Chapter 3, Problem 5PA

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 May.

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 May 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 $)
May 1	Cash		480,000
	Capital stock			480,000
	(To record the issue of the 6,000 shares of capital stock)
May 4	Land		84,000
	Office Building		216,000
	Cash			120,000
	Notes Payable			180,000
	(To record the purchase of land and office building)
May 9	Medical instruments		156,000
	Cash			156,000
	(To record the purchase of computer systems)
May 16	Office fixtures and equipment		60,000
	Cash			24,000
	Accounts Payable			36,000
	(To record the purchase of office fixtures and equipment)
May 21	Office supplies		6,000
	Cash			6,000
	(To record the purchase of office supplies purchased on account)
May 24	Cash		2,280
	Accounts receivable		360
	Veterinary service revenue			2,640
	(To record the veterinary service revenue earned)
May 27	Advertising expense		480
	Accounts payable			480
	(To record the advertising expense incurred)
May 28	Cash		120
	Accounts receivable			120
	(To record the cash collected from accounts receivable)
May 31	Salary expense		3,360
	Cash			3,360
	(To record the salary expense paid)

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:

Figure (2)

Figure (3)

d.

To determine

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

Veterinary Clinic
Trial Balance
May  31, Current Year
Cash	$173,040
Accounts receivable	240
Office supplies	6,000
Medical instruments	156,000
Office fixtures and equipment	60,000
Land	84,000
Building	216,000
Notes payable		$180,000
Accounts payable		36,480
Capital stock		480,000
Retained earnings		0
Veterinary service revenue		2,640
Advertising expense	480
Salary expense	3,360
	$699,120	$699,120

Table (2)

e.

To determine

Compute total assets, total liabilities, and owners’ equity and identify whether the month May appeared to be a profitable month.

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	$173,040
Accounts receivable	240
Office supplies	6,000
Medical instruments	156,000
Office fixtures and equipment	60,000
Land	84,000
Building	216,000
Total assets		$695,280
Total Liabilities:
Notes payable	$180,000
Accounts payable	36,480
Total liabilities		$216,480
Total Owners' Equity:
Total assets − Total liabilities $\left(\$695,280-\$216,480\right)$		$478,800

Table (3)

Identify whether the month May appeared to be a profitable month as follows:

	Amount (In $)	Amount (In $)
Veterinary service revenue		2,640
Less: Advertising expense	480
Salary expense	3,360	3,840
Net Loss		$ (1,200)

Table (4)

Hence, the month May did not appear to be a profitable month.