Chapter 4, Problem 3COP

Recording Transactions (Including Adjusting Journal Entries), Preparing Financial Statements and Closing Journal Entries, and Computing Net Profit Margin and Current Ratio (Chapters 2, 3, and 4)

Drs. Glenn Feltham and David Ambrose began operations of their physical therapy clinic, called Northland Physical Therapy, on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, was as follows (the amounts are rounded to thousands of dollars to simplify):

Transactions during 2018 (summarized in thousands of dollars) follow:

1. a. Borrowed $22 cash on July 1, 2018, signing a six-month note payable.
2. b. Purchased equipment for $25 cash on July 2, 2018.
3. c. Issued additional shares of common stock for $5 on July 3.
4. d. Purchased software on July 4, $3 cash.
5. e. Purchased supplies on July 5 on account for future use, $7.
6. f. Recorded revenues on December 6 of $55, including $8 on credit and $47 received in cash.
7. g. Recognized salaries and wages expense on December 7 of $30; paid in cash.
8. h. Collected accounts receivable on December 8, $9.
9. i. Paid accounts payable on December 9, $10.
10. j. Received a $3 cash deposit on December 10 from a hospital for a contract to start January 5, 2019.

Data for adjusting journal entries on December 31:

1. k. Amortization for 2018, $1.
2. l. Supplies of $3 were counted on December 31, 2018.
3. m. Depreciation for 2018, $4.
4. n. Accrued interest of $1 on notes payable.
5. o. Salaries and wages incurred but not yet paid or recorded, $3.
6. p. Income tax expense for 2018 was $4 and will be paid in 2019.

Required:

1. 1. Set up T-accounts for the accounts on the trial balance and enter beginning balances. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you.
2. 2. Record journal entries for transactions (a) through (j).
3. 3. Post the journal entries from requirement 2 to T-accounts and prepare an unadjusted trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your answers to requirement 2.
4. 4. Record the adjusting journal entries (k) through (p).
5. 5. Post the adjusting entries from requirement 4 and prepare an adjusted trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your previous answers.
6. 6. Prepare an income statement, statement of retained earnings, and balance sheet.
7. 7. Prepare the closing journal entry.
8. 8. Post the closing entry from requirement 7 and prepare a post-closing trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your previous answers.
9. 9. How much net income did the physical therapy clinic generate during 2018? What was its net profit margin? Is the business financed primarily by liabilities or stockholders’ equity? What is its current ratio?

To determine

Prepare the necessary T-account for the given transactions.

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 the T-account:

Cash (A) account
Beginning Balance	$7
a	22
c	5	b	$25
f	47	d	3
h	9	g	30
j	3	j	10
Ending Balance	$25

Accounts Receivable (A) account
Beginning Balance		3
f		8		h		9
Ending Balance		2
Supplies(A) account
Beginning Balance		3
e		7
		10
				l		7
Ending Balance		3
Equipment (A) account
Beginning Balance	8
b	25
Ending Balance	33

Accumulated depreciation -Equipment (xA) account
		Beginning Balance	1
		k	4
		Ending Balance	5
Software (A) account
Beginning Balance	5
d	3
Ending Balance	8
Accumulated Amortization (xA) account
		Beginning Balance	1
		k	1
		Ending Balance	2
Accounts payable (L) account
		Beginning Balance	5
i	10	e	7
		Ending Balance	2
Notes payable (L) account
		Beginning Balance	0
		a	22
		Ending Balance	22
Salaries and wages payable (L) account
		Beginning Balance	0
		o	3
		Ending Balance	3

Interest payable (L)
		Beginning Balance	0
		n	1
		Ending Balance	1

Income tax payable (L) account
		p	4
		Ending Balance	4

Deferred revenue (L) account

		j	3
		Ending Balance	3
Common Stock (SE) account
		Beginning Balance	15
		c	5
		Ending Balance	20
Retained earnings (SE) account
		Beginning Balance	4
		CE1	5
		Ending Balance	9

Service Revenue (R) account
		f	55
CE1	55
		Ending Balance	0

Depreciation expense (E) account
m	4
		CE1	4
Ending Balance	0

Amortization Expense ( E) account
Beginning Balance	0
k	1
		CE1	1
Ending Balance	0
Income Tax Expense ( E) account
p	4
		CE1	4
Ending Balance	0

Interest Expense ( E) account
n	1
		CE1	1
Ending Balance	0

Salaries and Wages Expense(E) account
g	30
o	3	CE1	33
Ending Balance	0

Supplies Expense ( E) account
l	7
		CE1	7
Ending Balance	0

To determine

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

Explanation of Solution

Record the necessary journal entries for transactions (a) to (j) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
a)	Cash (+A)			22
			Notes payable (Short-term) (+L)		22
	(To record borrowed cash on note)
b)	Equipment (+A)			25
			Cash (-A)		25
	(To record purchase of equipment)
c)	Cash (+A)			5
		Common Stock (+SE)			5
	(To record issued common stock for cash)
d)	Software (+A)			3
			Cash (-A)		3
	(To record Purchase of additional software)
e)	Supplies (+A)			7
			Accounts payable  (+L)		7
	(To record supplies purchased for future use)
f)	Cash (+A)			47
	Accounts Receivable (+A)			8	55
		Service Revenue (+R, +SE)
	(To record service revenue earned during the year 2018)
g)	Salaries and Wages Expense (+E, -SE)			30
		Cash (-A)			30
	(To record salaries and wages expense incurred during 2018)
h)	Cash (+A)			9
		Accounts Receivable (-A)			9
	(To record cash collected on customer’s account)
i)	Accounts payable (-L)			10
		Cash (-A)			10
	(To record cash paid to creditors)
j)	Cash (+A)			3
		Deferred Revenue (+L)			3
	(To record receiving of customers deposit before doing work)

Table (1)

To determine

Prepare an unadjusted trial balance based on requirement 2.

