Chapter 4, Problem 4.4BPR

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

The unadjusted trial balance of Recessive Interiors at January 31, 2018, the end of the year, follows:

Recessive Interiors Unadjusted Trial Balance January 31, 2018
	Account No.	Debit Balances	Credit Balances
Cash.....................................................	11	13,100
Supplies.................................................	13	8,000
Prepaid Insurance.........................................	14	7,500
Equipment...............................................	16	113,000
Accumulated Depreciation—Equipment....................	17		12,000
Trucks....................................................	18	90,000
Accumulated Depreciation—Trucks........................	19		27,100
Accounts Payable.........................................	21		4,500
Common Stock...........................................	31		30,000
Retained Earnings........................................	32		96,400
Dividends................................................	33	3,000
Service Revenue..........................................	41		155,000
Wages Expense...........................................	51	72,000
Rent Expense.............................................	52	7,600
Truck Expense............................................	53	5,350
Miscellaneous Expense....................................	59	5,450
		325,000	325,000

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

(A) Supplies on hand at January 31 are $2,850.

(B) Insurance premiums expired during the year are $3,1 SO.

(C) Depreciation of equipment during the year is $5,250.

(D) Depreciation of trucks during the year is $4,000.

(E) Wages accrued but not paid at January 31 are $900.

Instructions

1. For each account listed in the unadjusted trial balance, enter the balance in the appropriate Ba lance 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 accounts 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 Recessive Interiors’ chart of accounts should be used: Wages Payable, 22; Depreciation Expense—Equipment, 54; Supplies Expense, 55; Depreciation Expense—Trucks, 56; Insurance Expense, 57.

4. Prepare an adjusted trial balance.

5. Prepare an income statement, a retained earnings statement, and a balance sheet.

6. Journalize and post the closing entries. Record the closing entries on Page 27 of the journal. (Income Summary is account #34 in the chart of accounts.) Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry.

7. Prepare a post-closing trial balance.

To determine

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:

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

Account:         Cash                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			13,100

Account:   Supplies                                                            Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			8,000
	31	Adjusting	26		5,150	2,850

Account:    Prepaid Insurance                                                  Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			7,500
	31	Adjusting	26		3,150	4,350

Account:    Equipment                                                             Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			113,000

Account:  Accumulated Depreciation-Office equipment        Account no. 17
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓				12,000
	31	Adjusting	26		5,250		17,250

Account:    Trucks                                                                    Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			90,000

Account:  Accumulated Depreciation- Truck                      Account no. 19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓				27,100
	31	Adjusting	26		4,000		31,100

Account:     Accounts Payable                                                      Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓				4,500

Account:     Wages Payable                                                        Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Adjusting	26		900		900

Account:     Common Stock                                                        Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓		900		30,000

Account:          Retained Earnings                                                   Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓ 1				96,400
	31	Closing	27		46,150		142,550
	31	Closing	27	3,000			139,550

Account:        Dividends                                                              Account no. 33
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			3,000
	31	Closing	27		3,000

Account:          Income Summary                                                   Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Closing	27		155,000		155,000
	31	Closing	27	108,850			46,150
	31	Closing	27	46,150

Account:          Service revenue                                                         Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓				155,000
	31	Closing	27	155,000

Account:  Wages expense                                                           Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	1	Balance	✓			72,000
	31	Adjusting	26	900		72,900
	31	Closing	27		72,900

Account:   Rent expense                                                               Account no. 52
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			7,600
	31	Closing	27		7,600

Account:   Truck Expense                                                          Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Balance	✓			5,350
	31	Closing	27		5,350

Account:   Depreciation Expense- Equipment                                Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Adjusting	26	5,250		5,250
	31	Closing	27		5,250

Account:   Supplies Expenses                                                         Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Adjusting	26	5,150		5,150
	31	Closing	27		5,150

Account:   Depreciation Expense- Trucks                                      Account no. 56
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	31	Adjusting	26	4,000		4,000
	31	Closing	27		4,000

Account:   Insurance expense                                                     Account no. 57
Date		Item	Post. Ref		Debit  ($)	Credit ($)	Balance
							Debit ($)	Credit ($)
2018
January	31	Adjusting		26	3,150		3,150
	31	Closing		27		3,150

Account:   Miscellaneous expense                                                   Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2018
January	1	Balance	✓			5,450
	31	Closing	27		5,450

To determine

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

Explanation of Solution

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

The adjusting entries are journalized as follows:

Date		Description	Post Ref.	Debit ($)	Credit ($)
2018		Wages expense	51	900
January	31	Wages payable	22		900
		(To record the wages accrued)

Table (2)

• Wages expense is an expense account, and it is increased. Hence, debit the wages expense account by $900.
• Wages payable is a liability account, and it is increased. Hence, credit the wages payable account by $900.

Date		Description	Post Ref.	Debit ($)	Credit ($)
2018		Depreciation expense-Equipment	54	5,250
January	31	Accumulated depreciation- Equipment	17		5,250
		(To record the equipment depreciation)

Table (3)

• Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $5,250.
• Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $5,250.

Date		Description	Post Ref.	Debit ($)	Credit ($)
2018		Depreciation expense-Truck	56	4,000
January	31	Accumulated depreciation- Truck	19		4,000
		(To record the truck depreciation)

Table (4)

• Depreciation expense is an expense account, and it is increased. Hence, debit the wages expense account by $4,000.
• Accumulated depreciation is a contra asset account, and it is increased. Hence, credit the accumulated depreciation account by $4,000.

Date		Description	Post Ref.	Debit ($)	Credit ($)
2018		Supplies expense	55	5,150
January	31	Supplies $\left(\text{\$8,000}-\text{\$2,850}\right)$	13		5,150
		(To record the supplies used)

Table (5)

• Supplies expense is an expense account, and it is increased. Hence, debit the supplies expense account by $5,150.
• Supplies are the asset account, and it is increased. Hence, credit the supplies account by $5,150.

