Chapter 4, Problem 1CPP

Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2016. The accounting cycle for Kelly Consulting for April, including financial statements, was illustrated in this chapter. During May, Kelly Consulting entered into the following transactions:

May 3. Received cash from clients as an advance payment for services to be provided and recorded it as unearned fees, $4,500.

5. Received cash from clients on account, $2,450.

9. Paid cash for a newspaper advertisement, $225.

13. Paid Office Station Co. for part of the debt incurred on April 5, $640.

15. Recorded services provided on account for the period May 1–15, $9,180.

16. Paid part-time receptionist for two weeks' salary including the amount owed on April 30, $750.

17. Recorded cash from cash clients for fees earned during the period May 1–16, $8,360.

Record the following transactions on Page 6 of the journal:

20. Purchased supplies on account, $735.

21. Recorded services provided on account for the period May 16–20, $4,820.

25. Recorded cash from cash clients for fees earned for the period May 17–23, $7,900.

27. Received cash from clients on account, $9,520.

28. Paid part-time receptionist for two weeks' salary, $750.

30. Paid telephone bill for May, $260.

31. Paid electricity bill for May, $810.

31. Recorded cash from cash clients for fees earned for the period May 26–31, $3,300.

31. Recorded services provided on account for the remainder of May, $2,650.

31. Kelly withdrew $10,500 for personal use.

Instructions

1. The chart of accounts for Kelly Consulting is shown in Exhibit 9, and the post-closing trial balance as of April 30, 2016, is shown in Exhibit 17. For each account in the post-closing trial balance, enter the balance in the appropriate Balance column of a four-column account. Date the balances May 1, 2016, and place a check mark (✓) in the Posting Reference column. Journalize each of the May transactions in a two-column journal starting on Page 5 of the journal and using Kelly Consulting’s chart of accounts. (Do not insert the account numbers in the journal at this time.)

2. Post the journal to a ledger of four-column accounts.

3. Prepare an unadjusted trial balance.

4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6).

a. Insurance expired during May is $275.

b. Supplies on hand on May 31 are $715.

c. Depreciation of office equipment for May is $330.

d. Accrued receptionist salary on May 31 is $325.

e. Rent expired during May is $1,600.

f. Unearned fees on May 31 are $3,210.

5. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet.

6. Journalize and post the adjusting entries. Record the adjusting entries on Page 7 of the journal.

7. Prepare an adjusted trial balance.

8. Prepare an income statement, a statement of owner’s equity, and a balance sheet.

9. Prepare and post the closing entries. Record the closing entries on Page 8 of the journal. (Income Summary is account #33 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry.

10. Prepare a post-closing trial balance.

To determine

Journal:

Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

T-Accounts:

T-accounts are referred as T-account because its format represents the letter “T”. The T-accounts consists of the following:

• The title of accounts.
• The debit side (Dr) and,
• The credit side (Cr).

Adjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.

Adjusting entries:

An adjusting entry is prepared when the trial balance is not up-to-date, and complete, and they are usually prepared at the end of the accounting period. This adjusting entry is essential for preparing the financial statements of the business.

Spreadsheet: A spreadsheet is a worksheet. It is used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

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 drawing is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Income statement:

An income statement is one of the financial statements which shows the revenues, and expenses of the company. The income statement is prepared to ascertain the net income/loss of the company, by deducting the expenses from the revenues.

$\boxed{\text{Net}\text{income = Total revenues – Total expenses}}$

Balance sheet:

A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

To journalize: The transactions of May in a two column journal beginning on page 5.

Explanation of Solution

Journalize the transactions of May in a two column journal beginning on page 5.

