expense	18,500
	Cash		26,000
	(To record the payment of current and past salaries)
2018	Repairs and maintenance expense	13,000
September 25	Cash		13,000
	(To record the payment of repairs and maintenance expense)
2018	Equipment	8,000
October 19	Cash		8,000
	(To record purchase of equipment in cash)
2018	Dividends	1,100
December 30	Cash		1,100
	(To record the payment of dividends)

Table (1)

To determine

To post: The transactions to T-accounts.

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 items are recorded.

This account is referred to as the 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:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

T-accounts of above transactions are as follows:

Cash
Jan. 1	$20,000	Aug. 1	$26,000
Mar. 12	$39,000	Sep. 25	$13,000
May 2	$18,000	Oct. 19	$8,000
Jun. 30	$6,000	Dec. 30	$1,100
Total	$83,000	Total	$48,100
Bal.	$34,900

Equipment
Jan. 1	$15,000
Oct. 19	$8,000
Bal.	$23,000

Common stock
		Jan. 1	$25,000
		Jun. 30	$6,000
		Bal.	$31,000

Dividends
Jan. 1	$0
Dec. 30	$1,100
Bal.	$1,100

Accounts receivables
Jan. 1	$8,000
Mar. 12	$21,000	May 2	$18,000
Total	$29,000	Total	$18,000
Bal.	$11,000

Accumulated Depreciation
		Jan. 1	$5,000
		Bal.	$5,000

Supplies
Jan. 1	$4,000
Bal.	$4,000

Salaries payable
Aug. 1	$7,500	Jan. 1	$7,500
		Bal.	$0

Retained earnings
		Jan. 1	$9,500
		Bal.	$9,500

Salaries expense
Jan. 1	$0
Aug. 1	$18,500
Bal.	$18,500

Service revenue
		Jan. 1	$0
		Mar. 12	$60,000
		Bal.	$60,000

Repairs and maintenance expense
Jan. 1	$0
Sep. 25	$13,000
Bal.	$13,000

To determine

To prepare: The unadjusted trial balance of Company R.

Explanation of Solution

Unadjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts before making adjusting journal entries at the end of the period.

Company R
Unadjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	$34,900
Accounts Receivable	11,000
Supplies	4,000
Equipment	23,000
Accumulated depreciation		5,000
Salaries payable		0
Common stock		31,000
Retained earnings		9,500
Dividends	1,100
Service revenue		60,000
Salaries expense	18,500
Repairs and maintenance expense	13,000
Depreciation expense	0
Supplies expense	0
Totals	$105,500	$105,500

Table (2)

Therefore, the total of debit, and credit columns of unadjusted trial balance is $105,500 and agree.

To determine

To record: The given adjusting entries of Company R.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Rules of Debit and Credit:

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

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

Adjusting entries of Company R are as follows:

Accrued salaries:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Salaries expense		1,100
	Salaries payable			1,100
	(To record the salaries expense incurred at the end of the accounting year)

Table (3)

Following is the rule of debit and credit of above transaction:

• Salaries expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Salaries payable is a liability account. There is a decrease in liability, therefore it is credited.

Depreciation expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Depreciation Expense		5,000
	Accumulated Depreciation			5,000
	(To record the amount of depreciation for the year)

Table (4)

Following is the rule of debit and credit of above transaction:

• Depreciation expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Accumulated depreciation is a contra-asset account. There is a decrease in assets, therefore it is credited.

Office supplies expense:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Supplies expense		1,200
	Supplies			1,200
	(To record the supplies expense incurred at the end of the accounting year)

Table (5)

Following is the rule of debit and credit of above transaction:

• Supplies expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Supplies are an asset account. There is a decrease in assets, therefore it is credited.

To determine

To post: The adjusting entries to appropriate T-accounts.

