Chapter 4, Problem 4.3CACR

(a)

To determine

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:

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

To prepare: The T-accounts to enter the opening balances of Company BB as on August 31, 2017.

Explanation of Solution

Prepare the T-account to enter the opening balances of Company BB as follows:

Cash
Aug, 1	$6,040
Bal.	$6,040

Accounts receivable
Aug, 1	$2,910
Bal.	$2,910
Note receivable
Aug, 1	$4,000
Bal.	$4,000

Building
Aug, 1	$1,030
Bal.	$1,030

Equipment
Aug, 1	$10,000
Bal.	$10,000

Accumulated depreciation-Equipment
		Aug, 1	$600
		Bal.	$600

Accounts payable
		Aug, 1	$2,300
		Bal.	$2,300

Unearned service revenue
		Aug, 1	$1,260
		Bal.	$1,260

Salaries and wages payable
		Aug, 1	$1,420
		Bal.	$1,420

Common stock
		Aug, 1	$12,000
		Bal.	$12,000

Retained earnings
		Aug, 1	$6,400
		Bal.	$6,400

(b)

To determine

Journal:

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

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 BB for the month of August.

Explanation of Solution

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

Date	Account Title and Description	Debit ($)	Credit ($)
Aug 1, 2017	Prepaid advertising	620
	Cash		1,220
	(To record the prepaid expenses for advertising)
Aug 3, 2017	Rent	380
	Cash		380
	(To record the rent paid in cash)
Aug 5, 2017	Cash	1,200
	Accounts receivable		1,200
	(To record the cash received from customer)
Aug 10, 2017	Salaries and wages payable	1,420
	Salaries and wages expense	1,700
	Cash		3,120
	(To record salary paid to employee)
Aug 12, 2017	Cash	2,800
	Service revenue		2,800
	(To record service performance to customer)
Aug 15, 2017	Equipment	2,000
	Account payable		2,000
	(To record equipment purchased on account)
Aug 20, 2017	Accounts payable	2,000
	Cash		2,000
	(To record the cash paid to creditors)
Aug 22, 2017	Supplies	800
	Accounts payable		800
	(To record the supplies purchased on account)
Aug 25, 2017	Salaries and wages expense	2,900
	Cash		2,900
	(To record salaries paid to employee)
Aug 27, 2017	Accounts receivable	3,760
	Service revenue		3,760
	(To record the service performed to customer on account)
Aug 29, 2017	Cash	780
	Unearned service revenue		780
	(To record advance cash received from customer)

Table (1)

(c)

To determine

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:

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 BB

Explanation of Solution

Post the transactions to T-account of company BB as follows:

Cash
Aug, 1	$6,040	Aug, 1	$400
Aug,5	$1,200	Aug, 3	$380
Aug, 12	$2,800	Aug, 10	$3,120
Aug, 29	$780	Aug, 20	$2,000
		Aug, 25	$2,900
Total	$10,820	Total	$8,800
Bal.	$2,020

Equipment
Aug, 1 Aug, 15	$10,000   $2,000
Bal.	$12,000

Accounts receivable
Aug, 1	$2,910	Aug, 5	$1,200
Aug, 27	$3,760
Total	$6,670	Total	$1,200
Bal.	$5,470

Supplies
Aug, 1	$1,030
Aug, 22	$800
Bal.	$1,830
Accounts payable
Aug, 20	$2,000	Aug, 1	$2,300
		Aug, 15 Aug, 22	$2,000 $800
Total	$2,000	Total	$5,100
Bal.	$3,100

Unearned service revenue
		Aug, 1	$1,260
		Aug, 29	$780
		Bal.	1,240

Salaries and wages payable
Aug, 8	$1,420	Aug, 1	$1,420
Total	$1,420	Total	$1,420
		Bal.	0

Service revenue
		Aug, 12 Aug, 27	$2,800   $3,760
		Bal.	$6,560

Salaries and wages expense
Aug, 10	$1,700
Aug, 25	$2,900
Bal.	$4,600

Rent expense
Aug, 3	$380
Bal.	$380

(d)

