Chapter 4, Problem 1CP

1.

To determine

Indicate the given adjustments and complete the worksheet for ABY Spa for the month ended October 31, 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 October 31, 20--.

Figure-(1)

2.

To determine

Prepare adjusting journal entries for ABY Spa for the month ended October 31, 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 October 31, 20--.

Adjusting entry (a) for the prepaid insurance:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Insurance Expense		618	140
			Prepaid Insurance	117		140
		(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.

$\begin{array}{c}\text{Insurance expense = }\frac{\text{Amount of 6-month insurance policy}}{\text{Number of months}}\\ =\frac{\$840}{\text{6 months}}\\ =\$140\end{array}$

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Depreciation Expense, Office Equipment		619	13.25
			Accumulated Depreciation, Office Equipment	125		13.25
		(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.

$\begin{array}{c}\text{Depreciation expense=}\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Salvage value}\right)\text{×}\frac{\text{1}}{\text{Useful life}}\\ \text{=}\left(\text{\$1,345–\$550}\right)\text{×}\frac{\text{1}}{\text{60 months}\left(\text{5 years}\right)}\\ \text{=\$13}\text{.25}\end{array}$

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Depreciation Expense, Spa Equipment		620	150
			Accumulated Depreciation, Spa Equipment	129		150
		(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.

$\begin{array}{c}\text{Depreciation expense=}\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Salvage value}\right)\text{×}\frac{\text{1}}{\text{Useful life}}\\ \text{=}\left(\text{\$9,125–\$125}\right)\text{×}\frac{\text{1}}{\text{60 months}\left(\text{5 years}\right)}\\ \text{=\$150}\end{array}$

Adjusting entry (d) for the wages expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Wages Expense		611	415
			Wages Payable	212		415
		(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.

$\begin{array}{c}\text{Wage expense per day = }\frac{\text{Monthly wages}}{\text{Wages paid for number of days}}\\ =\frac{\$8,300}{\text{20 days}}\\ =\$415\end{array}$

Adjusting entry (e) for the office supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Office Supplies Expense		613	230
			Office Supplies	114		230
		(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.

$\begin{array}{c}\text{Office supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Closing balance of supplies}\end{array}\right)\\ \text{= \$355 }-\text{\$125 }\\ \text{= \$230}\end{array}$

Adjusting entry (f) for the spa supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
October	31	Spa Supplies Expense		614	430
			Spa Supplies	115		430
		(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.

$\begin{array}{c}\text{Spa supplies expense = }\left(\begin{array}{l}\text{Value of supplies before adjustment}-\\ \text{Closing balance of supplies}\end{array}\right)\\ \text{= \$685 }-\text{\$255 }\\ \text{= \$430}\end{array}$

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 ($)	Credit ($)
October	1		1	25,000		25,000
	3		1		840	24,160
	3		1		3,000	21,160
	3		1		1,000	20,160
	5		1		230	19,930
	5		1		115	19,815
	7		1		2,075	17,740
	7		1	3,465		21,205
	11		1		1,000	20,205
	14		1	3,307		23,512
	14		1		2,075	21,437
	18		1		1,200	20,237
	21		1	4,587		24,824
	21		1		2,075	22,749
	25		1		350	22,399
	28		1		2,075	20,324
	28		1		105	20,219
	31		1	6,588		26,807
	31		1		1,500	25,307
	31		1		325	24,982
	31		1		385	24,597

Table (7)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	350		350
	14		1	468		818
	21		1	345		1,163
	31		1	110		1,273

Table (8)

ACCOUNT    Office Supplies                                              ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	230		230
	5		1	125		355
	31	Adjusting			230	125

Table (9)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	685		685
	31	Adjusting			430	255

Table (10)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	840		840
	31	Adjusting			140	700

Table (11)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	520		520
	5		1	825		1,345

Table (12)

ACCOUNT    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		13.25		13.25

Table (13)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1	3,575		3,575
	3		1	5,550		9,125

Table (14)

ACCOUNT    Accumulated Depreciation, Spa Equipment               ACCOUNT NO. 129
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		150		150

Table (15)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1		2,550		2,550
	3		1		685		3,235
	5		1		520		3,755
	5		1		415		4,170
	5		1		825		4,995
	5		1		125		5,120
	11		1	1,000			4,120
	18		1	1,200			2,920
	25		1	350			2,570

Table (16)

ACCOUNT    Wages Payable                                              ACCOUNT NO. 212
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		415		415

