Chapter 3, Problem 4PB

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 March.

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 March 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 $)
March 2	Cash		80,000
	Capital stock			80,000
	(To record the issue of the capital stock)
March 4	Truck		45,000
	Cash			15,000
	Notes Payable			30,000
	(To record the purchase of truck)
March 5	Rent expense		2,500
	Cash			2,500
	(To record the payment made for March rent)
March 9	Accounts receivable		11,300
	Service revenue			11,300
	(To record the services provided on account)
March 15	Salaries expense		7,100
	Cash			7,100
	(To record the salary expense paid)
March 19	Maintenance expense		900
	Cash			900
	(To record the maintenance expense paid)
March 20	Cash		3,800
	Accounts receivable			3,800
	(To record the cash collected from accounts receivable)
March 28	Accounts receivable		14,400
	Service revenue			14,400
	(To record the services provided on account)
March 30	Salaries expense		7,500
	Cash			7,500
	(To record the salary expense paid)
March 30	Fuel expense		830
	Accounts payable			830
	(To record the bill received for fuel used during March)
March 30	Dividends		1,200
	Dividends Payable			1,200
	(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
March	2		80,000		80,000
	4			15,000	65,000
	5			2,500	62,500
	15			7,100	55,400
	19			900	54,500
	20		3,800		58,300
	30			7,500	50,800

Table (2)

Accounts Receivable
Date			Debit	Credit	Balance
Current Year
March	9		11,300		11,300
	20			3,800	7,500
	28		14,400		21,900

Table (3)

Truck
Date			Debit	Credit	Balance
Current Year
March	4		45,000		45,000

Table (4)

Notes Payable
Date			Debit	Credit	Balance
Current Year
March	4			30,000	30,000

Table (5)

Accounts Payable
Date			Debit	Credit	Balance
Current Year
March	30			830	830

Table (6)

Dividends Payable
Date			Debit	Credit	Balance
Current Year
March	30			1,200	1,200

Table (7)

Capital Stock
Date			Debit	Credit	Balance
Current Year
March	2			80,000	80,000

Table (8)

Dividends
Date			Debit	Credit	Balance
Current Year
March	30		1,200		1,200

Table (9)

Service Revenue
Date			Debit	Credit	Balance
Current Year
March	9			11,300	11,300
	28			14,400	25,700

Table (10)

Maintenance Expense
Date			Debit	Credit	Balance
Current Year
March	19		900		900

Table (11)

Fuel Expense
Date			Debit	Credit	Balance
Current Year
March	30		830		830

Table (12)

Salaries Expense
Date			Debit	Credit	Balance
Current Year
March	15		7,100		7,100
	30		7,500		14,600

Table (13)

Rent Expense
Date			Debit	Credit	Balance
Current Year
March	5		2,500		2,500

Table (14)

d.

To determine

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

Deliveries T
Trial Balance
March  31, Current Year
Cash	$50,800
Accounts receivable	21,900
Truck	45,000
Notes payable		$30,000
Accounts payable		830
Dividends payable		1,200
Capital stock		80,000
Retained earnings		0
Dividends	1,200
Service revenue		25,700
Maintenance expense	900
Fuel expense	830
Salaries expense	14,600
Rent expense	2,500
	$137,730	$137,730

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 March 31 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	$50,800
Accounts receivable	21,900
Trucks	45,000
Total assets		$117,700
Total Liabilities:
Notes payable	$30,000
Accounts payable	830
Dividends payable	1,200
Total liabilities		$32,030
Total Owners' Equity:
Total assets − Total liabilities $\left(\$117,700-\$32,030\right)$		$85,670

Table (16)

Explain whether these are the figures that the company will report in its March 31 balance sheet as follows:

No, these are not the figures that the company will report in its March 31 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 March 31 balance sheet.