Chapter 4, Problem 4.1CACR

(a)

To determine

Journal:

Journal is the systematic method of recording the business transactions in a chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system of accounting.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To journalize: The transaction as given in the book of Company KWW for the month of July.

Explanation of Solution

The journal entries in the book of Company KWW are as follows:

Date	Account Title	Post ref.	Debit ($)	Credit ($)
July 1	Cash		12,000
	Common Stock			12,000
	(To record the issue of common stock)
July 1	Equipment		8,000
	Accounts Payable			6,000
	Cash			2,000
	(To record the purchase of equipment making part payment and balance on credit)
July 3	Supplies		900
	Accounts Payable			900
	(To record cleaning supplies purchased on account)
July 5	Prepaid Insurance		1,800
	Cash			1,800
	(To record the payment of insurance premium)
July 12	Accounts Receivable		3,700
	Service Revenue			3,700
	(To record the services performed to customers on credit)
July 18	Accounts Payable		1,500
	Cash			1,500
	(To record payment of cash owed on truck and cleaning supplies)
July 20	Salaries and Wages Expense		2,000
	Cash			2,000
	(To record payment of salaries)
July 21	Cash		1,600
	Accounts Receivable			1,600
	(To record cash received from customer for service provided on July 12th for credit)
July 25	Accounts Receivable		2,500
	Service Revenue			2,500
	(To record services performed to customers on credit)
July 31	Maintenance and Repairs Expense		290
	Cash			290
	(To record payment made for maintenance of truck)
July 31	Dividends		600
	Cash			600
	(To record distribution of dividend)

Table (1)

(b)

To determine

T-account:

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

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

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

To post: The journal transactions to T-account of Company KWW for the month of July.

Explanation of Solution

Post the transactions to T-account of Company KWW as follows:

Cash

1-Jul

$12,000

7/1

$2,000

21-Jul

$1,600

7/5

$1,800

7/18

$1,500

7/20

$2,000

7/31

$290

7/31

$600

31-Jul

Bal.

$5,410

Accounts Receivable

12-Jul

$3,700

7/21

$1,600

25-Jul

$2,500

31-Jul

$1,700

31-Jul

Bal.

$6,300

Supplies

3-Jul

$900

7/31

$580

31-Jul

Bal.

$320

Prepaid Insurance

5-Jul

$1,800

7/31

$150

31-Jul

Bal.

$1,650

Equipment

1-Jul

$8,000

31-Jul

Bal.

$8,000

Accounts Payable

18-Jul

$1,500

7/1

$6,000

7/3

$900

7/31

Bal.

$5,400

Common Stock

7/1

$12,000

7/31

Bal.

$12,000

Maintenance and Repairs Expense

31-Jul

$290

7/31

$290

31-Jul

Bal.

0

Salaries and Wages Expense

20-Jul

$2,000

7/31

$2,400

31-Jul

$400

31-Jul

Bal.

0

(c)

To determine

To prepare: The trial balance of Company KWW on July 31, 2017 before adjustment.

Explanation of Solution

Trial balance of Company KWW on July 31, 2017, before adjustment is as follows:

Company KWW
Trial Balance before Adjustments
July 31, 2017
Particulars	Debit $	Credit $
Cash	5410
Accounts Receivable	4,600
Supplies	900
Prepaid Insurance	1,800
Equipment	8,000
Accounts Payable		5,400
Common Stock		12,000
Dividends	600
Service Revenue		6,200
Maintenance and Repairs Expense	290
Salaries and Wages Expense	2,000
	23,600	23,600

Table (2)

Thus, the total of debit, and credit columns of a trial balance is $23,600 and agreed.

(d)

To determine

Adjusting entries:

Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

To journalize: The adjusting transactions as given in the books of Company KWW.

Explanation of Solution

The adjusting journal entries in the book of Company KWW at the end of the July month are as follows:

1.  An adjusting entry for Accounts receivable:

In this case, Company KWW performed the service to customer in advance before the service. So, the necessary adjusting entry that the Company KWW should record for the unearned service revenue at end of the July month is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
July 31, 2017	Accounts Receivable	1700
	Service Revenue		1700
	(To record the unbilled services at end of the month)

Table (3)

Description:

• Accounts Receivable is a liability, and it decreases the value of liability by $1700, hence debit the unearned accounts receivable for $1700.
• Service revenue increases the value of stockholders’ equity by $1700; hence credit the service revenue for $1700.

