Chapter 3, Problem 6PSB

Preparing closing entries and financial statements P6 P7
The adjusted trial balance for Anara Co. as of December 31,2019, follows. P. Anara invested $40,000 cash in the business in exchange for common stock during year 2019 . The December 31,2018 , credit balance of the Retained Earnings account was $52,800.

Required

1. Prepare the income statement and the statement of retained earnings for calendar-year 2019 and the classified balance sheet at December 31, 2019.
2. Prepare the necessary closing entries at December 31,2019 .

Check (1) Total assets $(12/31/2019),$ $164,700; Net income, $28,890

To determine

Introduction:

The income statement contains revenues and expense items and is prepared to determine the net income.

Statement of retained earnings is a part of total stockholders’ equity. This report shows the changes in the retained earnings during the year due to dividend declaration and net operating income or loss.

The balance sheet houses all the assets and liabilities starting with the most liquid to non-liquid assets and liabilities. The asset total must tally with the total of liabilities and equity.

To Prepare:

The income statement, statement of retained earnings and the balance sheet for the year ended December 31, 2019, of A Company.

Explanation of Solution

The income statement is prepared as follows:

A Co. Income Statement For the Year Ended December 31, 2019
Particular	Amount	Amount
Revenue:
Professional fees earned	$59,600
Rent income	$4,500
Dividend income	$1,000
Interest income	$1,320
Total income		66,420
Expenses:
Depreciation expenses − Building	$2,000
Depreciation expense − Equipment	$1,000
Interest expense	$1,550
Wages Expenses	$18,500
Insurance Expenses	$1,525
Rent Expenses	$3,600
Supplies Expenses	$1,000
Postage Expenses	$410
Property Taxes Expense	$4,825
Repairs Expense	$679
Telephone Expenses	$521
Utilities Expense	$1,920
Total expense		$37,530
Net Income		$28,890

The retained earnings statement is prepared as follows:

A Co. Statement of Retained Earnings For the Year Ended December 31, 2019
Particular		Amount
Balance, January 1		$52,800
Add: net income		$28,890
Less: dividends paid		($8,000)
Balance, December 31		$73,690

The balance sheet is prepared as follows:

A Co. Balance Sheet As of December 31, 2019
Particular	Amount	Amount
Assets:
Current Assets:
Cash		$7,400
Short-term Investments		$11,200
Supplies		$4,600
Prepaid Insurance		$1,000
Total Current Assets		$24,200
Non-current Assets:
Land		$30,500
Building	$100,000
Less: Accumulated Depreciation	$10,000
Building, Net		$90,000
Equipment	$24,000
Less: Accumulated Depreciation	$4,000
Equipment, Net		$20,000
Total Non-current Assets		$140,500
Total Assets		$164,700
Liabilities and Equity:
Current Liabilities:
Accounts Payable		$3,500
Interest Payable		$1,750
Rent Payable		$400
Wages Payable		$1,280
Property Taxes Payable		$3,330
Unearned Professional Fees		$750
Long-term Notes Payable - Current Portion		$8,400
Total Current Liabilities		$19,410
Non-current Liabilities
Long-term Notes Payable		$31,600
Total Non-current Liabilities		$31,600
Total Liabilities		$51,010
Equity:
Common Stock		$40,000
Retained Earnings		$73,690
Total Equity		$113,690
Total Liabilities & Equity		$164,700

To determine

Introduction:

As the revenue and expense accounts should not have the ending balances, they should be transferred to the temporary account called income summary to determine the net results. Finally, the net result is transferred to retained earnings. If there is profit, the retained earnings are increased and if there is a loss, then the retained earnings are decreased.

To Prepare:

Closing entries as of December 31, 2019 for A Company.

Explanation of Solution

The closing entries are prepared as follows:

Journal
Date	Account Titles & Explanations	Account No.	Debit	Credit
2019
31-Dec	Professional fees earned	401	$59,600
	Rent earned	406	$4,500
	Dividends earned	407	$1,000
	Interest earned	409	$1,320
	Income summary			$66,420
	(To close the revenue accounts)
31-Dec	Income summary		$37,530
	Depreciation expense-Building	606		$2,000
	Depreciation expense-Equipment	612		$1,000
	Wages expenses	623		$18,500
	Interest expense	633		$1,550
	Insurance expense	637		$1,525
	Rent expense	640		$3,600
	Supplies expense	652		$1,000
	Postage expense	682		$410
	Property taxes expense	683		$4,825
	Repairs Expense	684		$679
	Telephone expense	688		$521
	Utilities expense	690		$1,920
	(To close the expense accounts)
31-Dec	Income summary		$28,890
	Retained earnings	318		$28,890
	(To close the income summary account)
31-Dec	Retained earnings	318	$8,000
	Dividends	319		$8,000
	(To close the dividends paid)