Chapter 4, Problem 4.4APR

Net Income: $51,150

Ledger accounts, adjusting entries, financial statements, and closing entries; optional spreadsheet

 The unadjusted trial balance of Lakota Freight Co. at March 31, 20Y4, the end of the year, follows:

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

(a) Supplies on hand at March 31 arc $7,500

(b) Insurance premiums expired during year are $1,800.

(c) Depreciation of equipment during year is $8,350

(d) Depreciation of trucks during year is $6,200

  (e) Wages accrued but not paid at March 31 are $600

  Instructions

1. For each account listed in the trial balance, enter the balance in the appropriate Balance column of a four-column account and place a check mark (✓) in the Posting Reference column.

2. (Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet Add the account» listed in part (3) as needed.

  3-Journalize and post the adjusting entries, inserting balances in the accounts affected. Record the adjusting entries on Page 26 of the journal. The following additional accounts from Lakota Freight Co.’s clean of accounts should lie used: Wages Payable, 22; Supplies Expense, 52; Depreciation Expense—Equipment. 55; Depreciation Expense—Trucks. 56; Insurance Expense. 57.

4. Prepare an adjusted trial balance.

5. Prepare an income statement, a statement of stockholders’ equity, and a balance sheet. During the year ended March 31, 20Y4, additional common stink of $6,000 was issued

6. Journalize and post the closing entries. Record the closing entries on Page 27 of the journal. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry.

7. Prepare a post-closing trial balance.

To determine

To prepare: The T-accounts.

Explanation of Solution

T-Accounts:

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

• The title of accounts.
• The debit side (Dr) and,
• The credit side (Cr).

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

Account:         Cash                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			12,000

Account:   Supplies                                                            Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			30,000
	31	Adjusting	26		22,500	7,500

Account:    Prepaid Insurance                                                  Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			3,600
	31	Adjusting	26		1,800	1,800

Account:    Equipment                                                             Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			110,000

Account:  Accumulated Depreciation-Office equipment        Account no. 17
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓				25,000
	31	Adjusting	26		8,350		33,350

Account:    Trucks                                                                    Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			60,000

Account:  Accumulated Depreciation- Truck                      Account no. 19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓				15,000
	31	Adjusting	26		6,200		21,200

Account:     Accounts Payable                                                      Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓				4,000

Account:     Wages Payable                                                        Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Adjusting	26		600		600

Account:          Common Stock                                                         Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓   1		26,000		26,000

Account:         Retained Earnings                                                       Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓				70,000
	31	Closing	27		51,150		121,150
	31	Closing	27	15,000			106,150

Account:          Dividends                                                         Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓   1			15,000
	31	Closing	27		15,000

Account:         Income Summary                                                       Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Closing	27		160,000		160,000
	31	Closing	27	108,850			51,150
	31	Closing	27	51,150

Account:          Service revenue                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓				160,000
	31	Closing	27	160,000

Account:  Wages expense                                                           Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			45,000
	31	Adjusting	26	600		45,600
	31	Closing	27		45,600

Account:     Supplies Expense                                                        Account no. 52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Adjusting	26	22,500		22,500
	31	Closing	27		22,500

Account:   Rent expense                                                               Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			10,600
	31	Closing	27		10,600

Account:   Truck Expense                                                          Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Balance	✓			9,000
	31	Closing	27		9,000

Account:   Depreciation Expense- Equipment                                Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Adjusting	26	8,350		8,350
	31	Closing	27		8,350

Account:   Depreciation Expense- Equipment                                Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Adjusting	26	8,350		8,350
	31	Closing	27		8,350

Account:   Depreciation Expense- Trucks                                         Account no. 56
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y4
March	31	Adjusting	26	6,200		6,200
	31	Closing	27		6,200

Account:   Insurance expense                                                     Account no. 57
Date		Item	Post. Ref		Debit  ($)	Credit ($)	Balance
							Debit ($)		Credit ($)
20Y4
March	31	Adjusting		26	1,800		1,800
	31	Closing		27		1,800
Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref		Debit  ($)	Credit ($)		Balance
								Debit ($)	Credit ($)
20Y4
March	31	Balance	✓					4,800
	31	Closing	27			4,800

To determine

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

Explanation of Solution

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.

