Chapter 4, Problem 2APSA

To determine

Introduction: At the end of an accounting cycle it is required to close the temporary accounts and ultimately identify the change in net equity for the accounting period. In order to ease the process 10 column worksheet will be used.

Requirement 1

: 10 column work sheet.

Answer to Problem 2APSA

Solution:

No.	Account Title	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance		Income Statement		Balance Sheet and Statement of Owner’s Equity
		Dr	Cr	Dr	Cr	Dr	Cr	Dr	Cr	Dr	Cr
101	Cash	$18,500				18,500				18,500
126	Supplies	9,900			(a)6,600	3,300				3,300
128	Prepaid Insurance	7,200			(b)3,800	3,400				3,400
167	Equipment	132,000				132,000				132,000
168	Accumulated Depreciation-Equipment		26,250		(c).8,400		34,650				34,650
201	Accounts Payable		6,800				6,800				6,800
203	Interest Payable		0		(h)250		250				250
208	Rent Payable		0		(f)500		500				500
210	Wages Payable		0		(e).1,800		1,800				1,800
213	Property Taxes Payable		0		(g)1,000		1,000				1,000
251	Long Term Notes Payable		25,000				25,000				25,000
301	V. Ace Capital		88,660				88,660				88,660
302	V. Ace Withdrawals	33,000				33,000				33,000
401	Construction fees earned		132,100				132,100		132,100
612	Depreciation Expense-Equipment	0		(c).8,400		8,400		8,400
623	Wages Expense	46,860		(e).1,800		48,660		48,660
633	Interest Expense	2,750		(h)250		3,000		3,000
637	Insurance Expense	0		(b)3,800		3,800		3,800
640	Rent Expense	12,000		(f)500		12,500		12,500
652	Supplies Expense	0		(a)6,600		6,600		6,600
683	Property Taxes Expense	7,800		(g)1,000		8,800		8,800
684	Repairs Expense	2,910				2,910		2,910
690	Utilities Expense	5,890		(d)650		6,540		6,540
	Utilities Payable				(d)650		650				650
	Totals	$278,810	$278,810	$23,000	$23,000	$291,410	$291,410	$101,210	$132,100	$190,200	$159,310
	Net Income							$30,890			$30,890
	Totals							$132,100	$132,100	$190,200	$190,200

Explanation of Solution

:

Unadjusted trial balance column details were given in the question. Adjustments from (a) to (h) is made by considering the matching concept to the unadjusted trial balance columns. (By matching expenses and income accounts with relevant accrual accounts.)

Following adjustments being made;

a) Office Supplies available at year end, $3,300

Office supplies unadjusted balance is $9,900 and at the yearend there would be only $3,300 valued office supplies in the company, which means the company has used $6,600 valued supplies which were belonging to current accounting period. ($9,900-$3,300). Used supplied amount which is $3,300 credited from Supplies account and Debited to Supplies Expense Account.

b) Cost of expired Insurance is $3,800

Expired Insurance is an expense for the company so that Insurance expense account increases by $3,800 (Dr 3,800). Prepaid Insurance is credited from same amount. (Cr 3,800)

c) Annual Depreciation is $8,400.

Depreciation is an expense for the company so that depreciation expense account increases by $8,400 (Dr 8,400). Accumulated depreciation is credited from same amount. (Cr 8,400)

d) Utilities Expense unrecorded $650

Utilities expense is an expense for the company so that Utilities expense account increases by $650 (Dr 650). Utilities payable is credited from same amount. (Cr 650)

e) Employee wages earned by employees is $1,800

Employees wage is an expense for the company so that wage expense account increases by $1,800 (Dr 1,800). Wages payable is credited from same amount. (Cr 1,800)

f) Rent Expense earned is $500

Rent Expense is an expense for the company so that rent expense account increases by $500 (Dr 500). Rent payable is credited from same amount. (Cr 500)

g) Additional taxes not recorded is $1,000

Property Tax Expense is an expense for the company so that property tax expense account increases by $1000 (Dr 1000). Property Taxes Payable is credited from same amount. (Cr 1000)

h) 1) Accrued total interest for June is $250

Total Interest Expense is an expense for the company so that interest expense account increases by $250 (Dr 250). Interest Payable is credited from same amount. (Cr 250)

2) $5,000 Notes payable in 2018

Long term notes payable amount decrease by $5,000 and it is transferred to short term payables account by same amount. In here short term liability identified from long term note payables.