Journal                                           Page 5
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016	3	Cash	11	4,500
May		Unearned fees	23		4,500
		(To record the cash received for the service yet to be provide)
	5	Cash	11	2,450
		Accounts receivable	12		2,450
		(To record the cash received from clients)
	9	Miscellaneousexpense	59	225
		Cash	11		225
		(To record the payment made for Miscellaneous expense)
	13	Accounts payable	21	640
		Cash	11		640
		(To record the payment made to creditors on account)
	15	Accounts receivable	12	9,180
		Fees earned	41		9,180
		(To record the revenue earned and billed)
	14	Salary Expense	51	630
		Salaries payable	22	120
		Cash	11		750
		(To record the payment made for salary)
		Cash	11	8,360
	17	Fees earned	41		8,360
		(To record the receipt of cash)

Table (1)

Journal                                           Page 6
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016	18	Supplies	14	735
May		Accounts payable	21		735
		(To record the payment made for automobile expense)
	21	Accounts receivable	12	4,820
		Fees earned	41		4,820
		(To record the payment of advertising expense)
	25	Cash	11	7,900
		Fees earned	41		7,900
		(To record the cash received from client for fees earned)
	27	Cash	11	9,520
		Accounts receivable	12		9,520
		(To record the cash received from clients)
	28	Salary expense	51	750
		Cash	11		750
		(To record the payment of salary)
	30	Miscellaneous Expense	59	260
		Cash	11		260
		(To record the payment of telephone charges)
	31	Miscellaneous Expense	59	810
		Cash	11		810
		(To record the payment of electricity charges)
	31	Cash	11	3,300
		Fees earned	41		3,300
		(To record the cash received from client for fees earned)
	31	Accounts receivable	12	2,650
		Fees earned	41		2,650
		(To record the revenue earned and billed)
	31	Dividends	33	10,500
		Cash	11		10,500
		(To record the drawing made for personal use)

Table (2)

To determine

To record: The balance of each accounts in the appropriate balance column of a four-column account and post them to the ledger.

Explanation of Solution

Account:         Cash         Account no.11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			22,100
	3		5	4,500		26,600
	5		5	2,450		29,050
	9		5		225	28,825
	13		5		640	28,185
	16		5		750	27,435
	17		5	8,360		35,795
	25		6	7,900		43,695
	27		6	9,520		53,215
	28		6		750	52,465
	30		6		260	52,205
	31		6		810	51,395
	31		6	3,300		54,695
	31		6		10,500	44,195

Table (3)

Account:    Accounts Receivable Account no.12
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			3,400
	5		5		2,450	950
	15		5	9,180		10,130
	21		6	4,820		14,950
	27		6		9,520	5,430
	31		6	2,650		8,080

Table (4)

Account:   Supplies Account no.14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			1,350
	20		6	735		2,085
	30	Adjusting	7		1,350	715

Table (5)

Account:    Prepaid Rent Account no.15
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			3,200
	31	Adjusting	7		1,600	1,600

Table (6)

Account:    Prepaid Insurance Account no.16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			1,500
	31	Adjusting	7		275	1,225

Table (7)

Account:    Office equipment Account no.18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓			14,500

Table (8)

Account:  Accumulated Depreciation-Office equipment Account no.19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓				330
	31	Adjusting	7		330		660

Table (9)

Account:     Accounts Payable         Account no.21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓				800
	13		5	640			160
	20		6		735		895

Table (10)

Account:     Salaries Payable      Account no.22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓				120
	16		5	120
	31	Adjusting	7		325		325

Table (11)

Account:   Unearned Fees          Account no.23
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓				2,500
	3		5		4,500		7,000
	31	Adjusting	7	3,790			3,210

Table (12)

Account:          Common Stock Account no.31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	1	Balance	✓				42,300
	31	Closing	8		33,425		75,725
	31	Closing	8	10,500			65,225

Table (13)

Account:     Dividends Account no.33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31		6	10,500		10,500
	31	Closing	8		10,500

Table (14)

Account:     Income Summary Account no.34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31	Closing	8		40,000		40,000
	31	Closing	8	6,575			33,425
	31	Closing	8	33,425

Table (15)

Account:          Fees earned            Account no.41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	15		5		9,180		9,180
	17		5		8,360		17,540
	21		6		4,820		22,360
	25		6		7,900		30,260
	31		6		3,300		33,560
	31		6		2,650		36,210
	31	Adjusting	7		3,790		40,000
	31	Closing	8	40,000

Table (16)

Account:   Salary expense Account no.51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	16		5	630		630
	28		6	750		1,380
	31	Adjusting	7	325		1,705
	31	Closing	8		1,705

Table (17)