The unadjusted trial balance on an end-of-period spreadsheet is prepared as follows:

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

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.

The adjusting entries are journalized as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y4		Supplies expense	52	22,500
March	31	Supplies $\left(\text{\$30,000}-\text{\$7,500}\right)$	13		22,500
		(To record the supplies used)

Table (2)

Description:

• • Supplies expense is an expense account, and it is increased. Hence, debit the supplies expense account by $22,500.
• • Supplies are the asset account, and it is increased. Hence, credit the supplies account by $22,500.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y4		Insurance expense	57	1,800
March	31	Prepaid insurance	14		1,800
		(To record the insurance expired)

Table (3)

Description:

• • Insurance expense is an expense account, and it is increased. Hence, debit the insurance expense account by $1,800.
• • Prepaid insurance is an asset account, and it is decreased. Hence, credit the prepaid insurance account by $1,800.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y4		Depreciation expense-Equipment	55	8,350
March	31	Accumulated depreciation- Equipment	17		8,350
		(To record the equipment depreciation)

Table (4)

Description:

• • Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $8,350.
• • Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $8,350.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y4		Depreciation expense-Truck	56	6,200
March	31	Accumulated depreciation- Truck	19		6,200
		(To record the truck depreciation)

Table (5)

Description:

• • Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $6,200.
• • Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $6,200.

Date		Description	Post Ref.	Debit ($)	Credit ($)
20Y4		Wages expense	51	600
March	31	Wages payable	22		600
		(To record the wages accrued)

Table (6)

Description:

• • Wages expense is an expense account, and it is increased. Hence, debit the wages expense account by $600.
• • Wages payable is a liability account, and it is increased. Hence, credit the wages payable account by $600.

To determine

To prepare: An adjusted trial balance for Company L, as of March 31, 20Y4.

Explanation of Solution

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.

Prepare an adjusted trial balance for Company L, as of March 31, 20Y4.

Company L
Adjusted Trial Balance
March 31, 20Y4
Accounts	Account Number	Debit Balances	Credit Balances
Cash	11	12,000
Supplies	13	7,500
Prepaid Insurance	14	1,800
Equipment	16	110,000
Accumulated depreciation- Equipment	17		33,350
Trucks	18	60,000
Accumulated depreciation- Trucks	19		21,200
Accounts payable	21		4,000
Wages Payable	22		600
Common stock	31		26,000
Retained earnings	32		70,000
Dividends		15,000
Service revenue	41		160,000
Wages expense	51	45,600
Supplies expense	52	22,500
Rent Expense	53	10,600
Truck Expense	54	9,000
Depreciation Expense- Equipment	55	8,350
Depreciation Expense- Trucks	56	6,200
Insurance Expense	57	1,800
Miscellaneous Expense	59	4,800
		315,150	315,150

Table (7)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $315,150.

To determine

The net income or net loss of L Company for the month of January and prepare the statement of retained earnings and balance sheet of L Company.

Explanation of Solution

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.

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

Company L
Income Statement
For the year ended March 31, 20Y4
Particulars	Amount ($)	Amount ($)
Revenue:
Service revenue		$160,000
Expenses:
Wages Expense	45,600
Supplies Expense	22,500
Rent Expense	10,600
Truck Expense	9,000
Depreciation Expense-Equipment	8,350
Depreciation Expense-Trucks	6,200
Insurance Expense	1,800
Miscellaneous Expense	4,800
Total Expenses		108,850
Net Income		$51,150

Table (8)

Statement of retained earnings: This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends are deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

The statement of retained earnings for the year ended March 31, 20Y4 is as follows:

Company L
Statement of Retained Earnings
For the Year Ended March 31, 20Y4
Particulars	Amount ($)	Amount ($)
Balance, April 1, 20Y4		$70,000
Add: Net income	$51,150
Less: Dividends	(15,000)
		36,150
Balance,  March 31, 20Y4		$106,150

Table (9)

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.

Prepare the balance sheet of Company L at March 31, 20Y4.

