Chapter 4, Problem 4.3BPR

T accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet

The unadjusted trial balance of La Mesa Laundry at August 31, 2019, the end of the fiscal year, follows:

La Mesa Laundry Unadjusted Trial Balance August 31,2019
	Debit Balances	Credit Balances
Cash	3,800
Laundry Supplies	9,000
Prepaid Insurance	6,000
Laundry Equipment	180,800
Accumulated Depreciation		49,200
Accounts Payable		7,800
Bobbi Downey. Capital		95,000
Bobbi Downey. Drawing	2,400
Laundry Revenue		248,000
Wages Expense	135,800
Rent Expense	43,200
Utilities Expense	16,000
Miscellaneous Expense	3,000
	400,000	400,000

The data needed to determine year-end adjustments are as follows:

a.    Wages accrued but not paid at August 31 are $2,200.

b.    Depreciation of equipment during the year is $8,150.

c.    Laundry supplies on hand at August 31 are $2,000.

d.    Insurance premiums expired during the year are $5,300.

Instructions

1.    For each account listed in the unadjusted trial balance, enter the balance in a T account. Identity the balance as "Aug. 31 Bal." In addition, add T accounts for Wages Payable, Depreciation Expense, Laundry Supplies Expense, and Insurance Expense.

2.    (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. Add the accounts listed in part (1) as needed.

3.    Journalize and post the adjusting entries. Identity the adjustments as "Adj." and the new balances as "Adj. Bal."

4.    Prepare an adjusted trial balance.

5.    Prepare an income statement, a statement of owner's equity (no additional investments were made during the year), and a balance sheet.

6.    Journalize and post the closing entries. Identify the closing entries as "Clos."

7.    Prepare a post-closing trial balance.

To determine

1, 3, and 6:

Journal:

Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

T-Accounts:

T-accounts are referred as T-account because its format represents the letter “T”. The T-accounts consists of the following:

Ø The title of accounts.

Ø The debit side (Dr) and,

Ø The credit side (Cr).

Adjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.

Adjusting entries:

An adjusting entry is prepared when the trial balance is not up-to-date, and complete, and they are usually prepared at the end of the accounting period. This adjusting entry is essential for preparing the financial statements of the business.

Spreadsheet:

A spreadsheet is a worksheet. It is used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Statement of owners’ equity:

This statement reports the beginning owner’s equity and all the changes, which led to ending owners’ equity. Additional capital, net income from income statement is added to and drawing is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Income statement:

An income statement is one of the financial statements which shows the revenues, and expenses of the company. The income statement is prepared to ascertain the net income/loss of the company, by deducting the expenses from the revenues.

$\boxed{\text{Net}\text{income = Total revenues – Total expenses}}$

Balance sheet:

A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

To prepare: The T-accounts.

Explanation of Solution

Record the transactions directly in their respective T-accounts, and determine their balances.

Cash
August 31	Balance			3,800
Laundry Supplies
August 31	Balance			9,000		August 31	Adjusted			7,000
August 31	Adjusted balance			2,000
Prepaid Insurance
August 31	Balance			6,000		August 31	Adjusted			5,300
	Adjusted balance			700
Laundry Equipment
August 31	Balance			180,800
Accumulated Depreciation
						August 31	Balance			49,200
						August 31	Adjusted			8,150
						August 31	Adjusted balance			57,350
Accounts Payable
						August 31	Balance			7,800
Wages Payable
						August 31	Adjusted			2,200
BD, Capital
August 31	Closing			2,400		August 31	Balance			95,000
						August 31	Closing			27,350
						August 31	Balance			119,950
BD, Drawing
August 31	Balance			2,400		August 31	Closing			2,400
Laundry Revenue
August 31	Closing			248,000		August 31	Balance			248,000
Wages Expense
August 31	Balance			135,800		August 31	Closing			138,000
August 31	Adjusted			2,200
August 31	Adjusted balance			138,000
Rent Expense
August 31		Balance	43,200		August 31			Closing	43,200
Utilities Expense
August 31		Balance	16,000		August 31			Closing	16,000
Depreciation Expense
August 31		Adjusted	8,150		August 31			Closing	8,150
Laundry Supplies Expense
August 31		Adjusted	7,000		August 31			Closing	7,000
Insurance Expense
August 31		Adjusted	5,300		August 31			Closing	5,300
Miscellaneous Expense
August 31		Balance	3,000		August 31			Closing	3,000

To determine

To enter: The unadjusted trial balance on an end-of-period spreadsheet, and complete the spreadsheet.

Explanation of Solution

Table (1)

Conclusion

Hence, the unadjusted trial balance on an end-of-period spreadsheet is prepared and completed.

To determine

To Journalize and post: The adjusting entries.

