Chapter 4, Problem 1COP

From Recording Transactions to Preparing Accrual and Deferral Adjustments and Reporting Results on the Balance Sheet and Income Statement (Chapters 2, 3, and 4)

RunHeavy Corporation (RHC) is a corporation that manages a local rock band. RHC was formed with an investment of $ 10,000 cash, paid in by the leader of the band on January 3 in exchange for common stock. On January 4, RHC purchased music equipment by paying $2,000 cash and signing an $8,000 promissory note payable in three years. On January 5, RHC booked the band for six concert events, at a price of $2,500 each. Of the six events, four were completed between January 10 and 20. On January 22, cash was collected for three of the four events. The other two bookings were for February concerts, but on January 24, RHC collected half of the $2,500 fee for one of them. On January 27, RHC paid $3,140 cash for the band’s travel-related costs. On January 28, RHC paid its band members a total of $2,400 cash for salaries and wages for the first three events. As of January 31, the band members hadn’t yet been paid wages for the fourth event completed in January, but they would be paid in February at the same rate as for the first three events. As of January 31, RHC has not yet recorded the $ 100 of monthly depreciation on the equipment. Also, RHC has not yet paid or recorded the $60 interest owed on the promissory note at January 31, RHC is subject to a 15% tax rate on the company’s income before lax.

Required:

1. 1. Prepare journal entries to record the transactions and adjustments needed on each of the dates indicated above.
2. 2. Post the journal entries from requirement 1 to T-accounts, calculate ending balances, and prepare an adjusted trial balance.
3. 3. Prepare a classified balance sheet and income statement as of and for the month ended January 31.

To determine

To prepare: The journal entries for the given transactions and to prepare the adjusting entries that are needed on each of the dates.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Prepare the journal entries:

Journal entry for issuance of common stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 3	Cash (A+)	10,000
	Common stock (SE+)		10,000
	(To record the issuance of common stock to investors)

Table (1)

• Cash is an asset. There is an increase in the asset. Hence, debit cash account with $10,000.
• Common stock is a component of stock holders’ equity. There is an increase in the common stock which increases the stock holders’ equity. Hence, credit common stock with $10,000.

Journal entry for purchase of equipment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 4	Equipment (A+)	10,000
	Notes payable (L+)		8,000
	Cash (A–)		2,000
	(To record the purchase of equipment partly for cash and partly by signing a note )

Table (2)

• Equipment is an asset. There is an increase in the asset. Hence, debit equipment with $10,000.
• Notes payable is a liability. There is an increase in the liability. Hence, credit notes payable with $8,000.
• Cash is an asset. There is a decrease in the asset. Hence, credit cash account with $2,000.

January ,5:

RHC booked the band for six concert events. As the booking represents only the mere exchange of promises, there is no need of recording the journal entry for that transaction. Hence, no entry is recorded.

Journal entry for providing services on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 10-20	Accounts receivable (A+)	10,000
	Service revenue(R+) (SE+)		10,000
	(To record the service made on account)

Table (3)

• Accounts receivable is an asset. There is an increase in the asset. Hence, debit accounts receivable with $10,000.
• Service revenue is a revenue account which is a component of stock holders’ equity. There is an increase in the revenue account which increases the stockholders’ equity. Hence credit stockholders’ equity with $10,000.

Journal entry for receiving cash for the service provided:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 22	Cash (A+)	7,500
	Accounts receivable (A-)		7,500
	(To record the cash receipt for the service performed on account)

Table (4)

• Cash is an asset. There is an increase in the asset. Hence, debit cash account with $7,500.
• Accounts receivable is an asset. There is a decrease in the asset. Hence, credit accounts receivable with $7,500.

Working note:

$\begin{array}{c}\text{Cash=Total amount×}\frac{\text{3}}{\text{4}}\left(\text{Number of events performed}\right)\\ =\$10,000\times \frac{3}{4}\\ =\$7,500\end{array}$

Journal entry for unearned revenue:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 24	Cash (A+)	1,250
	Unearned revenue (L+)		1,250
	(To record the cash receipt for the service performed on account)

Table (5)

• Cash is an asset. There is an increase in the asset. Hence, debit cash account with $1,250.
• Unearned revenue is a liability. There is an increase in the liability. Hence, credit unearned revenue with $1,250.

Working note:

$\begin{array}{c}\text{Unearned Revenue=\$2,500×}\frac{\text{1}}{\text{2}}\left(\text{Half of the amount}\right)\\ \text{=\$1,250}\end{array}$

Journal entry for travel expenses:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 27	Travel expense (E+) (SE-)	3,140
	Cash (A-)		3,140
	(To record the payment made for travel expense)

Table (6)

• Travel expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit travel expense with $3,140.
• Cash is an asset. There is a decrease in the asset. Hence, credit cash account with $3,140.