Company L
Balance Sheet
For the year ended March 31, 20Y4
Assets
Current Assets:
Cash		$12,000
Supplies		7,500
Prepaid Insurance		1,800
Total Current Assets			$21,300
Property, plant and equipment:
Equipment	$110,000
Less: Accumulated Depreciation- Equipment	(33,350)	$76,650
Trucks	$60,000
Less: Accumulated Depreciation- Trucks	(21,200)	38,800
Total property, plant, and equipment			115,450
Total Assets			$136,750
Liabilities
Current Liabilities:
Accounts Payable		$4,000
Wages Payable		600
Total Liabilities			$4,600
Owner’s Equity
Common stock		$26,000
Retained earnings		106,150
Total stockholder’s equity			132,150
Total Liabilities and Owners’ Equity			$136,750

Table (10)

It is one of the financial statements, which shows the assets, liabilities, and stockholders’ equity of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

Conclusion

Therefore, the net income for the year ended is $51,150, retained earnings for the year ended are $106,150, and the total assets and total liabilities plus stockholders’ equity at March 31, 20Y4 is $136,750 of Company L.

To determine

To Journalize: The closing entries for Company L.

Answer to Problem 4.4APR

Closing entry for revenue and expense accounts:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31, 20Y4	Service revenue	41	160,000
	Wages expense	51		45,600
	Supplies Expense	52		22,500
	Rent Expense	53		10,600
	Truck Expense	54		9,000
	Depreciation Expense–Equipment	55		8,350
	Depreciation Expense–Trucks	56		6,200
	Insurance Expense	57		1,800
	Miscellaneous Expense	59		4,800
	Retained Earnings	34		160,000
	(To close the revenues and expenses account. Then  the balance amount are  transferred to retained earnings  account)	32		51,150
March 31, 20Y4	Retained earnings	32	15,000
	Dividends	33		15,000
	(To close the dividend account to retained earnings account)

Table (11)

Explanation of Solution

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 such as retained earnings. It is passed at the end of the accounting period, to transfer the final balance.

Process of closing:

• • The balance of revenue and expense are transferred to retrained earnings account.
• • The balance of dividend account is transferred to retained earnings account to close the temporary accounts.

Rules of Debit and Credit:

• • Debit, the revenue account and retained earnings account balance. In addition debit retained earnings  account if it suffer loss (net loss)
• • Credit, the expense account, retained earnings  if it earn income (net income) and dividend account.
• • Fees earned are a revenue account. Since the amount of revenue is closed and transferred to retained earnings account. Here, AS Company earned an income of $51,150. Therefore, it is debited.
• • Wages Expense, Rent Expense, Insurance Expense, Utilities Expese, Supplies Expense, Depreciation Expense and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.

Working Note:

Calculate net income on income summary account:

$\begin{array}{c}\begin{array}{l}\text{Net Income or Net Loss on}\\ \text{ Income Summary account}\end{array}\}=\left(\begin{array}{l}\text{Total Revenues}-\\ \text{Total Expenses}\end{array}\right)\\ =\text{\$160,000}-\$108,850\\ =\$51,150\left(\text{ Net income}\right)\end{array}$

• • The Dividend is paid to the shareholders out of the Retained Earnings. Thus, Retained Earnings is debited since the earnings are decreased on payment of dividend.
• • Dividends is a component of stockholders’ equity account. It is credited because dividends are transferred to Retained Earnings account.

To determine

To prepare: The post–closing trial balance of Company L for the month ended March 31, 20Y4.

Explanation of Solution

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.

Prepare a post–closing trial balance of Company L for the month ended March 31, 20Y4 as follows:

Company L Post-closing Trial Balance March 31, 20Y4
Particulars	Account Number	Debit $	Credit $
Cash	11	12,000
Supplies	13	7,500
Prepaid insurance	14	1,800
Equipment	16	110,000
Accumulated depreciation- Equipment	17		33,350
Trucks	18	60,000
Accumulated depreciation- Trucks	19		21,200
Accounts payable	21		4,000
Wages payable	22		600
Common stock	31		26,000
Retained earnings			106,150
Total		191,300	191,300

Table (12)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $191,300.