To determine

To prepare: The trial balance of Company BB on August 31, 2017

Explanation of Solution

Trial balance of Company BB on August 31, 2017 is as follows:

Company BB
Trial balance
August 31, 2017
Particulars	Debit $	Credit $
Cash	2,020
Accounts receivable	5,470
Notes receivable	4,000
Supplies	1,830
Prepaid advertising	400
Equipment	12,000
Accumulated depreciation-Equipment		600
Accounts payable		3,100
Unearned rent revenue		2,040
Common stock		12,000
Retained earnings		6,400
Service revenue		6,560
Interest revenue
Salaries and wages expense	4,600
Rent expense	380
	30,700	30,700

Table (2)

Conclusion

Thus, the total of debit, and credit columns of a trial balance is $30,700 and agreed.

(e)

To determine

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

To journalize: The adjusting transactions as given in the books of Company BB, and post adjusting entries to T-accounts.

Explanation of Solution

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

1. An adjusting entry for Supplies expenses:

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

Date	Account Titles and Description	Debit ($)	Credit ($)
Aug 31, 2017	Supplies expenses (1)	870
	Supplies		870
	(To record the supplies expenses incurred at the end of the August)

Table (3)

Working note:

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

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\\ \text{begining of the August month}\end{array}\right)-\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\text{on}\text{hand}\\ \text{at}\text{the}\text{end}\text{of}\text{the August month}\end{array}\right)\\ =\left(\$1,830–\$960\right)\\ =\$870\end{array}$ (1)

Description:

• Supplies expense decreases the value of stockholders’ equity by $870; hence debit the supplies expenses for $870.
• Supplies are an asset, and it decreases the value of asset by $870, hence credit the supplies for $870.  

2.  An adjusting entry for salaries and wages payable:

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

Date	Account Title and Description	Debit ($)	Credit ($)
Aug 31, 2017	Salaries and wages expense	1,540
	Salaries and wages payable		1,540
	(To record the salaries and wages expense incurred at the end of the month)

Table (4)

Description:

• Salaries and wages expense decreases the value of stockholders’ equity by $1,540 hence, debit the salaries and wages expense for $1,540.
• Salaries and wages payable is a liability, and it increases the value of liability by $1,540, hence credit the salaries and wages payable for $1,540.

3. An adjusting entry for depreciation expense:

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

Date	Account Titles and Description	Debit ($)	Credit ($)
Aug 31, 2017	Depreciation expense	320
	Accumulated depreciation-Equipment		320
	(To record the depreciation expenses allocated at end of the month)

Table (5)

Description:

• Depreciation expense decreases the value of stockholders’ equity by $320; hence debit the depreciation expense for $320.
• Accumulated depreciation is a contra asset account, and it decreases the value of asset by $320 hence, credit the accumulated depreciation for $320.

4.  An adjusting entry for unearned service revenue:

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

Date	Account Title and Description	Debit ($)	Credit ($)
Aug 31, 2017	Unearned service revenue	800
	Service revenue		800
	(To record the unearned service revenue at end of the month)

Table (6)

Description:

• Unearned service revenue is a liability, and it decreases the value of liability by $800, hence debit the unearned rent revenue for $800.
• Service revenue increases the value of stockholders’ equity by $800; hence credit the service revenue for $800.

5. An adjusting entry for advertising expense:

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

Date	Account Titles and Description	Debit ($)	Credit ($)
Aug 31, 2017	Advertising expense	200
	Prepaid advertising		200
	(To record the advertising expenses incurred at the end of the August  month)

Table (7)

Description:

• Advertising expense decreases the value of stockholders’ equity by $200 hence debit the advertising expense for $200.
• Prepaid advertising is an asset, and it decreases the value of asset by $200, hence credit the prepaid advertising for $200.  

