Chapter 3, Problem 5GLP

To determine

Adjusting Entries:

The journal entries framed to realize the revenues and expense for the specified accounting period are called adjusting entries.

Income Statement:

The statement which shows the revenues earned and expenses incurred during a particular year is called Income statement.

Statement of Owner’s Equity:

Statement of owner’s equity is concerned with portion of owner’s equity.

Balance Sheet:

A financial statement which shows the financial position of a company during specified accounting period is called a balance sheet.

To determine:

Prepare the necessary adjusting entries, create the financial statements of Business Solutions for the month ended December 31, 2017 and determine the impact of each adjustment has on net income.

Answer to Problem 5GLP

Solution:

Date	Accounts	Debit	Credit
Dec. 31 a.	Computer Supplies Expense	$3,065
	Computer Supplies		$3,065
Dec. 31 b.	Insurance Expense	$555
	Prepaid Insurance		$555
Dec. 31 c.	Wages Expense	$500
	Wages Payable		$500
Dec. 31 d.	Depreciation Expense – Computer Equipment	$1,250
	Accumulated Depreciation– Computer Equipment		$1,250
Dec. 31 e.	Depreciation Expense – Office Equipment	$400
	Accumulated Depreciation– Office Equipment		$400
Dec. 31 f.	Rent Expense	$2,475
	Prepaid Rent		$2,475

Financial Statements

BUSINESS SOLUTIONS Income Statement December 31, 2017.
Revenues:
Computer Service Revenue		$31,284
Expenses:
Depreciation Expense - Office Equipment	$400
Depreciation Expense - Computer 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
Total Expense		$16,824
Net Income		$14,460

BUSINESS SOLUTIONS Statement of Owner’s Equity December 31, 2017.
S. Rey, Capital, Dec. 1	$73,000
Net income for three months	$14,460
Subtotal	$87,460
Owner’s withdrawal	($7,100)
S. Rey, Capital, Dec. 31.	$80,360

BUSINESS SOLUTIONS Balance Sheet December 31, 2017.
Assets
Current Asset:
Cash	$48,372
Accounts Receivable	$5,668
Computer Supplies	$580
Prepaid Insurance	$1,665
Prepaid Rent	$825
Total Current Assets		$57,110
Plant, Property and Equipment
Office Equipment	$8,000
Accumulated Depreciation – Office Equipment	$400	$7,600
Computer Equipment	$20,000
Accumulated Depreciation – Computer Equipment	$1,250	$18,750
Total Plant, Property and Equipment		$26,350
Total Assets		$83,460
Liabilities
Current Liabilities	$1,100
Accounts Payable	$500
Wages Payable	$1,500
Unearned Computer Service Revenue
Total Current Liabilities		$3,100
Total Liabilities		$3,100
Owner’s Equity
S. Rey, Capital		$80,360
Total Liabilities and Owner’s Equity		$83,460

Adjustment	Impact on Net Income
a.	Computer supplies expense is expense reported in income statement which reduces the net income.
b.	The expiration of three months prepaid insurance premium will decrease the net income.
c.	Accrued wages is a liability as well as expense which decrease the net income.
d.	The depreciation expense on computer equipment reduces the value of the computer equipment and net income for the period.
e.	Depreciation expense on office equipment is an expense which deducted from the revenue of the period. So consequently, the depreciation expense decreases the net income.
f.	Expiration of prepaid rent means the company incurred rent expense for the period which will decrease the net income of the company.

Explanation of Solution

Explanation:

Date	Accounts	Debit	Credit
Dec. 2	Advertising Expense	$1,025
	Cash		$1,025
3	Repair Expense – Computer	$500
	Cash		$500
4	Cash	$3,950
	Accounts Receivable		$3,950
10	Wages Expense	$750
	Cash		$750
14	Cash	$1,500
	Unearned Computer Service Revenue		$1,500
15	Computer Supplies	$1,100
	Accounts Payable		$1,100
16	No Journal Entry Required
20	Cash	$5,625
	Computer Service Revenue		$5,625
28	Cash	$3,000
	Accounts Receivable		$3,000
29	Mileage Expense	$192
	Cash		$192
31	S. Rey, Withdrawals	$1,500
	Cash		$1,500

