Chapter 4, Problem 2COP

1,3, 5 and 8

To determine

Prepare T-accounts for the necessary accounts.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

(a)The title of the account

(b)The left or debit side

(c)The right or credit side

Prepare T-accounts for the necessary accounts as follows:

Cash (A)
Beg.	$3
a	12	b	$9
c	23	d	10
h	120	f	13
j	24	i	$85
Bal.	$65

Land(A)
Beg.	$0
b	9
Bal.	$9

Software (A)
Beg.	$15
d	10
Bal.	$25

Accounts Payable (L)
		Beg.	$5
f	$13	e	18
		Bal.	$10

Salaries and Wages Payable (L)
		Beg.	$0
		o	12
		Bal.	$12

Common Stock (SE)
		Beg.	$71
		c	23
		Bal.	$94

Accounts  Receivable(A)
Beg.	$5
h	40	j	24
Bal.	$21

Equipment (A)
Beg.	$60
Bal.	$60

Accumulated  Amortization (xA)
		Beg.	$5
		k	5
		Bal.	$10

Notes Payable (short-term) (L)
		Beg	$0
		a	12
		Bal.	$12

Interest Payable (L)
		Beg.	$0
		n	1
		Bal.	$1

Retained Earnings (SE)
		Beg.	$8
		CE1	23
		Bal.	$31

Supplies (A)
Beg.	$12
e	18
	30
		l	20
Bal.	$10

Accumulated  Depreciation (xA)
		Beg.	$6
		m	6
		Bal.	$12

Income Tax  Payable (L)
		Beg.	$0
		p	8
		Bal.	$8

Service  Revenue (R)
		Beg.	0
		h	$160
CE1	$160
		Bal.	$0

Salaries and Wages Expense (E)
Beg.	$0
i	85
o	12
	97
		CE1	$97
Bal.	$0

Depreciation   Expense (E)
Beg.	$0
m	6
		CE1	$6
Bal.	$0

Amortization Expense (E)
Beg.	$0
k	5
		CE1	$5
Bal.	$0

Income Tax Expense (E)
Beg.	$0
p	8
		CE1	$8
Bal.	$0

Interest  Expense (E)
Beg.	$0
n	1
		CE1	$1
Bal.	$0

Supplies Expense (E)
Beg.	$0
l	20
		CE1	$20
Bal.	$0

2.

To determine

Record the necessary journal entries for transactions (a) to (j).

Explanation of Solution

Journal entries for the transactions (a) to (j) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
a)	Cash (+A)			12
			Notes payable (Short-term) (+L)		12
	(To record borrowed cash on note)
b)	Land (+A)			9
			Cash (-A)		9
	(To record purchase of land for building site)
c)	Cash (+A)			23
		Common Stock (+SE)			23
	(To record issued common stock for cash)
d)	Software (+A)			10
			Cash (-A)		10
	(To record Purchase of additional software)
e)	Supplies (+A)			18
			Accounts payable  (+L)		18
	(To record supplies purchased for future use)
f)	Accounts payable (-L)			13
	Cash (-A)				13
	(To record cash paid to creditors)
g)	No entry required, Because no revenue has been earned in 2018
h)	Cash (+A)			120
	Accounts Receivable (+A)			40
		Service Revenue (+R, +SE)			160
	(To record service revenue earned during the year 2018)
i)	Salaries and Wages Expense (+E, -SE)			85
		Cash (-A)			85
	(To record salaries and wages expense incurred during 2018)
j)	Cash (+A)			24
		Accounts Receivable (-A)			24
	(To record cash collected on customer’s account)

Table (1)

3.

To determine

Prepare an unadjusted trial balance of Incorporation H&H.

Explanation of Solution

Prepare an unadjusted trial balance of Incorporation H&H as follows:

Incorporation H&H
Unadjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	30
Land	9
Equipment	60
Accumulated Depreciation–Equipment		6
Software	25
Accumulated Amortization		5
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable
Interest Payable
Income Taxes Payable
Common Stock		94
Retained Earnings		8
Service Revenue		160
Salaries and Wages Expense	85
Supplies Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Total	295	295

Table (2)

4.

To determine

Record the adjusting journal entries (k) to (p).

