Chapter 4, Problem 1CP

1.

To determine

Indicate the given adjustments and complete the worksheet for ABY Spa for the month ended June 30, 20--.

Explanation of Solution

Worksheet: Worksheet is an accounting tool that help accountants to record adjustments and up-date balances required to prepare financial statements. Worksheet is a central place where trial balance, adjustments, adjusted trial balance, income statement, and balance sheet are presented.

Indicate the given adjustments and complete the worksheet for ABY Spa for the month ended June 30, 20--.

Figure-(1)

2.

To determine

Prepare adjusting journal entries for ABY Spa for the month ended June 30, 20--.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and owners’ or stockholders’ equity) to maintain the records according to accrual basis principle and matching concept.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare adjusting journal entries for ABY Spa for the month ended June 30, 20--.

Adjusting entry (a) for the prepaid insurance:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Insurance Expense		618	160
			Prepaid Insurance	117		160
		(Record part of prepaid insurance expired)

Table (1)

Description:

• Insurance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Insurance is an asset account. Since amount of insurance is expired, asset account decreased, and a decrease in asset is credited.

Working Note 1:

Calculate the value of insurance expense for 1 month.

$\begin{array}{c}\text{Insurance expense = }\frac{\text{Amount of 6-month insurance policy}}{\text{Number of months}}\\ =\frac{\$960}{\text{6 months}}\\ =\$160\end{array}$

Adjusting entry (b) for the depreciation expense for office equipment:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Depreciation Expense, Office Equipment		619	10.00
			Accumulated Depreciation, Office Equipment	125		10.00
		(Record depreciation expense)

Table (2)

Description:

• Depreciation Expense, Office Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation, Office Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Working Note 2:

Compute monthly depreciation expense for the office equipment.

$\begin{array}{c}\text{Depreciation expense=}\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Salvage value}\right)\text{×}\frac{\text{1}}{\text{Useful life}}\\ \text{=}\left(\text{\$1,150–\$550}\right)\text{×}\frac{\text{1}}{\text{60 months}\left(\text{5 years}\right)}\\ \text{=\$10}\text{.00}\end{array}$

Adjusting entry (c) for the depreciation expense for spa equipment:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Depreciation Expense, Spa Equipment		620	64.88
			Accumulated Depreciation, Spa Equipment	129		64.88
		(Record depreciation expense)

Table (3)

Description:

• Depreciation Expense, Spa Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation, Spa Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Working Note 3:

Compute monthly depreciation expense for the spa equipment.

$\begin{array}{c}\text{Depreciation expense=}\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Salvage value}\right)\text{×}\frac{\text{1}}{\text{Useful life}}\\ \text{=}\left(\text{\$7,393–\$3,500}\right)\text{×}\frac{\text{1}}{\text{60 months}\left(\text{5 years}\right)}\\ \text{=\$64}\text{.88}\end{array}$

Adjusting entry (d) for the wages expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Wages Expense		611	369.50
			Wages Payable	212		369.50
		(Record accrued wages expenses)

Table (4)

Description:

• Wages Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Wages Payable is a liability account. Since amount of payables has increased, liability decreased, and an increase in liability is credited.

Working Note 4:

Calculate the value of wages expense for 1 day.

$\begin{array}{c}\text{Wage expense per day = }\frac{\text{Monthly wages}}{\text{Wages paid for number of days}}\\ =\frac{\$7,390}{\text{20 days}}\\ =\$369.50\end{array}$

Adjusting entry (e) for the office supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Office Supplies Expense		613	238
			Office Supplies	114		238
		(Record part of supplies consumed)

Table (5)

Description:

• Office Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Office Supplies is an asset account. Since amount of supplies is used, asset account decreased, and a decrease in asset is credited.

Working Note 5:

Calculate the value of office supplies expense for the month.

$\begin{array}{c}\text{Office supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Closing balance of supplies}\end{array}\right)\\ \text{= \$368 }-\text{\$130 }\\ \text{= \$238}\end{array}$

Adjusting entry (f) for the spa supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Spa Supplies Expense		614	287
			Spa Supplies	115		287
		(Record part of supplies consumed)

Table (6)

Description:

• Spa Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Spa Supplies is an asset account. Since amount of supplies is used, asset account decreased, and a decrease in asset is credited.