Ledger Accounts

Cash Account No. 101
Date	Debit	Credit	Balance
Dec. 1			$38,264
2		$1,025	$37,239
3		$500	$36,739
4	$3,950		$40,689
10		$750	$39,939
14	$1,500		$41,439
20	$5,625		$47,064
28	$3,000		$50,064
29		$192	$49,872
31		$1,500	$48,372

Accounts Receivable Account No. 106
Date	Debit	Credit	Balance
Dec. 1			$12,618
4		$3,950	$8,668
28		$3,000	$5,668

Computer Supplies Account No. 126
Date	Debit	Credit	Balance
Dec. 1			$2,545
15	$1,100		$3,645
31 a.		$3,065	$580

Prepaid Insurance Account No. 128
Date	Debit	Credit	Balance
Dec. 1			$2,220
31 b.		$555	$1,665

Prepaid Rent Account No. 131
Date	Debit	Credit	Balance
Dec. 1			$3,300
31. f		$2,475	$825

Office Equipment Account No. 163
Date	Debit	Credit	Balance
Dec. 1			$8,000

Accumulated Depreciation - Office Equipment Account No. 164
Date	Debit	Credit	Balance
Dec. 1			$0
31 e.		$400	$400

Computer Equipment Account No. 167
Date	Debit	Credit	Balance
Dec. 1			$20,000

Accumulated Depreciation - Computer Equipment Account No. 168
Date	Debit	Credit	Balance
Dec. 1			$0
31 d.		$1,250	$1,250

Accounts Payable Account No. 201
Date	Debit	Credit	Balance
Dec. 1			$0
15		$1,100	$1,100

Wages Payable Account No. 210
Date	Debit	Credit	Balance
Dec. 1			$0
31 c.		$500	$500

Unearned Computer Service Revenue Account No. 236
Date	Debit	Credit	Balance
Dec. 1			$0
14		$1,500	$1,500

S. Rey, Capital Account No. 301
Date	Debit	Credit	Balance
Dec. 1			$73,000

S. Rey, Withdrawals Account No. 302
Date	Debit	Credit	Balance
Dec. 1			$5,600
31	$1,500		$7,100

Computer Service Revenue Account No. 403
Date	Debit	Credit	Balance
Dec. 1			$25,659
20		$5,625	$31,284

Depreciation Expense – Office Equipment Account No. 612
Date	Debit	Credit	Balance
Dec. 1			$0
31 e.	$400		$400
Depreciation Expense – Computer Equipment Account No. 613
Date	Debit	Credit	Balance
Dec. 1			$0
31 d.	$1,250		$1,250

Wages Expense Account No. 623
Date	Debit	Credit	Balance
Dec. 1			$2,625
10	$750		$3,375
31 c.	$500		$3,875

Insurance Expense Account No. 637
Date	Debit	Credit	Balance
Dec. 1			$0
31 b.	$555		$555

Rent Expense Account No. 640
Date	Debit	Credit	Balance
Dec. 1			$0
31 f.	$2,475		$2,475

Computer Supplies Expense Account No. 652
Date	Debit	Credit	Balance
Dec. 1			$0
31 a.	$3,065		$3,065

Advertising Expense Account No. 655
Date	Debit	Credit	Balance
Dec. 1			$1,728
2	$1,025		$2,753

Mileage Expense Account No. 676
Date	Debit	Credit	Balance
Dec. 1			$704
29	$192		$896

Miscellaneous Expense Account No. 677
Date	Debit	Credit	Balance
Dec. 1			$250

Repairs Expense – Computer Account No. 684
Date	Debit	Credit	Balance
Dec. 1			$805
3	$500		$1,305

Trial Balance

BUSINESS SOLUTIONS Trial Balance December 31, 2017
Cash	$48,372
Accounts Receivable	$5,668
Computer Supplies	$580
Prepaid Insurance	$1,665
Prepaid Rent	$825
Office Equipment	$8,000
Accumulated Depreciation – Office Equipment		$400
Computer Equipment	$20,000
Accumulated Depreciation – Computer Equipment		$1,250
Accounts Payable		$1,100
Wages Payable		$500
Unearned Computer Service Revenue		$1,500
S. Rey, Capital		$73,000
S. Rey, Withdrawals	$7,100
Computer Service Revenue		$31,284
Depreciation Expense - Office Equipment	$400
Depreciation Expense - Computer 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
Total	$109,034	$109,034

Conclusion

Conclusion:

The net income of Business Solutions for three month ended December 31, 2017 is $14,460 and the total assets, liabilities and owner’s equity amounts to $83,460.