Chapter 3, Problem 3SP

1.

To determine

Prepare the journal entries to record the each of the transactions and events for Solution B.

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.

Prepare the journal entries.

Date	Account titles and Explanation	Post Ref.	Debit ($)	Credit ($)
December  2	Advertising expense	655	1,025
	Cash	101		1,025
	(To record the advertising expense)
December  3	Repairs and expense-Computer	684	500
	Cash	101		500
	(To record  the repairs and expenses)
December  4	Cash	101	3,950
	Accounts receivable	106		3,950
	(To record the accounts receivable)
December  10	Wages expense	623	750
	Cash	101		750
	(To record the wages expense)
December  14	Cash	101	1,500
	Unearned computer service revenue	236		1,500
	(To record the unearned service revenue)
December  15	Cash	101	1,100
	Accounts payable	201		1,100
	(To record the accounts payable)
December  20	Cash	101	5,625
	Computer service revenue	403		5,625
	(To record the computer service revenue)
December  28	Cash	101	3,000
	Accounts receivable	106		3,000
	(To record the travel expense)
December  29	Mileage expense	676	192
	Cash	101		192
	(To record the mileage expense)
December  31	Dividends	319	1,500
	Cash			1,500
	(To record the payment of dividends)

Table (1)

2.

To determine

Prepare the adjusting entries as on 31^st December 2015.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare the adjusting entries as on 31^st December 2015.

Date	Account titles and Explanation	Post Ref.	Debit ($)	Credit ($)
December  31	Computer supplies expense	652	3,065
	Computer	126		3,065
	(To record the adjusting entry for supplies used)
December  31	Insurance expense $\left(\$2,200\times \frac{1}{4}\right)$	637	555
	Prepaid insurance	128		555
	(To record  the adjusting entry for insurance expense)
December  31	Wages expense	623	500
	Wages payable	210		500
	(To record the adjusting entry for wages expense)
December  31	Depreciation expense-Computer $\left(\frac{\$5,000}{4}\right)$	613	1,250
	Accumulated depreciation-Computer	168		1,250
	(To record the adjusting entry for depreciation expense, Computer)
December  31	Depreciation expense-Office equipment $\left(\frac{\$1,600}{4}\right)$	612	400
	Accumulated depreciation-Office equipment	164		400
	(To record the adjusting entry for depreciation expense, Office equipment)
December  31	Rent expense $\left(\$3,300\times \frac{3}{4}\right)$	640	2,475
	Prepaid rent	131		2,475
	(To record the adjusting entry for rent expense)

Table (2)

3.

To determine

Prepare the adjusted trial balance as of 31^st December 2015.

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.

Prepare the adjusted trial balance as of 31^st December 2015.

Solution B
Adjusted trial balance
For the year ended December 31, 2015
Particulars	Debit($)	Credit ($)
Cash	48,372
Accounts receivable	5,668
Computer supplies	580
Prepaid insurance	1,665
Prepaid rent	825
Office equipment	8,000
Accumulated depreciation, Office		400
Computer equipment	20,000
Accumulated depreciation, Computer		1,250
Accounts payable		1,100
Wages payable		500
Unearned computer service revenue		1,500
Common stock		73,000
Retained earnings		0
Dividends	7,100
Computer services revenue		31,284
Depreciation expense, Office	400
Depreciation expense, Equipment	1,250
Wages expense	3,875
Insurance expense	555
Rent expense	2,475
Computer supplies expense	3,065
Advertising expense	2,753
Mileage expense	896
Miscellaneous expense	250
Repairs expense, computer	1,305
Totals	$109,034	$109,034

Table (3)

4.

To determine

Prepare the income statement for the three months ended 31^st December 2015.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement for the year ended 31^st December 2015.

Solution B
Income statement
For the three months ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Revenues
Computer service revenue	31,284
Total revenue		31,284
Expenses
Depreciation expense, Office	400
Depreciation expense, Computer	1,250
Wages expense	3,875
Insurance expense	555
Rent expense	2,475
Computer Supplies expense	3,065
Advertising expense	2,753
Property taxes expense	4,825
Mileage expense	896
Repairs expense, Computer	1,305
Total Expenses		16,824
Net income		$14,460

Table (4)

5.