6. An adjusting entry for interest revenue:

In this case, Company BB recognized the interest revenue at the end of the August month. So, the necessary adjusting entry that the Company BB should record to recognize the accrued revenue is as follows:

Date	Account Titles and Description	Debit ($)	Credit ($)
Aug 31, 2017	Interest receivable (2)	20
	Interest revenue		20
	(To record the interest revenue incurred at the end of the month)

Table (8)

Calculate the value of interest revenue at end of the August month

$\begin{array}{c}\text{Interest revenue}\text{=}\left[\begin{array}{l}\left(\text{Notes payable ×}\text{Annual interest rate}\right)\text{×}\\ \left(\frac{\text{No}\text{. of months in a quarter}}{\text{No}\text{. of months in a year}}\right)\end{array}\right]\\ \text{=}\left(\text{\$4,000×}\frac{\text{6}}{\text{100}}\right)\text{×}\left(\frac{\text{1 months}}{\text{12 months}}\right)\\ \text{=\$20}\end{array}$ (2)

Description:

• Interest revenue is an asset, and it increases the value of asset by $20, hence debit the interest revenue for $20. 
• Interest revenue increases the value of stockholders’ equity by $20; hence credit the interest revenue for $20.

Post the adjusting transactions to T-accounts of Company BB on August 31, 2017 as follows:

Supplies
Aug, 31 Bal.	$1,830	Aug, 31	$870
Bal.	$960

Supplies expense
Aug, 31	$870
Bal.	$870

Salaries and wages expense
Aug, 31 Bal.	$4,600
Aug, 31	$1,540
Bal.	$6,140

Salaries and wages payable
		Aug, 31	$1,540
		Bal.	$1,540

Depreciation expense
Aug, 31	$320
Bal.	$320

Accumulated depreciation
		Aug, 1 Bal. Aug, 31	$600 $320
		Bal.	$920

Unearned service revenue
		Aug, 1 Bal. Aug, 31	$1,260 $780
		Bal.	$1,240

Service revenue
		Aug, 1 Bal. Aug, 31	$6,560 $800
		Bal.	$7,360

Advertising expense
Aug, 31	$200
Bal.	$200

Prepaid advertising
Aug, 1 Bal.	$400	Aug, 31	$200
Bal.	$200

Interest revenue
		Aug, 31	$20
		Bal.	$20

Interest receivable
Aug, 31	$20
Bal.	$20

(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 adjusted trial balance of Company BB on August 31, 2017

Explanation of Solution

Adjusted trial balance of Company BB on August 31, 2017 is as follows:

Company BB
Adjusted trial balance
August 31, 2017
Particulars	Debit $	Credit $
Cash	2,020
Accounts receivable	5,470
Notes receivable	4,000
Interest receivable	20
Supplies	960
Prepaid advertising	200
Equipment	12,000
Accumulated depreciation-Equipment		920
Accounts payable		3,100
Unearned rent revenue		1,240
Salaries and wages payable		1,540
Common stock		12,000
Retained earnings		6,400
Service revenue		7,360
Interest revenue		20
Salaries and wages expense	6,140
Supplies expense	870
Depreciation expense	320
Advertising expense	200
Rent expense	380
	32,580	32,580

Table (9)

Conclusion

Thus, the total of debit, and credit columns of a trial balance is $32,580 and agreed.

(g)

To determine

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

Explanation of Solution

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

Company BB
Income Statement
For the month ended August 31, 2017
Particulars	$	$
Revenue:
Service revenue	7,360
Interest revenue	20
Total revenue (A)		7,380
Less:  Expenses
Salaries and wages expenses	6,140
Supplies expense	870
Rent expense	380
Depreciation expense	320
Advertising expense	200
Total Expenses (B)		7,910
Net loss		-530

Table (10)

Hence, the net loss of Hotel M for the month ended August 31, 2017 is $530.

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

Company BB
Retained earnings statement
For the month ended August31, 2017
Particulars		$
Retained earnings at August, 1		6,400
Less:  Net loss		530
		5,870
Less:  Dividend paid		-
Retained earnings at August, 31		5,870

Table (11)

Hence, retained earnings of Company BB for the month ended August 31, 2017 are $5,870.