Once the above adjustments have being made total of unadjusted trial balance columns and adjustment values are added together to get adjusted trial balance values. Those values will be divided between income statement columns and balance sheet columns based on the concept of identifying which main account the account balance is belonging to.

• If the account balances are belonging to Revenue account it is recorded in Credit side of Income statement. (ex: Construction fees earned)
• If the account balances are belonging to Expense account it is recorded in Debit side of Income statement. (ex: Depreciation expense)
• If the account balances are belonging to Assets /Withdrawal account it is recorded in Debit side of Balance sheet column. (ex: Cash, withdrawal)
• If the account balances are belonging to Liability account it is recorded in Credit side of Balance sheet column. (ex: Accounts Payable)

Once the above classification is done, total of income statement columns are taken to identify the net gain or loss for the period. In this case it is a net revenue of $30,890.

Conclusion

after recording the adjustments in above stated manner in the work sheet, there is a net gain of $30,890 in income statement.

To determine

Requirement 2

Introduction:

Adjusting entries will be used to adjust the unadjusted trial balance when there are accounting entries which belongs to the accounting year and have not have being recorded so far in the accounts.

Closing Entries are used to close out temporary accounts such as Income/Expense/Withdrawals and Income Summary Account at the end of each accounting cycle for preparation of year-end financial statements.

To state: Journal entries of adjusting entries and closing entries.

Answer to Problem 2APSA

Solution:

Adjusting entries

a)

	Dr	Cr
Supplies Expense	$6,600
Supplies		$6,600

(Supplies used in year is $3,300)

b)

	Dr	Cr
Insurance Expense	$3,800
Prepaid Insurance		$3,800

(Cost of expired insurance is $3,800)

c)

	Dr	Cr
Depreciation Expense - Equipment	$8,400
Accumulated Depreciation-Equipment		$8,400

(Depreciation expense for year is $8,400)

d)	Dr	Cr
Utilities Expense	$650
Utilities Payable		$650

(Utilities expense for June is $650)

e)

	Dr	Cr
Wages Expense	$1,800
Wages Payable		$1,800

(Wages expense is $1,800)

f)

	Dr	Cr
Rent Expense	$500
Rent Payable		$500

(Rent expense for year is $500)

g)

	Dr	Cr
Property Taxes Expense	$1,000
Property Taxes Payable		$1,000

(Property taxes for the year is $1,000)

h)

	Dr	Cr
Interest Expense	$250
Interest Payable		$250

(Interest expense for year is $250)

	Dr	Cr
Long term notes payable	$5,000
Short term notes payable		$5,000

(notes payables within 2018 is $5,000)

Closing Entries

	Dr	Cr
Construction Fees Earned	$132,100
Income Summary Account		$132,100

(Closing Entry for Construction fees earned)

	Dr	Cr
Income Summary Account	$8,400
Depreciation Expense - Equipment		$8,400

(Closing entry for Depreciation expense)

	Dr	Cr
Income Summary Account	$48,660
Wages Expense		$48,660

(Closing entry for Wages expense)

	Dr	Cr
Income Summary Account	$3,000
Interest Expense		$3,000

(Closing entry for interest expense)

	Dr	Cr
Income Summary Account	$3,800
Insurance Expense		$3,800

(Closing entry for insurance expense)

	Dr	Cr
Income Summary Account	$12,500
Rent Expense		$12,500

(Closing entry for rent expense)

	Dr	Cr
Income Summary Account	$6,600
Supplies Expense		$6,600

(Closing entry for supplies expense)

	Dr	Cr
Income Summary Account	$8,800
Property Tax Expense		$8,800

(Closing entry for property tax expense)

	Dr	Cr
Income Summary Account	$2,910
Repairs Expense		$2,910

(Closing entry for repairs expense)

	Dr	Cr
Income Summary Account	$6,540
Utilities Expense		$6,540

(Closing entry for utilities expense)

	Dr	Cr
V. Ace Capital Account	$33,000
V. Ace Withdrawals Account		$33,000

(Closing entry for Withdrawals account)

	Dr	Cr
Net Gain	$30,890
Capital Account		$30,890

(Closing entry of Income Summary Account)

Explanation of Solution

Adjusting Entries

(a-h) adjusting entries are explained in the requirement 1 explanation.

Closing entries:

In the above scenario 4 types of closing entries need to be made. Which are income account’s closing entries, expense account’s closing entries, withdrawal account closing entry and Income summary account closing entry.