Working Note 6:

Calculate the value of spa supplies expense for the month.

$\begin{array}{c}\text{Spa supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Closing balance of supplies}\end{array}\right)\\ \text{= \$492 }-\text{\$205 }\\ \text{= \$287}\end{array}$

3.

To determine

Post the adjusting entries journalized in Part (2) in the ledger accounts of general ledger.

Explanation of Solution

Post the adjusting entries journalized in Part (2) in the ledger accounts of general ledger.

ACCOUNT    Cash                                                                 ACCOUNT NO. 111
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1	15,000.00		15,000.00
	3		1		960.00	14,040.00
	3		1		2,000.00	12,040.00
	3		1		1,650.00	10,390.00
	5		1		248.00	10,142.00
	5		1		112.00	10,030.00
	7		1		1,847.50	8,182.50
	7		1	2,630.00		10,812.50
	11		1		873.00	9,939.50
	14		1	3,703.00		13,642.50
	14		1		1,847.50	11,795.00
	18		1		1,200.00	10,595.00
	21		1	4,758.00		15,353.00
	21		1		1,847.50	13,505.50
	25		1		73.00	13,432.50
	28		1		1,847.50	11,585.00
	28		1		84.00	11,501.00
	30		1	5,992.00		17,493.00
	30		1		1,850.00	15,643.00
	30		1		225.00	15,418.00
	30		1		248.00	15,170.00

Table (7)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1	325.00		325.00
	14		1	486.00		811.00
	21		1	344.00		1,155.00
	30		1	109.00		1,264.00

Table (8)

ACCOUNT    Office Supplies                                             ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	248		248
	5		1	120		368
	30	Adjusting	4		238	130

Table (9)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	492		492
	30	Adjusting	4		287	205

Table (10)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	960		960
	30	Adjusting	4		160	800

Table (11)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	318		318
	5		1	832		1,150

Table (12)

ACCOUNT    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1		10.00		10.00

Table (13)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1	3,158		3,158
	3		1	4,235		7,393

Table (14)

ACCOUNT    Accumulated Depreciation, Spa Equipment               ACCOUNT NO. 129
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1		64.88		64.88

Table (15)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1		2,235		2,235
	3		1		492		2,727
	5		1		318		3,045
	5		1		397		3,442
	5		1		832		4,274
	5		1		120		4,394
	11		1	873			3,521
	18		1	1,200			2,321
	25		1	73			2,248

Table (16)

ACCOUNT    Wages Payable                                              ACCOUNT NO. 212
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1		369.50		369.50

Table (17)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1		1		15,000		15,000
	1		1		3,158		18,158

Table (18)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30		1	1,850		1,850

Table (19)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1		2,630		2,630
	7		1		325		2,955
	14		1		3,703		6,658
	14		1		486		7,144
	21		1		4,758		11,902
	21		1		344		12,246
	30		1		5,992		18,238
	30		1		109		18,347

Table (20)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	7		1	1,847.50		1,847.50
	14		1	1,847.50		3,695.00
	21		1	1,847.50		5,542.50
	28		1	1,847.50		7,390.00
	30	Adjusting	4	369.50		7,759.50

Table (21)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	3		1	1,650		1,650

Table (22)

ACCOUNT    Office Supplies Expense                                  ACCOUNT NO. 613
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1	238		238

Table (23)

ACCOUNT    Spa Supplies Expense                                       ACCOUNT NO. 614
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1	287		287

Table (24)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	28		1	84		84

Table (25)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	397		397

Table (26)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30		1	225		225
	30		1	248		473

Table (27)

ACCOUNT    Insurance Expense                                            ACCOUNT NO. 618
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1	160		160

Table (28)

ACCOUNT    Depreciation Expense, Office Equipment                ACCOUNT NO. 619
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1	10		10

Table (29)

ACCOUNT    Depreciation Expense, Spa Equipment                    ACCOUNT NO. 620
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	30	Adjusting	1	64.88		64.88

Table (30)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	5		1	112		112

Table (31)

4.