Account:   Rent expense Account no.52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31	Adjusting	7	1,600		1,600
	31	Closing	8		1,600

Table (18)

Account: Supplies expense Account no.53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31	Adjusting	7	1,370		1,370
	31	Closing	8		1,370

Table (19)

Account:   Depreciation expense Account no.54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31	Adjusting	7	330		330
	31	Closing	8		330

Table (20)

Account:   Insurance expense Account no.54
Date		Item	PostRef.	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	31	Adjusting	7	275		275
	31	Closing	8		275

Table (21)

Account:   Miscellaneous expense   Account no.59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
May	9		5	225		225
	30		6	260		485
	31		6	810		1,295
	31	Closing	8		1,295

Table (22)

To determine

To prepare: The unadjusted trial balance of Consulting K at May, 31.

Explanation of Solution

Prepare an unadjusted trial balance of Consulting K for the month ended May, 31 as follows:

K Consulting Unadjusted Trial Balance May  31, 2016
Particulars	Account No.	Debit $	Credit $
Cash	11	44,195
Accounts receivable	12	8,080
Supplies	14	2,085
Prepaid rent	15	3,200
Prepaid insurance	16	1,500
Office Equipment	18	14,500
Accumulated depreciation-Office equipment	19		330
Accounts payable	21		895
Salaries payable	22		0
Unearned fees	23		7,000
KP Capital	31		42,300
KP Drawings	33	10,500
Fees earned	41		36,210
Salary expense	51	1,380
Rent expense	52	0
Supplies expense	53	0
Depreciation expense	54	0
Insurance expense	55	0
Miscellaneous expense	59	1,295
Total		$86,735	$86,735

Table (23)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $86,735.

To determine

To enter: The unadjusted trial balance on an end-of-period spreadsheet.

Explanation of Solution

The unadjusted trial balance on an end-of-period spreadsheet is prepared as follows:

Table (24)

Conclusion

Hence, the unadjusted trial balance on an end-of-period spreadsheet is prepared and completed.

To determine

To Journalize: The adjusting entries of Consulting K for May 31.

Explanation of Solution

The adjusting entries of Consulting K for May 31, 2016are as follows:

Date		Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2016		Insurance expense	55	275
May	31	Prepaid insurance	16		275
		(To record the insurance expense for May )
	31	Supplies expense	53	1,370
		Supplies	14		1,370
		(To record the supplies expense)
	31	Depreciation expense	54	330
		Accumulated Depreciation	19		330
		(To record the depreciation and the accumulated depreciation)
	31	Salaries expense	51	325
		Salaries payable	22		325
		(To record the accrued salaries payable)
	31	Rent expense	52	1,600
		Prepaid rent	15		1,600
		(To record the rent expense for May )
	31	Unearned fees	23	3,790
		Fees earned	41		3,790
		(To record the receipt of unearned fees)

Table (25)

Working notes:

$\begin{array}{c}\text{Supplies expense=}\left[\begin{array}{l}\text{The amount of supplies at }\\ \text{the beginning of the year }\end{array}\right]-\left[\begin{array}{l}\text{The amount of supplies }\\ \text{at the end of the year }\end{array}\right]\\ \text{=}\left[\text{\$2,085}\right]-\text{\$715}\\ \text{=\$1,370}\end{array}$

$\begin{array}{c}\text{Unearned fees =}\left[\begin{array}{l}\text{The amount of unearned fees }\\ \text{at the beginning of the year }\end{array}\right]-\left[\begin{array}{l}\text{The amount of unearned }\\ \text{fees at the end of the year }\end{array}\right]\\ \text{=}\left[\text{\$7,000}\right]-\text{\$3,210}\\ \text{=\$3,790}\end{array}$

To determine

To prepare: An adjusted trial balance of Consulting K for May 31, 2016.