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

Company BB
Classified Balance sheet Statement
As  at August 31, 2017
Assets	$	$	$
Current assets:
Cash		2,020
Accounts receivable		5,470
Notes receivable		4,000
Interest receivable		20
Supplies		960
Prepaid advertising		200
Total of current assets (X)			12,670
Other assets:
Equipment	12,000
Less: Accumulated depreciation-Equipment	920	11,080
Total of other assets (Y)			11,080
Total assets   $\left(\text{X+Y}\right)$			23,750
Liabilities and Stockholders' equity	$	$	$
Current liabilities:
Accounts payable		3,100
Salaries and wages payable		1,540
Unearned rent revenue		1,240
Total current liabilities (A)			5,880
Stockholders' equity:
Common stock		12,000
Retained earnings		5,870
Total stockholders' equity (B)			17,870
Total liabilities and stockholders' equity $\left(\text{A+B}\right)$			23,750

Table (12)

Hence, the total assets of Hotel M are $23,750, and the total liabilities and stockholders’ equity are $23,750.

(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 BB, and post it to T-accounts.

Explanation of Solution

The closing entries of Company BB at August 31, 2017 are as follows:

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
Aug 31, 2017	Service revenue		7,360
	Interest revenue		20
	Income summary			7,380
	(To close all revenue account)
Aug 31, 2017	Income summary		7,910
	Salaries and wages expense			6,140
	Supplies expense			870
	Rent expense			380
	Depreciation expense			320
	Advertising expense			200
	(To close all the  expenses account)
Aug 31, 2017	Retained earnings		530
	Income summary (3)			530
	(To close the income summary account)

Table (13)

Working note:

Calculate the balance amount of income summary account for the month ended August 31, 2017:

$\begin{array}{c}\text{Balanace}\text{of}\text{income}\text{summary}\text{=}\left[\begin{array}{l}\text{Total}\text{debit}\text{balance}\text{of}\text{income}\text{summary}\text{–}\\ \text{Total}\text{credit}\text{balance}\text{of}\text{income}\text{summary}\end{array}\right]\\ =\$7,910–\$7,380\\ =\$530\end{array}$ (3)

Therefore, balance of income summary account is $530 (debit).

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 $7380, and credit the income summary account for $7,380.

Closing entry for expenses account:

In this closing entry, salaries and wages expense, maintenance and repair expense, and income tax 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 $7,910, and credit all the expenses account for $7,910.

Closing entry for income summary account:

In this closing entry, the income summary account is closed by transferring the amount of net income to the retained earnings in order to bring the income summary balance to zero.  Hence, debit the retained earnings for $530, and credit the income summary account for $530.

Post the closing transactions to T-accounts of Company BB on August 31, 2017 as follows:

Service revenue
Aug, 31	$7,360	Aug, 31 Bal.	$7,360
		Bal.	0
Interest revenue
Aug, 31	$20	Aug, 31 Bal.	$20
		Bal.	0

Salaries and wages expense
Aug, 31 Bal.	$6,140	Aug, 31	$6,140
Bal.	0

Supplies expense
Aug, 31 Bal.	$870	Aug,	$870
Bal.	0

Rent expense
Aug, 31 Bal.	$380	Aug, 31	$380
Bal.	0

Depreciation expense
Aug, 31 Bal.	$320	Aug, 31	$320
Bal.	0

Advertising expense
Aug, 31 Bal.	$200	Aug, 31	$200
Bal.	0
Income summary account
Aug, 31	$6,140	Aug, 31	$7,380
Aug, 31	$870	Aug, 31	$530
Aug, 31	$380
Aug, 31	$320
Aug, 31	$200
Total	$7,910	Total	$7,910
		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 BB on August 31, 2017

Explanation of Solution

The post-closing trial balance of Company BB on August 31, 2017 is as follows:

Company BB
Post-closing trial balance
August 31, 2017
Particulars	Debit $	Credit $
Cash	2,020
Accounts receivable	5,470
Notes receivable	4,000
Interest receivable	20
Supplies	960
Prepaid advertising	200
Equipment	12,000
Accumulated depreciation-Equipment		920
Accounts payable		3,100
Unearned rent revenue		1,240
Salaries and wages payable		1,540
Common stock		12,000
Retained earnings		5,870
	24,670	24,670

Conclusion

Thus, the total of debit, and credit columns of a trial balance is $24,670 and agreed.