
Concept explainers
Requirement 1
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.
: 10 column worksheet.

Answer to Problem 2BPSB
Solution:
No. | Account Title | Unadjusted |
Adjustments | Adjusted Trial Balance | Income Statement | ||||||
Dr | Cr | Dr | Cr | Dr | Cr | Dr | Cr | Dr | Cr | ||
101 | Cash | 7,000 | 7,000 | 7,000 | |||||||
126 | Supplies | 16,000 | (a)8,100 | 7,900 | 7,900 | ||||||
128 | Prepaid Insurance | 12,600 | (b)10,600 | 2,000 | 2,000 | ||||||
167 | Equipment | 200,000 | 200,000 | 200,000 | |||||||
168 | 14,000 | (c)7,000 | 21,000 | 21,000 | |||||||
201 | Accounts Payable | 6,800 | 6,800 | 6,800 | |||||||
203 | Interest Payable | 0 | (h)300 | 300 | 300 | ||||||
208 | Rent Payable | 0 | (f)3,000 | 3,000 | 3,000 | ||||||
210 | Wages Payable | 0 | (e)2,000 | 2,000 | 2,000 | ||||||
213 | Property Taxes Payable | 0 | (g)550 | 550 | 550 | ||||||
251 | Long Term Notes Payable | 30,000 | (h)10,000 | 20,000 | 20,000 | ||||||
Short Term Notes Payable | (h)10,000 | 10,000 | 10,000 | ||||||||
301 | J. Bonn, Capital | 86,900 | 86,900 | 86,900 | |||||||
302 | J. Bonn, Withdrawals | 12,000 | 12,000 | 12,000 | |||||||
401 | Demolition fees earned | 187,000 | 187,000 | 187,000 | |||||||
612 | Depreciation Expense-Equipment | 0 | (c)7,000 | 7,000 | 7,000 | ||||||
623 | Wages Expense | 41,400 | (e)2,000 | 43,400 | 43,400 | ||||||
633 | Interest Expense | 3,300 | (h)300 | 3,600 | 3,600 | ||||||
637 | Insurance Expense | 0 | (b)10,600 | 10,600 | 10,600 | ||||||
640 | Rent Expense | 13,200 | (f)3,000 | 16,200 | 16,200 | ||||||
652 | Supplies Expense | 0 | (a)8,100 | 8,100 | 8,100 | ||||||
683 | Property Taxes Expense | 9,700 | (g)550 | 10,250 | 10,250 | ||||||
684 | Repairs Expense | 4,700 | 4,700 | 4,700 | |||||||
690 | Utilities Expense | 4,800 | (d)800 | 5,600 | 5,600 | ||||||
Utilities Payable | (d)800 | 800 | 800 | ||||||||
Totals | $324,700 | $324,700 | $42,350 | $42,350 | $338,350 | $338,350 | $109,450 | $187,000 | $228,900 | $151,350 | |
Net Income | $77,550 | $77,550 | |||||||||
Totals | $187,000 | $187,000 | $228,900 | $228,900 |
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, $7,900
Office supplies unadjusted balance is $16,000 and at the yearend there would be only $7,900 valued office supplies in the company, which means the company has used $8,100 valued supplies which were belonging to current accounting period. ($16,000-$7,900). Used supplies amount which is $8,100 credited from Supplies account and Debited to Supplies Expense Account.
b) Cost of expired Insurance is $10,600
Expired Insurance is an expense for the company so that Insurance expense account increases by $10,600 (Dr 10,600). Prepaid Insurance is credited from same amount. (Cr 10,600)
c) Annual
Depreciation is an expense for the company so that depreciation expense account increases by $7,000 (Dr 7,000). Accumulated depreciation is credited from same amount. (Cr 7,000)
d) Utilities Expense unrecorded $800
Utilities expense is an expense for the company so that Utilities expense account increases by $800 (Dr 800). Utilities payable is credited from same amount. (Cr 800)
e) Employee wages earned by employees is $2,000
Employees wage is an expense for the company so that wage expense account increases by $2,000 (Dr 2,000). Wages payable is credited from same amount. (Cr 2,000)
f) Rent Expense of $3,000
Rent Expense is an expense for the company so that rent expense account increases by $3,000 (Dr 3,000). Rent payable is credited from same amount. (Cr 3,000)
g) Additional taxes not recorded is $550
Property Tax Expense is an expense for the company so that property tax expense account increases by $550 (Dr 550). Property Taxes Payable is credited from same amount. (Cr 550)
h) 1) Accrued total interest for April is $300
Total Interest Expense is an expense for the company so that interest expense account increases by $300 (Dr 300). Interest Payable is credited from same amount. (Cr 300)
2) $10,000 Notes payable in 2018
Long term notes payable amount decreases by $10,000 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: Demolition 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 is taken to identify the net gain or loss for the period. In this case it is a net revenue of $77,550.
after recording the adjustments in above stated manner in the work sheet, there is a net gain of $77,550 in income statement.