Explanation of Solution

An adjusted trial balance of Consulting K for May 31, 2016 is prepared as follows:

K Consulting Adjusted Trial Balance May  31, 2016
Particulars	Account No.	Debit $	Credit $
Cash	11	44,195
Accounts receivable	12	8,080
Supplies	14	715
Prepaid insurance	16	1,600
Prepaid rent	15	1,225
Office Equipment	18	14,500
Accumulated Depreciation-Office equipment	19		660
Accounts payable	21		895
Salaries payable	22		325
Unearned fees	23		3,210
Common stock	31		30,000
Retained earnings	32		12,300
Dividends	33	10,500
Fees earned	41		40,000
Salary expense	51	1,705
Rent expense	52	1,600
Supplies Expense	53	1,370
Depreciation expense	54	330
Insurance expense	55	275
Miscellaneous expense	59	1,295
Total		$87,390	$87,390

Table (25)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $87,390.

To determine

To Prepare: An income statement for the year ended May 31, 2016.

Answer to Problem 1CPP

K Consulting
Balance Sheet
May  31, 2016
Assets
Current Assets:		$	$
Cash		44,195
Accounts Receivable		8,080
Supplies		715
Prepaid Rent		1,600
Prepaid Insurance		1,225
Total Current Assets			55,815
Property, plant and equipment:
Office Equipment		14,500
Less: Accumulated Depreciation		(660)
Total Plant Assets			13,840
Total Assets			$69,655
Liabilities
Current Liabilities:
Accounts Payable		895
Salaries Payable		325
Unearned rent		3,210
Total Liabilities			$4,430
Owners’ Equity
Capital		65,225
Total owners ‘equity			65,225
Total Liabilities and Owners’ Equity			$69,655

Table (28)

Explanation of Solution

An income statement for the year ended May 31, 2016 is as follows:

K Consulting
Income Statement
For the year ended May  31, 2016
Particulars	Amount ($)	Amount ($)
Revenues:
Fees Earned		40,000
Expenses:
Salaries Expense	1,705
Rent Expense	1,600
Supplies Expense	1,370
Depreciation Expense- Building	330
Insurance Expense	275
Miscellaneous Expense	1,295
Total Expenses		6,575
Net Income		$33,425

Table (26)

Conclusion

Hence, the net income of K Consulting for the year ended May 31, 2016is $33,425.

To determine

To Journalize: The closing entries for K Consulting.

Answer to Problem 1CPP

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
May 31, 2016	Fees earned	41	40,000
	Income summary	34		40,000
	(To close the balances of revenue account)
May 31, 2016	Income summary	34	6,575
	Salary expense	51		1,705
	Rent Expense	52		1,600
	Supplies Expense	53		1,370
	Depreciation Expense	54		330
	Insurance Expense	55		275
	Miscellaneous Expense	59		1,295
	(To close the balances of expense account)
July 31	Income Summary	33	33,425
	KP Capital	31		33,425
	(To close balance of income summary are  transferred to owners’ capital account)
July 31	KP’s Capital	31	10,500
	KP’s Drawing	32		10,500
	(To Close the capital and drawings account)

Table (29)

Explanation of Solution

• A Service fee earned is revenue account. Since the amount of revenue is closed and transferred to JH’s capital account. Here, G Consulting earned an income of $64,550, and $18,000. Therefore, it is debited.

• Salaries Expense, Rent Expense, Insurance Expense, Utilities Expense, Supplies Expense, Depreciation Expense, Advertising Expense, JH Capital, and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.

• Owner’s capital is a component of owner’s equity. Thus, owners ‘equity is debited since the capital is decreased on owners’ drawings.

• Owner’s drawings are a component of owner’s equity. It is credited because the balance of owners’ drawing account is transferred to owners ‘capital account.

To determine

To Journalize: The closing entries for K Consulting.

Explanation of Solution

Prepare a post–closing trial balance of K Consulting for the month ended May 31, 2016 as follows:

Consulting K Post-closing Trial Balance May, 31, 2016
Particulars	Account Number	Debit $	Credit $
Cash	11	44,195
Accounts receivable	12	8,080
Supplies	14	715
Prepaid rent	15	1,600
Prepaid insurance	16	1,225
Office Equipment	18	14,500
Accumulated depreciation  –Office Equipment	19		660
Accounts payable	21		895
Salaries payable	22		325
Unearned rent	23		3,210
Common stock	31		30,000
Retained earnings	32		35,225
Total		$70,315	$70,315

Table (30)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $70,315.