Chapter 3, Problem 4PA

a.

To determine

Analyze the effects that each of the given transactions will have on the following six components of the company’s financial statements for the month of June.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

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.

Analyze the effects that each of the given transactions will have on the following six components of the company’s financial statements for the month of June as follows:

Figure (1)

b.

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.

Prepare journal entries for each transaction as follows:

Date	Account title and Explanation	Post ref.	Debit  (in $)	Credit (in $)
June 1	Cash		60,000
	Capital stock			60,000
	(To record the issue of the capital stock)
June 2	Aircraft		220,000
	Cash			40,000
	Notes Payable			180,000
	(To record the purchase of aircraft)
June 4	Rent expense		2,500
	Cash			2,500
	(To record the payment made for June rent)
June 15	Accounts receivable		8,320
	Aerial photography revenue			8,320
	(To record the services provided on account)
June 15	Salaries expense		5,880
	Cash			5,880
	(To record the salary expense paid)
June 18	Maintenance expense		1,890
	Cash			1,890
	(To record the maintenance expense paid)
June 25	Cash		4,910
	Accounts receivable			4,910
	(To record the cash collected from accounts receivable)
June 30	Accounts receivable		16,450
	Aerial photography revenue			16,450
	(To record the services provided on account)
June 30	Salaries expense		6,000
	Cash			6,000
	(To record the salary expense paid)
June 30	Fuel expense		2,510
	Accounts payable			2,510
	(To record the bill received for fuel used during June)
June 30	Dividends		2,000
	Dividends Payable			2,000
	(To record the payment due for the cash dividend declared)

Table (1)

c.

To determine

Post each transaction to the appropriate ledger accounts.

Explanation of Solution

T-account:

The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Post each transaction to the appropriate ledger accounts as follows:

Cash
Date			Debit	Credit	Balance
Current Year
June	1		60,000		60,000
	2			40,000	20,000
	4			2,500	17,500
	15			5,880	11,620
	18			1,890	9,730
	25		4,910		14,640
	30			6,000	8,640

Table (2)

Accounts Receivable
Date			Debit	Credit	Balance
Current Year
June	15		8,320		8,320
	25			4,910	3,410
	30		16,450		1,9860

Table (3)

Aircraft
Date			Debit	Credit	Balance
Current Year
June	2		220,000		220,000

Table (4)

Notes Payable
Date			Debit	Credit	Balance
Current Year
June	2			180,000	180,000

Table (5)

Accounts Payable
Date			Debit	Credit	Balance
Current Year
June	30			2,510	2,510

Table (6)

Dividends Payable
Date			Debit	Credit	Balance
Current Year
June	30			2,000	2,000

Table (7)

Capital Stock
Date			Debit	Credit	Balance
Current Year
June	1			60,000	60,000

Table (8)

Dividends
Date			Debit	Credit	Balance
Current Year
June	30		2,000		2,000

Table (9)

Aerial Photography Revenue
Date			Debit	Credit	Balance
Current Year
June	15			8,320	8,320
	30			16,450	24,770

Table (10)

Maintenance Expense
Date			Debit	Credit	Balance
Current Year
June	18		1,890		1,890

Table (11)

Fuel Expense
Date			Debit	Credit	Balance
Current Year
June	30		2,510		2,510

Table (12)

Salaries Expense
Date			Debit	Credit	Balance
Current Year
June	15		5,880		5,880
	30		6,000		11,880

Table (13)

Rent Expense
Date			Debit	Credit	Balance
Current Year
June	4		2,500		2,500

Table (14)

d.

To determine

Prepare a trial balance dated June 30, current year.

Explanation of Solution

Trial balance:

Trial balance is a summary of all the ledger accounts balances presented in a tabular form with two column, debit and credit. It checks the mathematical accuracy of the ledger postings and helps preparing the final accounts.

Prepare a trial balance dated June 31, current year as follows:

Company A
Trial Balance
June  30, Current Year
Cash	$8,640
Accounts receivable	19,860
Aircraft	220,000
Notes payable		$180,000
Accounts payable		2,510
Dividends payable		2,000
Capital stock		60,000
Retained earnings		0
Dividends	2,000
Aerial photography revenue		24,770
Maintenance expense	1,890
Fuel expense	2,510
Salaries expense	11,880
Rent expense	2,500
	$269,280	$269,280

Table (15)

e.

To determine

Compute total assets, total liabilities, and owners’ equity and explain whether these are the figures that the company will report in its June 30 balance sheet.

Explanation of Solution

Assets:

These are the resources owned and controlled by business and used to produce benefits for the company. Assets are classified on the balance sheet as current assets, non-current assets, property, plant, and equipment, and intangible assets.

Liabilities:

The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Owners’ equity:

Owner’s equity refers to the right the owner possesses over the resources of the business. Revenues and the expenses are the components of the owner’s equity.

Net income:

The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Compute total assets, total liabilities, and owners’ equity as follows:

Total Assets:
Cash	$8,640
Accounts receivable	19,860
Aircraft	220,000
Total assets		$248,500
Total Liabilities:
Notes payable	$180,000
Accounts payable	2,510
Dividends payable	2,000
Total liabilities		$184,510
Total Owners' Equity:
Total assets − Total liabilities $\left(\$248,500-\$184,510\right)$		$63,990

Table (16)

Explain whether these are the figures that the company will report in its June 30 balance sheet as follows:

No, these are not the figures that the company will report in its June 30 balance sheet. Adjustments will be made to the trial balance figures at the end, before preparing the financial statements of the company. The figures, after the adjustments are made, will be the figures that the company will report in its June 30 balance sheet.