Explanation of Solution

Depreciation expense
Jan. 1	$0
Dec. 31	$5,000
Bal.	$5,000

Accumulated Depreciation
		Jan. 1	$5,000
		Dec. 31	$5,000
		Bal.	$10,000

Salaries expense
Jan. 1	$0
Aug. 1	$18,500
Dec. 31	$1,100
Bal.	$19,600

Supplies expense
Jan. 1	$0
Dec. 31	$2,800
Bal.	$2,800

Supplies
Jan. 1	$4,000	Dec. 31	$2,800
Total	$4,000	Total	$2,800
Bal.	$1,200

Salaries payable
Aug. 1	$7,500	Jan. 1	$7,500
		Dec. 11	$1,100
Total	$7,500	Total	$8,600
		Bal.	$1,100

To determine

To prepare: The adjusted trial balance of Company R.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Adjusted trial balance of Company R is as follows:

Company R
Adjusted Trial Balance
December 31, 2018
Accounts	Debit	Credit
Cash	34,900
Accounts Receivable	11,000
Supplies	1,200
Equipment	23,000
Accumulated depreciation		10,000
Salaries payable		1,100
Common stock		31,000
Retained earnings		9,500
Dividends	1,100
Service revenue		60,000
Salaries expense	19,600
Repairs and maintenance expense	13,000
Depreciation expense	5000
Supplies expense	2,800
Totals	$111,600	$111,600

Table (6)

Therefore, the total of debit, and credit columns of adjusted trial balance is $111,600 and agree.

To determine

To prepare: An income statement for 2018 and classified balance sheet as on 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.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Income statement:

Income statement of Company R is as follows:

Company R
Income statement
For the year ended December 31, 2018
	$	$
Service revenue (A)		60,000
Expenses:
Salaries expense	19,600
Repairs and maintenance expense	13,000
Depreciation expense	5,000
Supplies expense	2,800
Total expense (B)		40,400
Net income $\left(\text{A}-\text{B}\right)$		19,600

Table (7)

Therefore, the net income of Company R is $19,600.

Classified balance sheet:

Classified balance sheet of Company R is as follows:

Figure (1)

Therefore, the total assets of Company R are $60,100, and the total liabilities and stockholders’ equity are $60,100.

Working note:

Calculation of ending balance retained earnings

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings + }\\ \text{Net income }-\text{Dividends}\end{array}\right)\\ =\$9,500+\$19,600-\$1,100\\ =\$28,000\end{array}$

To determine

To record: The necessary closing entries of Company R.

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

Closing entries of Company R is as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
2018	Service revenue		60,000
December 31	Retained earnings			60,000
	(To close all revenue account)
2018	Retained earnings		40,400
December 31	Salaries expense			19,600
	Repairs and maintenance expense			13,000
	Depreciation expense			5,000
	Supplies expense			2,800
	(To close all the expenses account)
2018	Retained earnings		1,100
December 31	Dividends			1,100
	(To close the dividends account)

Table (8)

To determine

To post: The closing entries to the T-accounts.

Explanation of Solution

Depreciation expense
Jan. 1	$0
Dec. 31	$5,000	Dec. 31	$5,000
Bal.	$0

Salaries expense
Jan. 1	$0
Aug. 1	$18,500
Dec. 31	$1,100	Dec. 31	$19,600
Bal.	$0

Supplies expense
Jan. 1	$0
Dec. 31	$2,800	Dec. 31	$2,800
Bal.	$0

Repairs and maintenance expense
Jan. 1	$0
Sep. 25	$13,000	Dec. 31	$13,000
Bal.	$0

Dividends
Jan. 1	$0
Dec. 30	$1,100	Dec. 31	$1,100
Bal.	$0

Service revenue
		Jan. 1	$0
Dec. 31	$60,000	Mar. 12	$60,000
		Bal.	$0

Retained earnings
Dec. 31	$40,400	Jan. 1	$9,500
Dec. 31	$1,100	Dec. 31	$60,000
Total	$41,500	Total	$69,500
		Bal.	$28,000

To determine

To prepare: A post-closing trial balance of Company R.

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted. The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Post-closing trial balance of Company R is as follows:

Company R
Post-closing trial balance
December 31, 2018
Accounts	Debit	Credit
Cash	$34,900
Accounts Receivable	11,000
Supplies	1,200
Equipment	23,000
Accumulated depreciation		10,000
Salaries payable		1,100
Common stock		31,000
Retained earnings		28,000
Totals	$70,100	$70,100

Table (9)

Therefore, the total of debit, and credit columns of post-closing trial balance is $70,100 and agree.