Journal entry for salaries and wages expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 28	Salaries and wages expense (E+) (SE-)	2,400
	Cash (A-)		2,400
	(To record the salaries and wages expense)

Table (7)

• Salaries and wages expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit salaries and wages expense with $2,400.
• Cash is an asset. There is a decrease in the asset. Hence, credit cash account with $2,400.

Adjusting entry for salaries and wages payable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 31	Salaries and wages expense (E+) (SE-)	800
	Salaries and wages payable (L+)		800
	(To record the adjusting entry salaries and wages expense)

Table (8)

• Salaries and wages expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit salaries and wages expense with $800.
• Salaries and wages payable is a liability. There is an increase in the liability. Hence, credit, salaries and wages payable with $800.

Working note:

$\begin{array}{c}\text{Salaries and Wages payable=Total amount×}\frac{\text{1}}{\text{3}}\left(\text{Unpaid}\right)\\ =\$2,400\times \frac{1}{3}\\ =\$800\end{array}$

Adjusting entry for accumulated depreciation on equipment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 31	Depreciation expense (E+) (SE-)	100
	Accumulated depreciation-Equipment (xA+) (A-)		100
	(To record the adjusting entry salaries and accumulated depreciation)

Table (9)

• Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $100.
• Accumulated depreciation is a contra-asset. There is an increase in the contra-asset which decreases the asset account. Hence, credit accumulated depreciation with $100.

Adjusting entry for interest expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 31	Interest expense (E+) (SE-)	60
	Interest payable (L+)		60
	(To record the adjusting entry for interest expense)

Table (10)

• Interest expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $60.
• Interest payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $60.

Adjusting entry for income tax expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 31	Income tax expense (E+) (SE-)(2)	525
	Income tax payable (L+)		525
	(To record the adjusting entry for income tax expense)

Table (11)

• Income tax expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $60.
• Income tax payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $60.

To determine

To prepare: The T-Accounts for the journal entries to calculate the ending balance and prepare an adjusted trial balance.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

• The title of the account
• The left or debit side
• The right or credit side

Prepare the T-account:

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given time.  It is usually prepared at end of the accounting period.  Debit balances are listed in left column and credit balances are listed in right column.  The totals of debit and credit column should be equal. Trial balance is useful in the preparation of the financial statements.

Prepare the adjusted trial balance:

Corporation RH
Adjusted Trial Balance
As on 31st January
Particulars	Debits ($)	Credits ($)
Cash	11,210
Accounts Receivable	2,500
Equipment	10,000
Accumulated Depreciation-equipment		100
Unearned Revenue		1,250
Salaries and Wages payable		800
Interest Payable		60
Income Tax Payable		525
Note Payable (long–term)		8,000
Common Stock		10,000
Retained Earnings		0
Service Revenue		10,000
Travel Expense	3,140
Salaries and Wages  expense	3,200
Interest Expense	60
Depreciation Expense	100
Income Tax Expense	525
Total	30,735	30,735

Table (12)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $30,735.

To determine

To prepare: An income statement as on 31^st January, and classified balance sheet.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues.

Prepare the income statement as on 31^st January.

Corporation RH
Income Statement
For the Month Ended January 31
Particulars	Amount ($)	Amount ($)
Revenues:
Service Revenue	10,000
Total Revenue		10,000
Expenses:
Salaries and Wages expense	3,200
Travel Expenses	3,140
Depreciation Expense	100
Interest Expense	60
Income Tax Expense(2)	525
Total Expenses		7,025
Net income		2,975

Table (13)

Working note:

Calculate the income before income tax:

$\begin{array}{c}\text{Income before income tax}=\text{Totalrevenue}-\text{Expenses}\left(\text{Excluding income tax expense}\right)\\ =\$10,000-\left(\$3,200+\$3,140+\$100+60\right)\\ =\$3,500\end{array}$ (1)

Calculate the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\text{Income before income tax}\times 15\%\\ =\$3,500\times 15\%\\ =\$525\end{array}$ (2)

Thus the income statement of Corporation R is prepared and it shows the net income of $2,975.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Prepare the classified balance sheet as on 31^st January:

Corporation RH
Balance Sheet
As on 31st January
Particulars	Amount ($)	Amount ($)
Assets
Current Assets:
Cash	11,210
Accounts Receivable	2,500
Total Current Assets		13,710
Non-Current assets:
Equipment	10,000
Accumulated Depreciation–Equipment	(100)
Equipment, net of Accumulated Depreciation	9,900
TOTAL ASSETS		$23,610
Liabilities and stockholders’ equity
Current Liabilities:
Unearned Revenue	1,250
Salaries and Wages Payable	800
Interest Payable	60
Income Tax Payable	525
Total Current Liabilities		2,635
Non-Current liabilities:
Note Payable (long–term)	8,000
Total Liabilities		10,635
Stockholders’ Equity:
Common Stock	10,000
Retained Earnings	2,975
Total Stockholders’ Equity		12,975
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		23,610

Table (14)

Conclusion

Thus, the classified balance sheet of Corporation RHC is prepared and the total assets and liabilities showing equal balance of $23,610.