Explanation of Solution

Date		Description	Debit ($)	Credit ($)
2019		Wages expense	2,200
August	31	Wages payable		2,200
		(To record the wages accrued)

Table (2)

Explanation:

• Wages expense is an expense account, and it is increased. Hence, debit the wages expense account by $2,200.
• Wages payable is a liability account, and it is increased. Hence, credit the wages payable account by $2,200.

Date		Description	Debit ($)	Credit ($)
2019		Depreciation expense	8,150
August	31	Accumulated depreciation		8,150
		(To record the equipment depreciation)

Table (3)

Explanation:

• Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $8,150.
• Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $8,150.

Date		Description	Debit ($)	Credit ($)
2019		Laundry supplies expense	7,000
August	31	Laundry supplies $\left(\$9,000-\$2,000\right)$		7,000
		(To record the equipment depreciation)

Table (4)

Explanation:

• Laundry supplies expense is an expense account, and it is increased. Hence, debit the laundry supplies expense account by $7,000.
• Laundry supplies are the asset account, and it is increased. Hence, credit the laundry supplies account by $7,000.

Date		Description	Debit ($)	Credit ($)
2019		Insurance expense	5,300
August	31	Prepaid insurance $\left(\$9,000-\$2,000\right)$		5,300
		(To record the equipment depreciation)

Table (5)

Explanation:

• Insurance expense is an expense account, and it is increased. Hence, debit the insurance expense account by $5,300.
• Prepaid insurance is anasset account, and it is decreased. Hence, credit the prepaid insurance account by $5,300.

To determine

To prepare: An unadjusted trial balance for Laundry LM, as of August 31, 2019.

Explanation of Solution

Prepare an unadjusted trial balance for Laundry LM, as of August 31, 2019.

Laundry LM
Unadjusted Trial Balance
August 31, 2019
Accounts	Debit Balances	Credit Balances
Cash	3,800
Laundry Supplies	2,000
Prepaid Insurance	700
Laundry Equipment	180,800
Accumulated depreciation		57,350
Accounts payable		7,800
Wages Payable		2,200
BD, Capital		95,000
BD, Drawing	2,400
Laundry revenue		248,000
Wages expense	138,000
Rent expense	43,200
Utilities Expense	16,000
Depreciation Expense	8,150
Laundry supplies expense	7,000
Insurance Expense	5,300
Miscellaneous Expense	3,000
	410,350	410,350

Table (6)

To determine

The net income or net loss of Laundry LMfor the month of August.

Explanation of Solution

The net income of Laundry LM for the month of August r is $27,350.

LM Laundry
Income Statement
For the year ended August 31, 2019
Particulars	Amount ($)	Amount ($)
Revenue:
Laundry revenue		$248,000
Expenses:
Wages Expense	$138,000
Rent Expense	43,200
Utilities Expense	16,000
Depreciation Expense	8,150
Laundry supplies Expense	7,000
Insurance Expense	5,300
Miscellaneous Expense	3,000
Total Expenses		220,650
Net Income		$27,350

Table (7)

Conclusion

Hence, owners’ equity for the year ended August 31, 2019 is $119,950.

To determine

To Journalize: The closing entries for LM Laundry.

Explanation of Solution

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 31, 2019	Laundry Revenue		248,000
	WagesExpense			138,000
	Rent Expense			43,200
	Utilities Expense			16,000
	Depreciation Expense			8,150
	Laundry supplies Expense			7,000
	Insurance Expense			5,300
	Miscellaneous Expense			3,000
	BD, Capital			27,350
	(To close the revenues and expenses account. Then the balance amount are  transferred to owners’ capital account)
August 31	BD’s Capital		2,400
	BD’ Drawing			2,400
	(To Close the capital and drawings account)

Table (4)

Explanation:

• Laundry revenue is revenue account. Since the amount of revenue is closed, and transferred to BD’s capital account. Here, LM Laundry earned an income of $248,000. Therefore, it is debited.
• Wages Expense, Rent Expense, Insurance Expense, Utilities Expense, Laundry Supplies Expense, Depreciation Expense, BD Capital,and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.
• Owner’s capital is a component of owner’s equity. Thus, owners ‘equity is debited since the capital is decreased on owners’ drawings.
• Owner’s drawings are a component of owner’s equity. It is credited because the balance of owners’ drawing account is transferred to owners ‘capital account

To determine

To prepare: The post–closing trial balance of LM Laundryfor the month ended August 31, 2019.

Explanation of Solution

Prepare apost–closing trial balance of LM Laundry for the month ended August 31, 2019 as follows:

Laundry LM Post-closing Trial Balance August 31, 2019
Particulars	Debit $	Credit $
Cash	3,800
Laundry Supplies	2,000
Prepaid insurance	700
Laundry Equipment	180,800
Accumulated depreciation		57,350
Accounts payable		7,800
Wages payable		2,200
BD’s Capital		119,950
Total	187,300	187,300

Table (5)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $187,300.