2. An adjusting entry for depreciation expense:

In this case, Company KWW recognized the depreciation expense on equipment at end of the July month.  So, the necessary adjusting entry that the Company KWW should make to record the depreciation expense at end of the month is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
July 31, 2017	Depreciation expense	180
	Accumulated depreciation-Equipment		180
	(To record the depreciation expenses allocated at end of the month)

Table (4)

Description:

• Depreciation expense decreases the value of stockholders’ equity by $180; hence debit the depreciation expense for $180.
• Accumulated depreciation is a contra asset account, and it decreases the value of asset by $180 hence, credit the accumulated depreciation for $180.

3. An adjusting entry for insurance expense:

In this case, Company KWW recognized the insurance expenses at the end of the July month. So, the necessary adjusting entry that the Company KWW should record to recognize the insurance expense is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
July 31, 2017	Insurance  expense	150
	Prepaid insurance  (1)		150
	(To record the insurance expenses expired at the end of July month)

Table (5)

Description:

• Insurance expense decreases the value of stockholders’ equity by $150 hence debit the insurance expense for $150.
• Prepaid insurance is an asset, and it decreases the value of asset by $150, hence credit the prepaid insurance for $150.  

Working Note:

Calculate the insurance expense.

$\begin{array}{c}\text{Insurance expense = Prepaid insurance}\times \text{1 month}\\ \text{= }\left(\$1,800\times \frac{1}{12}\right)\\ \text{= \$150}\end{array}$ (1)

4. An adjusting entry for Supplies expenses:

In this case, Company KWW recognized the supplies expenses at the end of the July month. So, the necessary adjusting entry that the Company KWW should record to recognize the supplies expense is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
July 31, 2017	Supplies Expense	580
	Supplies (2)		580
	(To record the supplies expenses incurred at the end of the July)

Table (6)

Description:

• Supplies expense decreases the value of stockholders’ equity by $580; hence debit the supplies expenses for $580.
• Supplies are an asset, and it decreases the value of asset by $580, hence credit the supplies for $580.  

Working note:

Calculate the value of supplies expense at end of the July month

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\\ \text{begining of the July month}\end{array}\right)-\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\text{on}\text{hand}\\ \text{at}\text{the}\text{end}\text{of}\text{the July month}\end{array}\right)\\ =\left(\$900–\$320\right)\\ =\$580\end{array}$ (1)

5.  An adjusting entry for salaries and wages payable:

In this case, Company KWW incurred the salaries and wages expense but cash is not yet paid.  So, the necessary adjusting entry that the Company KWW should record to recognize the accrued expense is as follows:

Date	Account Title and Description	Debit ($)	Credit ($)
July 31, 2017	Salaries and wages expense	400
	Salaries and wages payable		400
	(To record the salaries and wages expense incurred at the end of the month)

Table (7)

Description:

• Salaries and wages expense decreases the value of stockholders’ equity by $400 hence, debit the salaries and wages expense for $400.
• Salaries and wages payable is a liability, and it increases the value of liability by $400, hence credit the salaries and wages payable for $400.

(e)

To determine

To post: The adjusting entries to T-account of Company KWW for the month of July.

Explanation of Solution

Post the adjusting entries to T-account of Company KWW as follows:

Accounts Receivable
12-Jul		$3,700	7/21		$1,600
25-Jul		$2,500
31-Jul		$1,700
31-Jul	Bal.	$6,300

Accumulated Depreciation— Equipment
			7/31		180
			7/31	Bal.	$180

Prepaid Insurance
5-Jul		$1,800	7/31		$150
31-Jul	Bal.	$1,650

Supplies Expense
31-Jul		$580		7/31		$580
31-Jul	Bal.		0

Salaries and Wages Payable
			7/31		400
			7/31	Bal.	$400

(f)

To determine

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

To prepare: The trial balance of Company KWW on July 31, 2017 after adjustment.

Explanation of Solution

Trial balance of Company KWW on July 31, 2017, after adjustment is as follows:

Company KWW
Trial Balance after Adjustments
July 31, 2017
Particulars	Debit $	Credit $
Cash	5,410
Accounts Receivable	6,300
Supplies	320
Prepaid Insurance	1,650
Equipment	8,000
Accumulated Depreciation - Equipment		180
Accounts Payable		5,400
Salaries and Wages Payable		400
Common Stock		12,000
Dividends	600
Service Revenue		7,900
Maintenance and Repairs Expense	290
Supplies Expense	580
Depreciation Expense	180
Insurance Expense	150
Salaries and Wages Expense	2,400
	25,880	25,880

Table (8)

Thus, the total of debit, and credit columns of a trial balance is $25,880 and agreed.

(g)

To determine

To prepare: The income statement, statement of retained earnings, and classified balance sheet of Company KWW.

