Chapter 3, Problem 4PSB

To determine

Income Statement:

It is a financial statement which shows the profit and loss made by the firm in a particular accounting period.

Retained Earnings:

It is a financial statement which shows the amount of profit retained by the company for their future unforeseen events.

Balance sheet:

It shows the financial position of an enterprise. It consists of assets, liabilities and stockholder’s equity of the enterprise.

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	45,000				45,000
Accounts receivable	60,000		6,660(a)		66,660
Office supplies	40,000			23,000(c)	17,000
Prepaid insurance	8,200			4,600(d)	3,600
Office equipment	120,000				120,000
Accumulated depreciation-Office equipment		20,000		10,000(e)		30,000
Accounts payable		26,000		6,000(f)		32,000
Interest payable		0		2,150(g)		2,150
Salaries payable		0		16,000(h)		16,000
Unearned consulting fees		40,000	12,200 (b)			27,800
Long-term notes payable		75,000				75,000
Common stock		4,000				4,000
Retained earnings		76,200				76,200
Dividends	20,000				20,000
Consulting fees earned		234,600		18,860(a),(b)		253,460
Depreciation expense- office equipment	0		10,000 (e)		10,000
Salaries expense	112,000		16,000 (h)		128,000
Interest expense	8,600		2,150(g)		10,750
Insurance expense	0		4,600(d)		4,600
Rent expense	20,000				20,000
Office supplies expense	0		23,000 (c)		23,000
Advertising expense	42,000		6,000(f)		48,000
Totals	475,800	475,800	80,610	80,610	516,610	516,610

(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 $6,660.
• Consulting fees earned are an income. Since, the revenue is earned, income has increased. So, credit consulting fees earned by $6,660.

(b)

• Unearned consulting fees are a liability. Since, services are provided, liability has decreased. So, debit unearned consulting fees by $12,200.
• Consulting fees earned are an income. Since, the revenue is earned, income has increased. So, credit consulting fees earned by $12,200.

(c)

• Office supplies expense is an expense. Since, expense reduces equity, debit office supplies expense account by $23,000.
• Office supplies are an asset. Since, the supplies worth of $23,000 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 $4,600.
• Prepaid insurance is an asset. Since, the insurance worth of $4,600 is used up, asset has reduced. So, credit prepaid insurance by $4,600.

(e)

• Depreciation expense is an expense. Since, expense reduces equity, debit depreciation expense by $10,000.
• Accumulated Depreciation is a contra asset account. Contra-asset accounts have a normal credit balance. Hence, credit Accumulation Depreciation account by $10,000.

(f)

• Advertising expense is an expense. Since, expense reduces equity, debit advertising expense account by $6,000.
• Accounts payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit accounts payable by $6,000.

(g)

• Interest expense is an expense. Since, expense reduces equity, debit interest expense account by $2,150.
• Interest payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit interest payable by $2,150.

(h)

• Salaries expense is an expense. Since, expense reduces equity, debit salaries expense account by $16,000.
• Salaries payable is a liability. Since, expense is incurred but not paid yet, liability has increased. So, credit salaries payable by $16,000.

2.

(a)

To determine

To prepare: Income statement and statement of retained earnings.

Explanation of Solution

Income Statement

Y.C. Company
Income Statement
For the year ended December 31, 2017
Particulars	Amount ($)	Amount ($)
Revenue:
Service Revenue	253,460
Total Revenue		253,460
Expenses:
Insurance Expense	4,600
Salaries Expense	128,000
Office Supplies Expense	23,000
Rent Expenses	20,000
Interest Expense	10,750
Advertising Expense	48,000
Depreciation Expense-Office Equipment	10,000
Total Expense		244,350
Net Income		9,110

Net income of Y.C. Company is $9,110.

Retained Earnings Statement

Y.C. Company
Retained Earnings Statement
As on December 31, 2017
Particulars	Amount ($)
Opening balance	76,200
Net income	9,110
Dividends	(20,000)
Retained earnings	65,310

Therefore, retained earnings of Y.C. Company are $65,310.

b.

To determine

To prepare: Balance sheet.

Explanation of Solution

Balance Sheet

Y.C. Company
Balance Sheet
As on December 31, 2017
Particulars		Amount ($)
Assets
Cash		45,000
Office Supplies		17,000
Account Receivables		66,660
Prepaid Insurance		3,600
Office Equipment	120,000
Less: Accumulated depreciation	(30,000)	90,000
Total Assets		222,260
Liabilities and Stockholder’s Equity
Liabilities
Accounts payable		32,000
Interest payable		2,150
Salaries Payable		16,000
Unearned consulting fees		27,800
Long-term notes payable		75,000
Stockholder’s Equity
Common Stock	4,000
Retained earnings	65,310
Total stockholders’ equity		69,310
Total Liabilities and Stockholder’s equity		222,260

Thus, balance sheet total is $222,260.