Date		Description	Post Ref.	Debit ($)	Credit ($)
2018		Insurance expense	57	3,150
January	31	Prepaid insurance	14		3,150
		(To record the insurance expense)

Table (6)

• Insurance expense is an expense account, and it is increased. Hence, debit the insurance expense account by $3,150.
• Prepaid insurance is an asset account, and it is decreased. Hence, credit the prepaid insurance account by $3,150.

To determine

To prepare: An adjusted trial balance for R interiors, as of January 31, 2018.

Explanation of Solution

Prepare an adjusted trial balance for R interiors, as of January 31, 2018.

R interiors
Adjusted Trial Balance
January 31, 2018
Accounts	Account Number	Debit Balances	Credit Balances
Cash	11	13,100
Supplies	13	2,850
Prepaid Insurance	14	4,350
Equipment	16	113,000
Accumulated depreciation- Equipment	17		17,250
Trucks	18	90,000
Accumulated depreciation- Trucks	19		31,100
Accounts payable	21		4,500
Wages Payable	22		900
Common Stock	31		30,0 00
Retained earnings	32		96,400
Dividends	33	3,000
Service revenue	41		155,000
Wages expense	51	72,900
Rent expense	52	7,600
Truck Expense	53	5,350
Depreciation Expense- Equipment	54	5,250
Supplies expense	55	5,150
Depreciation Expense- Trucks	56	4,000
Insurance Expense	57	3,150
Miscellaneous Expense	59	5,450
		335,150	335,150

Table (7)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $335,150.

To determine

The net income or net loss of R interiors for the month of January.

Explanation of Solution

The net income of R interiors for the month of January is $46,150.

R interiors
Income Statement
For the year ended January 31, 2018
Particulars	Amount ($)	Amount ($)
Revenue:
Laundry revenue		$155,000
Expenses:
Wages Expense	$72,900
Rent Expense	7,600
Truck Expense	5,350
Depreciation Expense-Equipment	5,250
Supplies Expense	5,150
Depreciation Expense-Trucks	4,000
Insurance Expense	3,150
Miscellaneous Expense	5,450
Total Expenses		108,850
Net Income		$46,150

Table (8)

Conclusion

Hence, the net income of R interiors for the year ended January 31, 2018 is $46,150.

To determine

To Journalize: The closing entries for R interiors.

Explanation of Solution

Closing entry for revenue and expense accounts:

Journal                                            Page 27
Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2018	Service Revenue	41	155,000
	Income Summary	34		155,000
	(To record the closure of revenues account )
January 31	Income Summary	34	108,850
	Wages Expense	51		72,900
	Rent Expense	52		7,600
	Truck Expense	53		5,350
	Depreciation Expense-Equipment	54		5,250
	Supplies Expense	55		5,150
	Depreciation Expense-Truck	56		4,000
	Insurance Expense	57		3,150
	Miscellaneous Expense	59		5,450
	(To close the revenues and expenses account. Then  the balance amount are  transferred to income summary account)
January 31	Income Summary	34	46,150
	Retained earnings	32		46,150
	(To record the closure of net income from income summary to retained earnings)
January 31	Retained earnings	32	3,000
	Dividends	33		3,000
	(To record the closure of dividend to retained earnings)

Table (11)

Service revenue account has a normal credit balance of $155,000 in total, now to close this account, the service revenue account must be debited with $155,000 and, income summary account must be credited with $155,000.

• In this closing entry, the fees earned account balance is being transferred to the income summary account, to bring the revenues account balance to zero.
• Thereby, the income summary account balance gets increased by $155,000 and, the revenue account balance gets decreased by $155,000.

All expenses accounts have a normal debit balance, the total of expenses are $108,850 have to be closed by transferring these account balances to the income summary account. All expenses account must be credited, and the income summary account must be debited with $108,850.

• In this closing entry, all the expenses account balances are transferred to the income summary account, to bring the expenses account balances to zero.
• Thereby, both the income summary account, and the expenses account balances get decreased by $108,850.

Determined amount balance of income summary is $46,150, which has to be closed by debiting the income summary account with $46,150, and crediting the retained earnings account with $46,150.

• In this closing entry, the income summary account balance is being transferred to the retained earnings account, to bring the income summary account balance to zero.
• Thereby, the income summary account gets decreased, and the retained earnings account balance gets increased by $46,150.

Dividends account has a normal debit balance of $3,000, now to close this account, retained earnings account must be debited with $3,000 and, dividend account must be credited with $3,000.

• In this closing entry, the dividend account balance is being transferred to the retained earnings account, to bring the dividend account balance to zero.
• Thereby, the retained earnings account balance gets increased by $3,000 and, the dividend account balance gets decreased by $3,000.

To determine

To prepare: The post–closing trial balance of R interiors for the month ended January 31, 2018.

Explanation of Solution

Prepare a post–closing trial balance of R interiors for the month ended January 31, 2018 as follows:

R interiors Post-closing Trial Balance January 31, 2018
Particulars	Account Number	Debit $	Credit $
Cash	11	13,100
Supplies	13	2,850
Prepaid insurance	14	4,350
Equipment	16	113,000
Accumulated depreciation- Equipment	17		17,250
Trucks	18	90,000
Accumulated depreciation- Trucks	19		31,100
Accounts payable	21		4,500
Wages payable	22		900
Common Stock	31		30,000
Retained earnings	32		139,550
Total		223,300	223,300

Table (12)

Conclusion

The debit column and credit column of the post–closing trial balance are agreed, both having balance of $223,300