To determine

Prepare the statement of retained earnings for the three months ended 31^st December 2015.

Explanation of Solution

Statement of Retained Earnings:

Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare the statement of retained earnings for the year ended 31^st December 2015.

Solution B
Statement of Retained Earnings
For the three months ended 31st December 2015
Particulars	Amount ($)	Amount ($)
Retained earnings, Beginning	0
Add: Net income	14,460
Subtotal	14,460
Less: Dividends	7,100
Retained earnings, Ending		$7,360

Table (5)

6.

To determine

Prepare the balance sheet as on 31^st December 2015.

Explanation of Solution

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and 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 on 31^st December 2015.

Solution B
Balance Sheet
As an December 31, 2015
Particulars	Amount($)	Amount($)
ASSETS
Current Assets:
Cash	48,372
Accounts receivable	5,668
Computer Supplies	580
Prepaid rent	825
Prepaid insurance	1,665
Total Current Assets		57,110
Office Equipment	8,000
Less: Accumulated depreciation, Equipment	400	7,600
Computer equipment	20,000
Accumulated depreciation, Computer equipment	1,250	18,750
Total assets		$83,460
LIABILITIES
Current Liabilities:
Accounts payable	1,100
Wages payable	500
Unearned Computer service revenue	1,500
Total current liabilities		3,100
Long-liabilities:		0
Total liabilities		3,100
Stockholders’ equity
Paid-in capital
Common stock	73,000
Retained earnings	7,360
Total Stockholders’ Equity		80,360
Total liabilities and Stockholders’ Equity		$83,460

Table (6)

7.

To determine

Record and post the necessary closing entries as of 31^st December 2015.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare the closing entry for revenue accounts.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Computer services revenue	403	31,284
	Income summary	901		31,284
	(To close the revenues account)

Table (7)

In this closing entry, revenue accounts are closed by transferring the amount of revenue accounts to the income summary account in order to bring the revenue account balance to zero. Hence, debit the revenue accounts and credit income summary account.

Prepare the closing entry for expenses account.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Income summary	901	16,824
	Depreciation expense-Office equipment	612		400
	Depreciation expense- Computer Equipment	613		1,250
	Wages expense	623		3,875
	Insurance expense	637		555
	Rent expense	640		2,475
	Computer Supplies expense	652		3,065
	Advertising expense	655		2,753
	Mileage expense	676		896
	Miscellaneous expense	677		250
	Repairs expense	684		1,305
	(To close the expenses account)

Table (8)

In this closing entry, expenses account is closed by transferring the amount of expenses to the income summary in order to bring the expenses account balance to zero. Hence, debit the income summary account and credit all expenses account.

Prepare closing entry for income summary account.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Income Summary	901	14,460
	Retained Earnings	308		14,460
	(To close the income summary account)

Table (9)

Closing entry of income summary account:

In this closing entry, income summary account is closed by transferring the amount of income summary (profit) to the retained earnings in order to bring the income summary account balance to zero. Hence, debit the income summary account and credit retained earnings account.

Prepare closing entry for dividend account.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Retained Earnings	318	7,100
	Dividends			7,100
	(To close the dividends account)

Table (10)

In this closing entry, dividend account is closed by transferring the amount of dividend to the retained earnings in order to bring the dividend account balance to zero. Hence, debit the retained earnings account and credit dividend account.

8.

To determine

Prepare the post-closing trial balance as on 31^st December 2015.

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.

Prepare the post-closing trial balance as on 31^st December 2015.

Solution B
Adjusted trial balance
For the year ended December 31, 2015
Particulars	Debit($)	Credit ($)
Cash	48,372
Accounts receivable	5,668
Computer supplies	580
Prepaid insurance	1,665
Prepaid rent	825
Office equipment	8,000
Accumulated depreciation, Office		400
Computer equipment	20,000
Accumulated depreciation, Computer		1,250
Accounts payable		1,100
Wages payable		500
Unearned computer service revenue		1,500
Common stock		73,000
Retained earnings		7,360
Totals	$85,110	$85,110

Table (11)

1, 2 and 7

To determine

Post the transactions to the general ledger.

Explanation of Solution

Post the transactions to the general ledger.