Chapter 3, Problem 5PB

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 August.

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 August 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 $)
August 1	Cash		280,000
	Capital stock			280,000
	(To record the issue of the 1,000 shares of capital stock)
August 4	Land		60,000
	Office Building		340,000
	Cash			80,000
	Notes Payable			320,000
	(To record the purchase of land and office building)
August 9	Medical instruments		75,000
	Cash			75,000
	(To record the purchase of computer systems)
August 16	Office fixtures and equipment		25,000
	Cash			10,000
	Accounts Payable			15,000
	(To record the purchase of office fixtures and equipment)
August 21	Office supplies		4,200
	Cash			4,200
	(To record the purchase of office supplies purchased on account)
August 24	Cash		1,000
	Accounts receivable		12,000
	Service revenue			13,000
	(To record the service revenue earned)
August 27	Advertising expense		450
	Accounts payable			450
	(To record the advertising expense incurred)
August 28	Cash		500
	Accounts receivable			500
	(To record the cash collected from accounts receivable)
August 31	Salary expense		2,200
	Cash			2,200
	(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 August 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 August 31, current year as follows:

Dental Clinic
Trial Balance
August  31, Current Year
Cash	$110,100
Accounts receivable	11,500
Office supplies	4,200
Medical instruments	75,000
Office fixtures and equipment	25,000
Land	60,000
Building	340,000
Notes payable		$320,000
Accounts payable		15,450
Capital stock		280,000
Retained earnings		0
Veterinary service revenue		13,000
Advertising expense	450
Salary expense	2,200
	$628,450	$628,450

Table (2)

e.

To determine

Compute total assets, total liabilities, and owners’ equity and identify whether the month August 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	$110,100
Accounts receivable	11,500
Office supplies	4,200
Medical instruments	75,000
Office fixtures and equipment	25,000
Land	60,000
Building	340,000
Total assets		$625,800
Total Liabilities:
Notes payable	$320,000
Accounts payable	15,450
Total liabilities		$335,450
Total Owners' Equity:
Total assets − Total liabilities $\left(\$625,800-\$335,450\right)$		$290,350

Table (3)

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

	Amount (In $)	Amount (In $)
Service revenue		13,000
Less: Advertising expense	450
Salary expense	2,200	2,650
Net income (Profit)		$10,350

Table (4)

Hence, the month August appeared to be a profitable month.