Chapter 3, Problem 4PSA

To determine

Income Statement: It is a financial statement which show the profit and loss made by the firm in a particular accounting period.

Retained Earnings: It is a financial statement which show the amount of profit retained by the company for their future unforeseen events.

1.

Difference between adjusted and unadjusted trial balance.

Explanation of Solution

Account Title and Explanation	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
	Debit($)	Credit($)	Debit($)	Credit($)	Debit($)	Credit($)
Cash	34,000				34,000
Accounts receivable	14,000		8,000(a)		22,000
Office supplies	16,000			14,000(c)	2,000
Prepaid insurance	8,540			5,580(d)	2,960
Office equipment	84,000				84,000
Accumulated depreciation-Office equipment		14,000		6,000(e)		20,000
Accounts payable		9,100		900(f)		10,000
Interest payable		0		1,000(g)		1,000
Salaries payable		0		7,000(h)		7,000
Unearned consulting fees		18,000	3,000(b)			15,000
Long-term notes payable		52,000				52,000
Common stock		15,000				15,000
Retained earnings		25,000				25,000
Dividends	5,000				5,000
Consulting fees earned		123,240		11,000(a),(b)		134,240
Depreciation expense- office equipment	0		6,000(e)		6,000
Salaries expense	67,000		7,000(h)		74,000
Interest expense	1,200		1,000(g)		2,200
Insurance expense	0		5,580(d)		5,580
Rent expense	14,500				14,500
Office supplies expense	0		14,000(c)		14,000
Advertising expense	12,100		900(f)		13,000
Totals	256,340	256,340	45,480	45,480	279,240	279,240

(a)

• Accounts receivable is an asset. Since, the revenue is earned but not received yet, the asset has increased. So, debit account receivable account by $8,000.
• Consulting fees earned are an income. Since, the revenue is earned, income has increased. So, credit consulting fees earned by $8,000.

(b)

• Unearned consulting fees are a liability. Since, services are provided, liability has decreased. So, debit unearned consulting fees by $3,000.
• Consulting fees earned are an income. Since, the revenue is earned, income has increased. So, credit consulting fees earned by $3,000.

(c)

• Office supplies expense is an expense. Since, expense reduces equity, debit office supplies expense account by $14,000.
• Office supplies are an asset. Since, the supplies worth of $14,000 is used, asset has decreased. So, debit office supplies account.

(d)

• Insurance expense is an expense. Since, expense reduces equity, debit insurance expense account by $5,580.
• Prepaid insurance is an asset. Since, the insurance worth of $5,580 is used up, asset has reduced. So, credit prepaid insurance by $5,580.

(e)

• Depreciation expense is an expense. Since, expense reduces equity, debit depreciation expense by $6,000.
• Accumulated Depreciation is a contra asset account. Contra-asset accounts have a normal credit balance. Hence, credit Accumulation Depreciation account by $6,000.

(f)

• Advertising expense is an expense. Since, expense reduces equity, debit advertising expense account by $900.
• Accounts payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit accounts payable by $900.

(g)

• Interest expense is an expense. Since, expense reduces equity, debit interest expense account by $1,000.
• Interest payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit interest payable by $1,000.

(h)

• Salaries expense is an expense. Since, expense reduces equity, debit salaries expense account by $7,000.
• Salaries payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit salaries payable by $7,000.

2.

a.

To determine

To prepare: Income statement and statement of retained earnings.

Explanation of Solution

Prepare Income Statement:

J. Company
Income Statement
For the year ended July 31, 2017
Particulars	Amount ($)	Amount ($)
Revenue:
Service Revenue	134,240
Total Revenue		134,240
Expenses:
Insurance Expense	5,580
Salaries Expense	74,000
Office Supplies Expense	14,000
Rent expenses	14,500
Interest Expense	2,200
Advertising Expense	13,000
Depreciation Expense-Office equipment	6,000
Total Expense		129,280
Net income		4,960

Net income of J. Company is $4,960.

Prepare Retained Earnings Statement.

J. Company
Retained Earnings Statement
As on July 31, 2017
Particulars	Amount ($)
Opening balance	25,000
Net income	4,960
Dividends	(5,000)
Retained earnings	24,960

Therefore, retained earnings of J. Company are $24,960.

b.

To determine

To prepare: Balance sheet.

Explanation of Solution

Prepare Balance Sheet:

J. Company
Balance sheet
As on July 31, 2017
Particulars		Amount ($)
Assets
Cash		34,000
Office Supplies		2,000
Account Receivables		22,000
Prepaid Insurance		2,960
Office Equipment	84,000
Less: Accumulated depreciation	(20,000)	64,000
Total Assets		124,960
Liabilities and Stockholder’s Equity
Liabilities
Accounts payable		10,000
Interest payable		1,000
Salaries Payable		7,000
Unearned consulting fees		15,000
Long-term notes payable		52,000
Stockholder’s Equity
Common Stock	15,000
Retained earnings	24,960
Total stockholders’ equity		39,960
Total Liabilities and Stockholder’s equity		124,960

Balance sheet total is $124,960.