Requirement 2
Introduction:
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:

Answer to Problem 2BPSB
Solution:
Adjusting entries
a)
Dr | Cr | |
Supplies Expense | $8,100 | |
Supplies | $8,100 |
(Supplies used in year is $8,100)
b)
Dr | Cr | |
Insurance Expense | $10,600 | |
Prepaid Insurance | $10,600 |
(Cost of expired insurance is $10,600)
c)
Dr | Cr | |
Depreciation Expense - Equipment | $7,000 | |
Accumulated Depreciation-Equipment | $7,000 |
(Depreciation expense for year is $7,000)
d) | Dr | Cr |
Utilities Expense | $800 | |
Utilities Payable | $800 |
(Utilities expense for April is $800)
e)
Dr | Cr | |
Wages Expense | $2,000 | |
Wages Payable | $2,000 |
(Accrued Wages expense is $2,000)
f)
Dr | Cr | |
Rent Expense | $3000 | |
Rent Payable | $3000 |
(Accrued Rent expense for year is $3000)
g)
Dr | Cr | |
Property Taxes Expense | $550 | |
Property Taxes Payable | $550 |
(Additional Property taxes for the year is $550)
h)
Dr | Cr | |
Interest Expense | $300 | |
Interest Payable | $300 |
(Interest expense for April is $300)
Dr | Cr | |
Long term notes payable | $10,000 | |
Short term notes payable | $10,000 |
(notes payables within 2018 is $10,000)
Closing Entries
Dr | Cr | |
Demolition Fees Earned | $187,000 | |
Income Summary Account | $187,000 |
(Closing Entry for Demolition fees earned)
Dr | Cr | |
Income Summary Account | $7,000 | |
Depreciation Expense - Equipment | $7,000 |
(Closing entry for Depreciation expense)
Dr | Cr | |
Income Summary Account | $43,400 | |
Wages Expense | $43,400 |
(Closing entry for Wages expense)
Dr | Cr | |
Income Summary Account | $3,600 | |
Interest Expense | $3,600 |
(Closing entry for interest expense)
Dr | Cr | |
Income Summary Account | $10,600 | |
Insurance Expense | $10,600 |
(Closing entry for insurance expense)
Dr | Cr | |
Income Summary Account | $16,200 | |
Rent Expense | $16,200 |
(Closing entry for rent expense)
Dr | Cr | |
Income Summary Account | $8,100 | |
Supplies Expense | $8,100 |
(Closing entry for supplies expense)
Dr | Cr | |
Income Summary Account | $10,250 | |
Property Tax Expense | $10,250 |
(Closing entry for property tax expense)
Dr | Cr | |
Income Summary Account | $4,700 | |
Repairs Expense | $4,700 |
(Closing entry for repairs expense)
Dr | Cr | |
Income Summary Account | $5,600 | |
Utilities Expense | $5,600 |
(Closing entry for utilities expense)
Dr | Cr | |
J. Bonn Capital Account | $12,000 | |
J. Bonn Withdrawals Account | $12,000 |
(Closing entry for Withdrawals account)
Dr | Cr | |
Net Gain | $77,550 | |
Capital Account | $77,550 |
(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 (Demolition Fees Earned) by $187,000.
• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,
(Depreciation Expense - $7000
Wages Expense -$43,400
Interest Expense $3,600
Insurance Expense -$10,600
Rent Expense-Trucks $16,200
Supplies Expense-$8,100
Property Taxes Expense - $10,250
Repairs Expense - $4,700
Utilities Expense - $5,600
• Withdrawals account is closed out by crediting the withdrawals account and debiting the Capital Account by $12,000
• 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 $77,550. This is recorded in
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 Power Demolition. Income account, Expense Accounts, withdrawals account and Income summary account should be closed respectively using the above-mentioned closing entries.
Requirement 3
Introduction: There are four main types of financial statements namely income statement, Statement of owners’ equity, Balance Sheet and Statement of
: Income statement, Statement of owners’ equity, Balance Sheet.