Explanation of Solution

The income statement of Company KWW for the month ended July 31, 2017 is as follows:

Company KWW
Income Statement
July 31, 2017
Particulars	Amount ($)	Amount ($)
Revenues
Service revenue		7,900
Expenses
Salaries and wages expense	2,400
Supplies expense	580
Maintenance and repairs expense	290
Depreciation expense	180
Insurance expense	150
Total expenses		3,600
Net income		4,300

Table (9)

The Net Income for the month ended July31, 2017 is $4,300.

The retained earnings statement of Company KWW for the month ended July 31, 2017 is as follows:

Company KWW
Retained Earnings Statement
July 31, 2017
Particulars	Amount ($)
Retained earnings, July 1, 2017
Add:   Net income	4,300
	4,300
Less:  Dividends	600
Retained earnings, July 31, 2017	3,700

Table (10)

Hence, retained earnings for the month ended July 31, 2017 is $3,700.

The classified balance sheet at July 31, 2017 is as follows:

Company KWW
Classified Balance Sheet
July 31, 2017
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	5,410
Accounts receivable	6,300
Supplies	320
Prepaid insurance	1,650
Total current assets		13,680
Property, plant, and equipment
Equipment	8,000
Less:  Accumulated depreciation	180	7,820
Total assets		21,500
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	5,400
Salaries and wages payable	400
Total current liabilities		5,800
Stockholders’ equity
Common stock	12,000
Retained earnings	3,700
Total stockholders’ equity		15,700
Total liabilities and stockholders’ equity		21,500

 Table (11)

Thus the total assets of Company KWW for the month ended July 31, 2017 is $21500 which is equal to the liabilities for the same period.

(h)

To determine

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the income summary account. Closing entries produce a zero balance in each temporary account.

To prepare: The closing journal entries of Company KWW, and post it to T-accounts.

Explanation of Solution

The closing entries of Company KWW at July31, 2017 are as follows:

Date	Account Title	Post ref.	Debit ($)	Credit ($)
July 31	Service Revenue		7,900
	Income Summary			7900
	(To close the revenue account)
July 31	Income Summary		3,600
	Salaries and Wages Expense			2400
	Supplies Expense  Depreciation Expense			580
	Maintenance and Repairs Expense			290
	Depreciation Expense			180
	Insurance Expense			150
	(To close all the expenses account)
July 31	Income Summary		4,300
	Retained Earnings			4300
	(To close the income summary account)
July 31	Retained Earnings		600
	Dividends			600
	(To close the dividend account)

Table (12)

Description:

Closing entry for revenue account:

In this closing entry, the service revenue account is closed by transferring the amount of service revenue to the income summary account in order to bring the revenue accounts balance to zero.  Hence, debit the service revenue account for $7,900, and credit the income summary account for $7,900.

Closing entry for expenses account:

In this closing entry, all the expense are closed by transferring the amount of all expenses to the income summary account in order to bring all the expense accounts balance to zero. Hence, debit the income summary account for $3,600, and credit all the expenses account for $3,600.

Closing entry for income summary account:

In this closing entry, the income summary account is closed by transferring the amount of balance of $4,300 $\left(\$7,900-\$3,600\right)$ to the retained earnings in order to bring the income summary balance to zero.  Hence, debit the income summary for $4,300, and credit the retained earnings account for $4,300.

Closing entry for dividend account:

In this closing entry, the entire dividend declared by the company is transferred to the retained earnings. Hence, debit the retained earnings account for $600, and credit the dividends account for $600.

Post the closing transactions to T-accounts of Company KWW on July31, 2017 as follows:

Service Revenue

31-Jul

$7,900

7/12

$3,700

7/25

$2,500

7/31

$1,700

7/31

Bal.

0

Income Summary

31-Jul

$3,600

7/31

$7,900

31-Jul

$4,300

7/31

Bal.

0

Retained Earnings

31-Jul

$600

7/31

4,300

7/31

Bal.

$3,700

Dividends

31-Jul

$600

7/31

$600

31-Jul

Bal.

0

(i)

To determine

Post closing trial balance:

The post closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted.  The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

To prepare: The post-closing trial balance of Company KWW on July31, 2017

Explanation of Solution

The post-closing trial balance of Company KWW on July31, 2017 is as follows:

Company KWW
Post Closing Trial balance
July 31, 2017
Particulars	Debit $	Credit $
Cash	5410
Accounts Receivable	4,600
Supplies	900
Prepaid Insurance	1,800
Equipment	8,000
Accumulated Depreciation - Equipment		180
Accounts Payable		5,400
Salaries and Wages Payable		400
Common Stock		12,000
Retained Earnings		3,700
	21,680	21,680

Table (13)

Thus, the total of debit, and credit columns of a trial balance is $21,680 and agreed.