Chapter 3, Problem 3PB

Analyzing the Effects of Transactions Using T-Accounts, Preparing an Unadjusted Trial Balance, and Determining Net Income and Net Profit Margin

Jessica Pothier opened FunFlatables on June 1. The company rents out moon walks and inflatable slides for parties and corporate events. The company also has obtained the use of an abandoned ice rink located in a local shopping mall, where its rental products are displayed and available for casual hourly rental by mall patrons. The following transactions occurred during the first month of operations.

1. a. Jessica contributed $50,000 cash to the company on June 1 in exchange for its common stock.
2. b. Purchased inflatable rides and inflation equipment on June 2, paying $20,000 cash.
3. c. Received $5,000 cash from casual hourly rentals at the mall on June 3.
4. d. Rented rides and equipment to customers for $10,000. Received cash of $2,000 on June 4 and the rest is due from customers.
5. e. Received $2,500 from a large corporate customer on June 5 as a deposit on a party booking for July 4.
6. f. Began to prepare for the July 4 party by purchasing and receiving various party supplies on June 6 on account for $600.
7. g. On June 7, paid $6,000 in cash for renting the mall space this month.
8. h. On June 8, prepaid next month’s mall space rental charge of $6,000.
9. i. Received $1,000 on June 9 from customers on accounts receivable.
10. j. Paid $1,000 for running a television ad on June 10.
11. k. Paid $4,000 in wages to employees on June 30 for work done during the month.

Required:

1. 1. Record the effects of transactions (a) through (k) using journal entries.
2. 2. If you are completing this requirement manually, set up appropriate T-accounts. All accounts begin with zero balances. Summarize the journal entries from requirement 1 in the T-accounts, referencing each transaction in the accounts with the transaction number. Show the unadjusted ending balances in the T-accounts. If you are using the GL tool in Connect, your answers to requirement 1 will have been posted automatically to general ledger accounts that are similar in appearance to Exhibit 2.9.
3. 3. Prepare an unadjusted trial balance for the end of June. If you are using the GL tool in Connect, this requirement is completed automatically using your previous answers.
4. 4. Refer to the revenues and expenses shown on the unadjusted trial balance to calculate preliminary net income and determine whether the net profit margin is better or worse than the 30.0 percent earned by a close competitor.

To determine

Prepare journal entries for each transaction.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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. a. Journalize the issuance of common stock.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 1	Cash (A+)	50,000
	Common stock (SE+)		50,000
	(To record the issuance of common stock)

Table (1)

• Cash is an asset account. Thus, an increase in cash increases the value of asset account. Hence, debit cash account by $50,000.
• Common stock is a component of stockholder equity account. Thus, an increase in common stock increases the value of stockholders equity account. Hence, common stock account is being credited to increase its balance by $50,000.

1. b. Journalize the purchase of equipment.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 2	Equipment (A+)	20,000
	Cash (A–)		20,000
	(To record the purchase of equipment)

Table (2)

• Equipment is an asset account. Thus, an increase in equipment account increases the value of asset account. Hence, debit equipment account by $20,000.
• Cash is an asset account. Thus, a decrease in cash decreases the value of asset account. Hence, credit cash account by $20,000.

1. c. Journalize the cash receipt.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 3	Cash (A+)	5,000
	Service revenue (R+, SE+)		5,000
	(To record the cash received for the service rendered)

    Table (3)

• Cash is an asset account. Thus, an increase in cash increases the value of asset account. Hence, debit cash account by $5,000.
• Service revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the value of stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $5,000.

1. d. Journalize the rent earned.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 4	Cash (A+)	2,000
	Accounts receivable (A+)	8,000
	Service revenue (R+, SE+)		10,000
	(To record the service provided partly for cash and partly on account)

    Table (4)

• Cash is an asset account. Thus, an increase in cash increases the value of asset account. Hence, debit cash account by $2,000.
• Accounts receivable is an asset account. Thus, an increase in accounts receivable increases the value of asset account. Hence, accounts receivable account debited by $8,000.
• Service revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the value of stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $10,000.

1. e. Journalize the cash received from customer as a deposit for the service yet to provide.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 5	Cash (A+)	2,500
	Deferred revenue (L+)		2,500
	(To record the receipt of cash from customers for the service yet to provide)

    Table (5)

• Cash is an asset account. Thus, an increase in cash increases the value of asset account. Hence, debit cash account by $2,500.
• Deferred revenue is a liability account. Thus, an increase in deferred revenue increases the value of liability account. Hence, deferred revenue account is being credited to increase its balance by $2,500.

1. f. Journalize the purchase of supplies on account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 6	Supplies (A+)	600
	Accounts payable (L+)		600
	(To record the purchase of supplies on account)

Table (6)

• A supply is an asset account. Thus, an increase in supplies increases the value of asset account. Hence, debit supplies account by $600.
• Accounts payable is a liability account. Thus, an increase in accounts payable increases the value of liability account. Hence, accounts payable account is being credited to increase its balance by $600.

1. g. Journalize the rent expense for the current month.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 7	Rent expenses (E+, SE-)	6,000
	Cash (A–)		6,000
	(To record the rent expenses incurred )

    Table (7)

• Rent expense is an expense account which comes under retained earnings in stockholder’s equity. Thus, an increase in rent expense account decreases the value of stockholder’s equity account. Hence, rent expenses account is being debited to increase its balance by $6,000.
• Cash is an asset account. Thus, a decrease in cash account decreases the value of asset account. Hence, cash account is being credited to decrease its balance by $6,000.