To determine

Prepare an adjusted trial balance for ABY Spa as at June 30, 20--, based on the account balances derived in Part (3).

Explanation of Solution

Adjusted trial balance: The trial balance which reflects the adjusting entries and incorporates the effect of all adjustments in the ledger accounts, is referred to as adjusted trial balance.

Prepare an adjusted trial balance for ABY Spa as at June 30, 20--, based on the account balances derived in Part (3).

ABY Spa
Adjusted Trial Balance
June 30, 20--
Account Title	Debit ($)	Credit ($)
Cash	$15,170.00
Accounts Receivable	1,264.00
Office Supplies	130.00
Spa Supplies	205.00
Prepaid Insurance	800.00
Office Equipment	1,150.00
Accumulated Depreciation, Office Equipment		$10.00
Spa Equipment	7,393.00
Accumulated Depreciation, Spa Equipment		64.88
Accounts Payable		2,248.00
Wages Payable		369.50
AV, Capital		18,158.00
AV, Drawing	1,850.00
Income from Services		18,347.00
Wages Expense	7,759.50
Rent Expense	1,650.00
Office Supplies Expense	238.00
Laundry Expense	84.00
Advertising Expense	397.00
Utilities Expense	473.00
Promotional Expense	112.00
Depreciation Expense, Office Equipment	10.00
Depreciation Expense, Spa Equipment	64.88
Spa Supplies Expense	287.00
Insurance Expense	160.00
Total	$39,197.38	$39,197.38

Table (32)

Conclusion

Hence, the debit and credit total of adjusted trial balance of ABY Spa at June 30, 20-- is $39,197.38.

5.

To determine

Prepare an income statement of ABY Spa for the month ended June 30, 20--, based on the account balances derived in Part (3).

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.

Prepare an income statement of ABY Spa for the month ended June 30, 20--.

ABY Spa
Income Statement
For the Month Ended June 30, 20--
Revenues:
Income from Services		$18,347.00
Expenses:
Wages Expense	$7,759.50
Rent Expense	1,650.00
Office Supplies Expense	238.00
Laundry Expense	84.00
Advertising Expense	397.00
Utilities Expense	473.00
Promotional Expense	112.00
Depreciation Expense, Office Equipment	10.00
Depreciation Expense, Spa Equipment	64.88
Spa Supplies Expense	287.00
Insurance Expense	160.00
Total expenses		11,235.38
Net income		$7,111.62

Table (33)

6.

To determine

Prepare a statement of owners’ equity of ABY Spa, based on the account balances derived in Part (3), and net income computed in Part (5).

Explanation of Solution

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owners’ equity. Additional capital, net income from income statement is added to, and drawings is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement of owners’ equity for ABY Spa for the month ended June 30, 20--.

ABY Spa
Statement of Owners’ Equity
For the Month Ended June 30, 20--
AV, Capital, June 1, 20--		$0
Investments during June	$18,158.00
Net income for June	7,111.62
	25,269.62
Less: Withdrawals for June	1,850.00
Increase in capital		23,419.62
AV, Capital, June 30, 20--		$23,419.62

Table (34)

7.

To determine

Prepare a balance sheet for ABY Spa, based on the account balances derived in Part (3), and capital of the owner from the statement of owners’ equity prepared in Part (6).

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and owners (owners’ equity) over those resources. The resources of the company are assets which include money contributed by owners and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and owners’ equity.

Prepare the balance sheet for ABY Spa as at June 30, 20--.

ABY Spa
Balance Sheet
June 30, 20--
Assets
Cash		$15,170.00
Accounts Receivable		1,264.00
Office Supplies		130.00
Spa Supplies		205.00
Prepaid Insurance		800.00
Office Equipment	$1,150.00
Less: Accumulated Depreciation, Office Equipment	10.00	1,140.00
Spa Equipment	7,393.00
Less: Accumulated Depreciation, Spa Equipment	64.88	7,328.12
Total assets		$26,037.12
Liabilities
Accounts Payable	$2,248.00
Wages Payable	369.50
Total Liabilities		$2,617.50
Owners’ Equity
AV, Capital		23,419.62
Total Liabilities and Owners’ Equity		$26,037.12

Table (35)