• Income accounts are closed out by debiting income account and crediting the Income Summary Account (Construction Fees Earned) by $132,100.
• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,

  (Depreciation Expense - $8400

  Wages Expense -$48,660

  Interest Expense $3,000

  Insurance Expense -$3,800

  Rent Expense-Trucks $12,500

  Supplies Expense-$6,600

  Property Taxes Expense - $8,800

  Repairs Expense - $2,910

  Utilities Expense - $6,540)

• Withdrawals account is closed out by crediting the withdrawals account and debiting the Capital Account by $33,000
• Net value of the total Income and total Expenses is considered as net gain or net loss for the period, in the above case it is a net gain of $ 30,890. This is recorded in capital gain by Debiting Income Summary Account and crediting Capital Account by $30,890.

Conclusion

Above mentioned adjusting entries should be made to prepare the final trial balance before closing accounts at a year end.

4 main types of closing entries should be prepared for Ace Construction. Income account, Expense Accounts, withdrawals account and Income summary account should be closed respectively using the above mentioned closing entries.

To determine

Requirement 3

Introduction: There are four main types of financial statements namely income statement, Statement of owners’ equity, Balance Sheet and Statement of cash flow. Income statement is used to identify Net revenue per given period, Statement of owners’ equity is used to identify changes of net equity from net revenue and withdrawals. Balance sheet is prepared to identify the financial position as at a yearend date

: Income statement, Statement of owners’ equity, Balance Sheet.

Answer to Problem 2APSA

Solution:

1) Income statement

Ace Construction Company

Income statement

For the year ended 30^th June, 2017 ($)

Revenues
Construction fees earned	132,100
Total revenues		132,100
Expenses
Depreciation Expense-Equipment	8,400
Wages Expense	48,660
Interest Expense	3,000
Insurance expense	3,800
Rent Expense	12,500
Supplies Expense	6,600
Property Taxes Expenses	8,800
Repairs Expense	2,910
Utilities Expense	6,540
Total Expenses		101,210
Net Income		30,890

2) Statement of owners’ equity

Ace Construction Company

Statement of owners’ equity

For the year ended 30^th June, 2017 ($)

Ace, Capital as at June 30, 2016		88,660
Plus:
Net Income	30,890	30,890
		119,550
Less:
Withdrawals by owner	33,000	33,000
Wilson, Capital as at December 31,2017		86,550

3) Balance Sheet

Ace Construction Company

Balance Sheet

June 30, 2017 ($)

Assets
Current Assets
Cash	18,500
Supplies	3,300
Prepaid Insurance	3,400
Total Current Assets		25,200
Plant Assets
Equipment	132,000
Less: Accumulated Depreciation-Equipment	(34,650)
Total Plant Assets		97,350
Total Assets		122,550
Liabilities
Current Liabilities
Accounts Payable	6,800
Interest Payable	250
Rent Payable	500
Wages Payable	1,800
Property Taxes Payable	1,000
Utilities Payable	650
Short Term Notes Payable	5000
Total Current Liabilities		16,000
Long Term Liabilities
Long Term Notes Payable	20,000	20,000
Total Liabilities		36,000
Equity
V. Ace Capital		86,550
Total Liabilities and Accounts		122,550

Explanation of Solution

:

Income Statement

• Income accounts are closed out by debiting income account and crediting the Income Summary Account (Construction Fees Earned) by $132,100.

• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,

  (Depreciation Expense - $8400

  Wages Expense -$48,660

  Interest Expense $3,000

  Insurance Expense -$3,800

  Rent Expense-Trucks $12,500

  Supplies Expense-$6,600

  Property Taxes Expense - $8,800

  Repairs Expense - $2,910

  Utilities Expense - $6,540)

• Net value of the total Income and total Expenses is considered as net gain or net loss for the period, in the above case it is a net gain of $ 30,890.

  Total Income : $132,100

  Total Expense: ($101,210)

  Difference : $30,890

Statement of owners’ equity

Net gain ($30,890) identified from income statement and the withdrawals amount ($33,000) is extended to statement of owner’s equity as in solution.

Net income increases the equity and withdrawals recorded in debit side reduces equity.

Accordingly year end capital for 2017 results with $86,550 value. Net change in equity for the year is -$2,110 ($86,550 -$88,660). It is a reduction in equity.