Explanation of Solution

Prepare an unadjusted trial balance based on requirement 2 as follows:

Incorporation NPT
Unadjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	25
Accounts Receivable	2
Supplies	10
Equipment	33
Accumulated Depreciation–Equipment		1
Software	8
Accumulated Amortization		1
Accounts Payable		2
Notes Payable (short–term)		22
Salaries and Wages Payable
Interest Payable
Income Tax Payable
Deferred revenue		3
Common Stock		20
Retained Earnings		4
Service Revenue		55
Salaries and Wages Expense	30
Supplies Expense
Depreciation Expense
Amortization Expense
Interest Expense
Income Tax Expense
Total	108	108

Table (2)

To determine

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

Explanation of Solution

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

Date	Account Title and Explanation			Debit ($)	Credit ($)
k.	Amortization Expense (+E, -SE)			1
			Accumulated Amortization (+xA, -A)		1
	(To record adjusting entry for amortization expenses)
l.	Supplies expense (+E, -SE) (refer working note 1)			7
			Supplies(-A)		7
	(To record the use of supplies)
m.	Depreciation expense (+E, -SE)			4
		Accumulated depreciation –Equipment (+xA, -A)			4
	(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)			3
			Salaries and wages payable (+L)		3
	(To record the adjusting entry for salaries and wages expenses)
p.	Income tax expense(+E, -SE)			4
			Income tax payable(+L)		4
	(To record the adjusting entry for income tax expense)

Table (3)

Working note 1:

Calculate the value of supplies expenses:

$\begin{array}{c}\text{Supplies expenses = }\left(\text{Beginning supplies + Purchase of supplies}-\text{Ending supplies}\right)\\ \text{=\$3+\$7}-\$3\\ =\$7\end{array}$

To determine

Prepare an adjusted trial balance from requirement 4.

Explanation of Solution

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

Incorporation NPT
Adjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	25
Accounts Receivable	2
Supplies	3
Equipment	33
Accumulated Depreciation–Equipment		5
Software	8
Accumulated Amortization		2
Accounts Payable		2
Notes Payable (short–term)		22
Salaries and Wages Payable		3
Interest Payable		1
Income Tax Payable		4
Deferred revenue		3
Common Stock		20
Retained Earnings		4
Service Revenue		55
Salaries and Wages Expense	33
Supplies Expense	7
Depreciation Expense	4
Amortization Expense	1
Interest Expense	1
Income Tax Expense	4
Total	121	121

Table (4)

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 NPT
Income Statement
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	55
Total revenues		55
Less: Expenses
Salaries and wage expense	33
Supplies expense	7
Amortization expense	1
Depreciation expense	4
Interest expense	1
Income tax expense	4
Total expenses		50
Net income		5

Table (5)

Prepare a statement of retained earnings as follows:

Incorporation NPT
Statement of Retained Earnings
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Balance, January 1, 2018	4
Add: Net income	5
		9
Less: Dividends		(0)
Balance, December 31, 2018		9

Table (6)

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

Table (7)

To determine

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

Explanation of Solution

Prepare closing entries for Incorporation NPT on December 31, 2018 as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2018	Sales revenue(-R)	55
	Salaries and wages expense(-E)		33
	Depreciation expense(-E)		4
	Supplies expense(-E)		7
	Amortization expense (-E)		1
	Income tax expense(-E)		4
	Interest expense (-E)		1
	Retained earnings(+SE) (refer table 5)		5
	(To record the closing entries for Incorporation NPT)

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.

To determine

Prepare a post-closing trial balance from the requirement 7.

Explanation of Solution

Prepare a Post-closing trial balance for Incorporation NPT for December 31, 2018 follows:

Incorporation NPT
Post-closing Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	25
Accounts Receivable	2
Supplies	3
Equipment	33
Accumulated Depreciation–Equipment		5
Software	8
Accumulated Amortization		2
Accounts Payable		2
Notes Payable (short–term)		22
Salaries and Wages Payable		3
Interest Payable		1
Income Taxes Payable		4
Deferred revenue		3
Common Stock		20
Retained Earnings		9
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	71	71

Table (9)

To determine

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

Explanation of Solution

The net income of Incorporation NPT for 2018:

Incorporation NPT generated net income of $5(thousand) in the year 2018.

Calculate the net profit margin:

$\begin{array}{c}\text{Net profit margin =}\frac{\text{Net income }}{\text{Total revenues}}\times 100\\ =\frac{\$5}{\$55}\times 100\\ =9.1\%\end{array}$

The net profit margin of Incorporation NPT is 9.1%.

Whether the Incorporation NPT is financed primarily by liabilities or stockholders’ equity as follows:

The invested amount of assets primarily comes from liabilities of Incorporation NPT, because the liabilities have financed $35 thousand of the Incorporation NPT’s total assets, whereas stockholder’s equity has financed $29 thousand.

Calculate the current ratio:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$30}{\$35}\\ =0.86:1\end{array}$

The current ratio is 0.86:1.