Explanation of Solution

Record the adjusting journal entries (k) to (p) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
k.	Amortization Expense (+E, -SE)			5
			Accumulated Amortization (+xA, -A)		5
	(To record adjusting entry for amortization expenses)
l.	Supplies expense (+E, -SE) (refer working note 1)			20
			Supplies(-A)		20
	(To record the use of supplies)
m.	Depreciation expense (+E, -SE)			6
		Accumulated depreciation –Equipment (+xA, -A)			6
	(To record adjusting entry for depreciation expense)
n.	Interest expense (+E, -SE)			1
			Interest payable(+L)		1
	(To record the adjusting entry for interest expense)
o.	Salaries and wages expense (+E, -SE)			12
			Salaries and wages payable (+L)		12
	(To record the adjusting entry for salaries and wages expenses)
p.	Income tax expense(+E, -SE)			8
			Income tax payable(+L)		8
	(To record the adjusting entry for income tax expense)

Table (3)

Working notes 1:

Calculate the value of supplies expenses:

$\begin{array}{c}\text{Supplies expenses=Beginning supplies+Purchase of supplies}-\text{Ending supplies}\\ \text{=\$12+\$18}-\$10\\ =\$20\end{array}$

5.

To determine

Prepare an adjusted trial balance from requirement 4.

Explanation of Solution

Prepare an adjusted trial balance for Incorporation H&H for December 31, 2018 as follows:

Incorporation H&H
Adjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	10
Land	9
Equipment	60
Accumulated Depreciation–Equipment		12
Software	25
Accumulated Amortization		10
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable		12
Interest Payable		1
Income Taxes Payable		8
Common Stock		94
Retained Earnings		8
Service Revenue		160
Salaries and Wages Expense	97
Supplies Expense	20
Depreciation Expense	6
Amortization expense	5
Interest Expense	1
Income Tax Expense	8
Total	327	327

Table (4)

6.

To determine

Prepare an income statement, statement of retained earnings and balance sheet.

Explanation of Solution

Prepare an income statement for the year ended December 31, 2018 as follows:

Incorporation H&H
Income Statement
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	160
Total revenues		160
Less: Expenses
Salaries and wage expense	97
Supplies expense	20
Depreciation expense	6
Amortization expense	5
Interest expense	1
Income tax expense	8
Total expenses		137
Net income		23

Table (5)

Prepare a statement of retained earnings as follows:

Incorporation H&H
Statement of Retained Earnings
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Balance, January 1, 2018	8
Add: Net income	23
		31
Less: Dividends		(0)
Balance, December 31, 2018		31

Table (6)

Prepare a balance sheet for the year December 31, 2018 as follows:

Table (7)

7.

To determine

Prepare the closing entry for Incorporation H&H on December 31, 2018.

Explanation of Solution

Prepare closing entries for Incorporation H&H on December 31, 2018:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2018	Sales revenue(-R)	160
	Salaries and wages expense(-E)		97
	Depreciation expense(-E)		6
	Supplies expense(-E)		20
	Amortization expense (-E)		5
	Income tax expense(-E)		8
	Interest expense (-E)		1
	Retained earnings(+SE) (refer table 5)		23
	(To record the closing entries for Incorporation H&H)

Table (8)

For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts are transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.

8.

To determine

Prepare post-closing trial balance from the requirement 7.

Explanation of Solution

Prepare a Post-closing trial balance for Incorporation H&H for December 31, 2018 as follows:

Incorporation H&H
Post-closing Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	10
Land	9
Equipment	60
Accumulated Depreciation–Equipment		12
Software	25
Accumulated Amortization		10
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable		12
Interest Payable		1
Income Taxes Payable		8
Common Stock		94
Retained Earnings		31
Dividends	0
Service Revenue		0
Salaries and Wages Expense	0
Supplies Expense	0
Depreciation Expense	0
Amortization expense	0
Interest Expense	0
Income Tax Expense	0
Total	190	190

Table (9)

9.

To determine

Ascertain the net income of Incorporation H&H that has been generated during 2018 and calculate the net profit margin. Explain the company has been financed primarily by liabilities or stockholders’ equity, and find the current ratio.

Explanation of Solution

The net income of Incorporation H&H for 2018:

Incorporation H&H generated net income of $23(thousand) in the year 2018

Calculate the net profit margin:

$\begin{array}{c}\text{Net profit margin =}\frac{\text{Net income }}{\text{Total revenues}}\times 100\\ =\frac{\$23}{\$160}\times 100\\ =14.4\%\end{array}$

The net profit margin of Incorporation H&H is 14.4%.

Whether the Incorporation H&H is financed primarily by liabilities or stockholders’ equity:

Incorporation H&H is financed primarily by stockholders’ equity, where by providing stockholders’ equity for $125(thousand) with the total assets and liabilities providing for $43(thousand).

The invested amount of assets primarily come from stockholder’s’ equity of Incorporation H&H, because the stockholder’s equity (common stock) has financed $125 thousand of the Incorporation H&H’s total assets, whereas liabilities has financed $34 thousand.

Calculate the current ratio:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$96}{\$13}\\ =2.23:1\end{array}$

The current ratio is 2.23:1.