1. h. Journalize the rent paid in advance.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 8	Prepaid Rent (A+)	6,000
	Cash (A–)		6,000
	(To record the rent paid in advance for the next month)

Table (8)

• Prepaid rent is an asset account. Thus, an increase in prepaid rent increases the value of asset account. Hence, debit prepaid rent account by $6,000.
• Cash is an asset account. Thus, a decrease in cash decreases the value of asset account. Hence, credit cash account by $6,000.

1. i. Journalize the amount received from customer.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 9	Cash (A+)	1,000
	Accounts receivable (A–)		1,000
	(To record the cash receipt for the service performed on account )

Table (9)

• Cash is an asset account. Thus, an increase in cash increases the value of asset account. Hence, debit cash account by $1,000.
• Accounts receivable is an asset account. Thus, a decrease in accounts receivable decreases the value of asset account. Hence, credit accounts receivable account by $1,000.

1. j. Journalize the payment made for advertisement expenses.

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 10	Advertisement Expense (E+, SE–)	1,000
	Cash (A-)		1,000
	(To record the payment made for the advertisement charges)

    Table (10)

• Advertisement expense is an expense account which comes under retained earnings in stockholder’s equity. Thus, an increase in advertisement expense account decreases value of the stockholder’s equity account. Hence, advertisement expense account is being debited to increase its balance by $1,000.
• Cash is an asset account. Thus, a decrease in cash account decreases the value of asset account. Hence, cash account is being credited to decrease its balance by $1,000.

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

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 30	Salaries and Wages Expense (E+, SE–)	4,000
	Cash (A-)		4,000
	(To record the payment made for the repair charges)

    Table (11)

• Salaries and wages expense is an expense account which comes under retained earnings in stockholder’s equity. Thus, an increase in salaries and wages expense account decreases the value of stockholder’s equity account. Hence, salaries and wages expense account is being debited to increase its balance by $4,000.
• Cash is an asset account. Thus, a decrease in cash account decreases the value of asset account. Hence, cash account is being credited to decrease its balance by $4,000.

To determine

Summarize the journal entries from requirement 1 in the T-accounts and 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
a.	$50,000		b.		$20,000
c.	$5,000		g.		$6,000
d.	$2,000		h.		$6,000
e.	$2,500		j.		$1,000
i.	$1,000		k.		$4,000
Total	$60,500		Total		$37,000
Ending Balance	$23,500
Supplies (A)
Beginning Balance		$0
f.		600
Ending Balance		$600

Accounts Receivable (A)
Beginning Balance		$0
d.		8,000		i.		$1,000
Ending Balance		$7,000
Prepaid Rent(A)
Beginning Balance		$0
h.		$6,000
Ending Balance		$6,000
Equipment (A)
Beginning Balance		$0
b.		$20,000
Ending Balance		$20,000
Advertisement expense (E)
Beginning Balance	$0
j.	$1,000
Ending Balance	$1,000

Salaries and Wages expense(E)
Beginning Balance	$0
k.	$4,000
Ending Balance	$4,000

Rent expense (E)
Beginning Balance	$0
g.	$6,000
Ending Balance	$6,000
Accounts Payable (L)
				Beginning Balance		$0
				f.		$600
				Ending Balance		$600
Common Stock (SE)
				Beginning Balance		$0
				a.		$50,000
				Ending Balance		$50,000
Deferred revenue (L)
				Beginning Balance		$0
				e.		$2,500
				Ending Balance		$2,500
Service Revenue (R)
				Beginning Balance		$0
				c.		5,000
				d.		$10,000
				Ending Balance		$15,000

To determine

Prepare the unadjusted trial balance at the end of June.

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 Fat the end of June is prepared as follows:

Company F
Unadjusted Trial Balance
At June 30
Particulars	Debit	Credit
Cash	$23,500
Accounts Receivable	7,000
Supplies	600
Prepaid Rent	6,000
Equipment	20,000
Accounts Payable		$600
Deferred Revenue		2,500
Common Stock		50,000
Service Revenue		15,000
Rent Expense	6,000
Salaries and Wages Expense	4,000
Advertising Expense	1,000
Total	$68,100	$68,100

Table (12)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having the balance of $68,100.

To determine

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.

Profit Margin Ratio:

Profit margin provides an indication of the earnings per dollar of sales, and it is determining the net profit as a percentage of the revenues. Use the following formula to calculate the profit margin ratio.

$\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Revenue}}\times 100$

Compute the preliminary net income of the company as follows:

Particulars	Amount ($)	Amount ($)
Revenues:
Service Revenue	$15,000
Total Revenues		15,000
Less: Expenses:
Rent Expense	6,000
Advertisement Expense	1,000
Salaries and Wages Expense	4,000
Total Expenses		11,000
Net Income		$4,000

Table (13)

Compute the net profit margin of the Company as follows:

  $\begin{array}{c}\text{Profit margin ratio}=\frac{\text{Net}\text{income}}{\text{Revenues}}\times 100\\ =\frac{\$4,000}{\$15,000}\times 100\\ =26.7\%\end{array}$

Conclusion

Company F is performing worse than its competitor, because Company F has a net profit margin of 26.7% while its competitor company has a net profit margin of 30%.