Table (17)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1		25,000		25,000
	1		1		3,575		28,575

Table (18)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	1,500		1,500

Table (19)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1		3,465		3,465
	7		1		350		3,815
	14		1		3,307		7,122
	14		1		468		7,590
	21		1		4,587		12,177
	21		1		345		12,522
	31		1		6,588		19,110
	31		1		110		19,220

Table (20)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	2,075		2,075
	14		1	2,075		4,150
	21		1	2,075		6,225
	28		1	2,075		8,300
	31	Adjusting		415		8,715

Table (21)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	1,000		1,000

Table (22)

ACCOUNT    Office Supplies Expense                                  ACCOUNT NO. 613
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	230		230

Table (23)

ACCOUNT    Spa Supplies Expense                                       ACCOUNT NO. 614
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	430		430

Table (24)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	28		1	105		105

Table (25)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	415		415

Table (26)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	325		325
	31		1	385		710430

Table (27)

ACCOUNT    Insurance Expense                                            ACCOUNT NO. 618
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	140		140

Table (28)

ACCOUNT    Depreciation Expense, Office Equipment                ACCOUNT NO. 619
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	13.25		13.25

Table (29)

ACCOUNT    Depreciation Expense, Spa Equipment                    ACCOUNT NO. 620
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	150		150

Table (30)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	115		115

Table (31)

4.

To determine

Prepare an adjusted trial balance for ABY Spa as at October 31, 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 October 31, 20--, based on the account balances derived in Part (3).

ABY Spa
Adjusted Trial Balance
October 31, 20--
Account Title	Debit ($)	Credit ($)
Cash	$24,597
Accounts Receivable	1,273
Office Supplies	125
Spa Supplies	255
Prepaid Insurance	700
Office Equipment	1,345
Accumulated Depreciation, Office Equipment		$13.25
Spa Equipment	9,125
Accumulated Depreciation, Spa Equipment		150
Accounts Payable		2,570
Wages Payable		415
AV, Capital		28,575
AV, Drawing	1,500
Income from Services		19,220
Wages Expense	8,715
Rent Expense	1,000
Office Supplies Expense	230
Laundry Expense	105
Advertising Expense	415
Utilities Expense	710
Promotional Expense	115
Depreciation Expense, Office Equipment	13.25
Depreciation Expense, Spa Equipment	150
Spa Supplies Expense	430
Insurance Expense	140
Total	$50,943.25	$50,943.25

Table (32)

Conclusion

Hence, the debit and credit total of adjusted trial balance of ABY Spa at October 31, 20-- is $50,943.25.

5.

To determine

Prepare an income statement of ABY Spa for the month ended October 31, 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 October 31, 20--.

ABY Spa
Income Statement
For the Month Ended October 31, 20--
Revenues:
Income from Services		$19,220.00
Expenses:
Wages Expense	$8,715.00
Rent Expense	1,000.00
Office Supplies Expense	230.00
Laundry Expense	105.00
Advertising Expense	415.00
Utilities Expense	710.00
Promotional Expense	115.00
Depreciation Expense, Office Equipment	13.25
Depreciation Expense, Spa Equipment	150.00
Spa Supplies Expense	430.00
Insurance Expense	140.00
Total expenses		12,023.25
Net income		$7,196.75

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 October 31, 20--.

ABY Spa
Statement of Owners’ Equity
For the Month Ended October 31, 20--
AV, Capital, October 1, 20--		$0
Investments during October	$28,575.00
Net income for October	7,196.75
	35,771.75
Less: Withdrawals for October	1,500.00
Increase in capital		34,271.75
AV, Capital, October 31, 20--		$34,271.75

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 October 31, 20--.

ABY Spa
Balance Sheet
October 31, 20--
Assets
Cash		$24,597.00
Accounts Receivable		1,273.00
Office Supplies		125.00
Spa Supplies		255.00
Prepaid Insurance		700.00
Office Equipment	$1,345.00
Less: Accumulated Depreciation, Office Equipment	13.25	1,331.75
Spa Equipment	9,125.00
Less: Accumulated Depreciation, Spa Equipment	150.00	8,975.00
Total assets		$37,256.75
Liabilities
Accounts Payable	$2,570.00
Wages Payable	415.00
Total Liabilities		$2,985.00
Owners’ Equity
AV, Capital		34,271.75
Total Liabilities and Owners’ Equity		$37,256.75

Table (35)