Answer to Problem 2BPSB
Solution:
1) Income statement
Power Demolition Company
Income statement
For the year ended 30th April, 2017 ($)
Revenues | ||
Demolition fees earned | 187,000 | |
Total revenues | 187,000 | |
Expenses | ||
Depreciation Expense-Equipment | 7,000 | |
Wages Expense | 43,400 | |
Interest Expense | 3,600 | |
Insurance expense | 10,600 | |
Rent Expense | 16,200 | |
Supplies Expense | 8,100 | |
Property Taxes Expenses | 10,250 | |
Repairs Expense | 4,700 | |
Utilities Expense | 5,600 | |
Total Expenses | 109,450 | |
Net Income | 77,550 |
2) Statement of owners’ equity
Power Demolition Company
Statement of owners’ equity
For the year ended 30th April, 2017 ($)
J. Bonn, Capital as at May 01, 2016 | 86,900 | |
Plus: | ||
Net Income | 77,550 | 77,550 |
164,450 | ||
Less: | ||
Withdrawals by owner | 12,000 | 12,000 |
J. Bonn, Capital as at April 30,2017 | 152,450 |
3) Balance Sheet
Power Demolition Company
Balance Sheet
April 30, 2017 ($)
Assets | ||
Current Assets | ||
Cash | 7,000 | |
Supplies | 7,900 | |
Prepaid Insurance | 2,000 | |
Total Current Assets | 16,900 | |
Plant Assets | ||
Equipment | 200,000 | |
Less: Accumulated Depreciation-Equipment | (21,000) | |
Total Plant Assets | 179,000 | |
Total Assets | 195,900 | |
Liabilities | ||
Current Liabilities | ||
Accounts Payable | 6,800 | |
Interest Payable | 300 | |
Rent Payable | 3,000 | |
Wages Payable | 2,000 | |
Property Taxes Payable | 550 | |
Utilities Payable | 800 | |
Short Term Notes Payable | 10,000 | |
Total Current Liabilities | 23,450 | |
Long Term Liabilities | ||
Long Term Notes Payable | 20,000 | 20,000 |
Total Liabilities | 43,450 | |
Equity | ||
J. Bonn Capital | 152,450 | |
Total Liabilities and Accounts | 195,900 | |
Explanation of Solution
:
Income Statement
• Income accounts are closed out by debiting income account and crediting the Income Summary Account (Demolition Fees Earned) by $187,000
• Expense accounts are closed out by crediting expense accounts and debiting Income Summary account each by,
(Depreciation Expense - $7,000
Wages Expense -$43,400
Interest Expense $3,600
Insurance Expense -$10,600
Rent Expense-Trucks $16,200
Supplies Expense-$8,100
Property Taxes Expense - $10,250
Repairs Expense - $4,700
Utilities Expense - $5,600
• 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 $ 77,550.
Total Income : $187,000
Total Expense: ($109,450)
Difference : $77,550
Statement of owners’ equity
Net gain ($77,550) identified from income statement and the withdrawals amount ($12,000) is extended to statement of owner’s equity as in solution.
Net income increases equity and withdrawals reduces company equity.
Accordingly, year end capital for 2017 results with $86,550 value. Net change in equity for the year is $65,550 ($152,450 -$86,900). It is an increase 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 $16,900. (Assets which take one year to realize) Equipment identified under Plant assets with a total of $179,000. (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 $23,450. (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)
Power Demolition Company’s capital account balance identified under Equity with $152,450. This was identified after making closing entries to income, expense and withdrawal accounts. (Refer Statement of Owner’s Equity)
Income statement: Income statement is prepared to identify net gain or loss for a given accounting period. Power Demolition company has a net gain of $77,550 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 value of $152,450 with a net change of $65,550 value throughout the year 2017.
Balance Sheet.
Balance sheet prepared for Power Demolition 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
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 2BPSB
Solution:
a) Insurance Expense for year is recognized as $2,000 instead of $10,600.
1) 10 Column Worksheet:
Supplies Expense account gets debited and Supplies account gets credited with a discrepancy of $8,600. So that the adjusted trial balance will be having a discrepancy of $8,600 value in its both debit and credit columns.
2) It is not likely to get discovered.
3) Income statement: Revenue overstates by $8,600.
Balance Sheet: Prepaid Insurance overstates by $8,600.
Yearend capital: Overstates by $8,600.
b) $4700 repair expense being extended to the debit side of the balance sheet column.
1) 10 Column Worksheet:
Totals of Debit and Credit sides of the balance sheet items in the 10 Column Worksheet will not tally. Debit side will be $4700 higher than the Credit side. .
2) Likely to get discovered.
Explanation of Solution
a) Insurance expense for the year recognized as $2,000 instead of $10,600.
• Insurance expense is understated by $8,600(10,600-2,000) This is affecting the adjustment made on unadjusted balance sheet. This leads to recording an expense in account with $2,000 value where it should be $10,600. Thus, it leads to an understatement of debit and credit columns in adjusted trial balance by $2,000.
• Error is not likely to be discovered as the adjusted trial balance gets tallied. It gets tallied 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 $8,600 due to Total expense (Insurance expense) being understated by $8,600.
Balance Sheet: Supplies in the current assets will be overstated by $8,600, due to non-recognition of total usage of supplies for the year of $10,600.
Statement of changes in Equity: Yearend capital will be overstated as the net income extracting from income statement is overstated by $8,600
c) $4700 repair expense being extended to the debit side of the balance sheet column.
• Repair expense is an expense account and hence the balance of the repair expense account should only be included in the debit side of the trial balance and the items in the income statement. It shouldn’t be included in either side of the balance sheet.
• This error is visible in worksheet as the totals credit and debit sides in balance sheet items do not tally with an overstated debit column and understated credit column.
a) Insurance expense for the year recognized as $2,000 instead of $10,600.
Insurance expense for the year is recognized as $2,000 instead of $10,600 – 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) $4700 repair expense being extended to the debit side of the balance sheet column.
This will result in an overstatement of the debit side of the balance sheet items. This error can easily be recognized since it will result in a difference between credit and debit sides of the balance sheet unless an event of offsetting occurs due to another error of the same value incurs. If Financial Statements to be prepared with this error ignored, the balance sheet will not tally and will display an overestimate of assets if $4700 were recorded in assets.
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