Balance Sheet

Current assets and Plant assets were identified by the nature of realizing the assets within the operating cycle of company. Accordingly cash, supplies, Prepaid Insurance accounts were categorized under current assets with a total of $25,200. (Assets which take one year to realize) Equipment identified under Plant assets with a total of $97,350. (Assets which take more than one year to realize)

Current Liabilities and non-current liabilities also identified based on the operating cycle which the liabilities are due to fulfill. Accordingly Accounts Payable, Interest Payable, Rent Payable, Wages Payable, Property Taxes Payable, Short Term Notes Payable were categorized under current liabilities with a total of $16,000. (Liabilities due within one year) Long Term Notes payable identified as non-current liability of $20,000. (Liabilities doesn’t need to fulfill within one year)

Ace capital account balance identified under Equity with $86,550. This was identified after making closing entries to income, expense and withdrawal accounts. (Refer Statement of Owner’s Equity)

Conclusion

Income statement: Income statement is prepared to identify net gain or loss for a given accounting period. Wilson trucking company has a net gain of $30,890 according to its income statement for 2017 year end.

Statement of owners’ equity

Statement of owners’ equity is prepared on above manner considering effects from net income and withdrawals. End capital results with a values of $86,550 with a net change of -$2,110 value between the year 2017.

Balance Sheet.

Balance sheet prepared for Ace Company with the main categories of Assets, Liabilities and Equity. It is further classified into to current and non-current assets/liabilities based on company operating cycle

To determine

Requirement 4

Introduction:

Accounting errors could occur by an error of omission, error of commission or by an error of principle.

These errors are considered to be non-fraudulent and need to be corrected.

Determine:

• How an error could affect 10 columns worksheet?
• Whether error is likely to be discovered in completing work sheet?
• If not discovered, what would be the impact on financial statements?

Answer to Problem 2APSA

Solution:

a) Supplies used for year is recognized as $3,300 instead of $6,600.

1) 10 Column Worksheet:

Supplies Expense account gets debited and Supplies account gets credited with a discrepancy of $3,300. So that the adjusted trial balance will be having a discrepancy of $3,300 value in its both debit and credit columns.

2) It is not likely to get discovered.

3) Income statement: Revenue overstates by $3,300.

Balance Sheet: Supplies overstates by $3,300.

Yearend capital: Overstates by $3,300.

b) Cash is entered in the credit column of adjusted trial balance.

1) 10 Column Worksheet:

Adjusted trial balance doesn’t get tally by $18,500. Whereas Credit side total value will be higher from $10,000 and Debit side total column will be lower by $18,500.

2) Likely to get discovered

Explanation of Solution

a) Supplies used for year is recognized as $3,300 instead of $6,600.

• Supplies expense is understated by $3,300(6600-3300) This is affecting the adjustment made on unadjusted balance sheet. This leads to recording an expense in account with $3,300 value where it should be $6,600. Thus it leads to an understatement of debit and credit columns in adjusted trial balance by $3,300.
• Error is not likely to be discovered as the adjusted trial balance get tally. It gets tally because the impact on two accounts is nullifying due to recording an equal amount, even though the amount entered is incorrect. (Double entry has a same value for both the accounts.)
• It is having an impact on financial statements:

Income statement: Profit will be overstated by $3,300 due to Total expense (Supplies expense) is understated by $3,300.

Balance Sheet: Supplies in the current assets will be overstated by $3,300, due to non-recognition of total usage of supplies for the year of $6,600.

Statement of changes in Equity: Yearend capital will be overstated as the net income extracting from income statement is overstated by $3,300

c) Cash is entered in the credit column of adjusted trial balance.

• Since Cash is an asset account, it should be recorded in debit side of trial balance. In this case cash is recorded in the wrong column making credit column overstated by $18,500 and Debit column understated by $18,500.
• This error is visible in worksheet as the trial balance doesn’t get tally with an overstated credit column and understated debit column.

Conclusion

a) Supplies used for year is recognized as $3,300 instead of $6,600.

Supplies used for year is recognized as $3,300 instead of $6,600 – The error cannot be identified from the 10 column work sheet. This error will be having an impact on 3 financial statements. Where it will reflect a better position in company by understating the real expense.

a) Cash is entered in the credit column of adjusted trial balance.

Cash is recorded in wrong column of trial balance. It doesn’t make the adjusted trial balance tally and this error can be easily recognized in 10 column work sheet.