Chapter 4, Problem 4.6COP

1.

To determine

To prepare: The journal entries for the transactions that occurred from January 1 to January 31.

Explanation of Solution

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.

Prepare the journal entries for the transactions that occurred from January 1 to January 31:

Date		Account Title and Explanation	Debit ($)	Credit ($)
January 1		Prepaid insurance (A+)	5,700
		Cash (A-)		5,700
		(To record the cash paid for the insurance expense)
January 2		Prepaid rent	4,200
		Cash (A-)		4,200
		(To record the payment of prepaid rent)
January 3		Cash (A+)	30,000
		Notes payable (L+)		30,000
		(To record the note payable)
January 4		Equipment (A+)	24,000
		Cash  (A–)		24,000
		(To record the purchase of an equipment)
January 5		Cash (A+)	6,000
		Common stock (SE+)		6,000
		(To record the cash invested in common stock)
January 6		Supplies  (A+)	1,000
		Accounts payable (L+)		1,000
		(To record the additional purchase of supplies)
January 7		Cash (A+)	600
		Accounts receivable (A-)		600
		(To record the accounts receivable)
January 8		Accounts payable (L-)	400
		Cash (A-)		40
		(To record the accounts payable)
January 9		Accounts receivable (A+)	10,400
		Service revenue (R+) (SE+)		10,400
		(To record the service provided to the customer on account)
January 10		Cash (A+)	7,600
		Service revenue (R+) (SE+)		7,600
		(To record the cash received for the service performed)
January 16		Salaries and wages expense (E+) (SE-)	2,200
		Cash (A-)		2,200
		(To record the payment of salaries and wages)
January 20		Cash (A+)	3,500
		Unearned revenue (L+)		3,500
		(To record the unearned revenue)
January 25		Cash (A+)	4,500
		Accounts receivable (A-)		4,500
		(To record the collection of cash from customer for service provided before)

Table (1)

2.

To determine

To prepare: the T-Accounts using the beginning balances that are given in the January 1 balance sheet.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholders’ 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:

• The title of the account
• The left or debit side
• The right or credit side

Prepare the T-Accounts:

Unadjusted trial balance:

Unadjusted trial balance is that statement which contains complete list of accounts with their unadjusted balances. This statement is prepared at the end of every financial period.

Prepare the unadjusted trial balance:

Incorporation FD
Unadjusted trial balance
As on 31st January
Account titles	Debit ($)	Credit ($)
Cash	26,600
Accounts receivable	6,100
Supplies	1,400
Prepaid insurance	5,700
Prepaid rent	4,200
Equipment	24,000
Accumulated depreciation		0
Accounts payable		1,100
Unearned revenue		3,500
Notes payable		30,000
Salaries and wages payable		0
Interest payable		0
Commonstock		17,000
Retained earnings		600
Service revenue		18,000
Salaries and wages expense	2,200
Supplies expense	0
Depreciation expense	0
Interest expense	0
Total	70,200	70,200

Table (2)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $70,200.

3.

To determine

To record: The adjusting journal entries that are needed at 31^st January.

Explanation of Solution

Adjusting entries:

Adjusting entries are those entries which are made at the end of the accounting period, to record the revenues in the period of which they have been earned and to record the expenses in the period of which have been incurred, as well as to update all the balances of assets and liabilities accounts on the balance sheet, and to ascertain accurate amount of net income (loss) on the income statement to maintain the records according to the accrual basis principle.

Record the adjusting journal entries:

Date		Account Title and Explanation	Debit ($)	Credit ($)
January 31	a.	Utilities Expense (E+, SE-)	1,200
		Accounts payable (L+)		1,200
		(To record the adjusting entry for utilities expense))
January 31	b.	Supplies expense (E+) (SE-)	1,150
		Supplies (A-)		1,150
		(To record the adjusting entry for supplies expense)
January 31	c.	Unearned revenue (L-)	2,100
		Service revenue (R+) (SE+)		2,100
		(To record the adjusting entry for unearned revenue)
January 31	d.	Interest expense (E+) (SE-)	150
		Interest payable (L+)		150
		(To record the adjusting entry for interest expense)
January 31	e.	Depreciation Expense (E+) (SE-)	500
		Accumulated depreciation- Equipment (xA+) (A-)		500
		(To record the adjusting entry for accumulated depreciation)
January 31	f.	Salaries and wages expense (E+) (SE-)	2,200
		Salaries and wages payable (L+)		2,200
		(To record the adjusting entry for salaries and wages expense)
January 31	g.	Insurance expense (E+) (SE-)	475
		Prepaid insurance (A-)		475
		(To record the adjusting entry for insurance expense)
January 31	g.	Rent expense (E+) (SE-)	350
		Prepaid rent (A-)		350
		(To record the adjusting entry for insurance expense)

Table (3)

Working note:

Calculate the amount of supplies expense:

$\begin{array}{c}\text{Supplies expense}=\text{Unadjusted balance}-\text{Supplies in hand}\\ =\$1,400-\$250\\ =\$1,150\end{array}$

Calculate the amount of unearned revenue:

$\begin{array}{c}\text{Unearned revenue}=\text{Total amount}\times \text{60\%}\\ =\$3,500\times 60\%\\ =\$2,100\end{array}$

Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense}=\text{Total amount}\times 60\%\\ =\$30,000\times 60\%\times \frac{1}{2}\left(\text{Months}\right)\\ =\$150\end{array}$

Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Accumulate depreciation}=\text{Total amount}\times \frac{1}{4}\times \frac{1}{2}\\ =\$24,000\times \frac{1}{4}\times \frac{1}{2}\\ =\$500\end{array}$

Calculate the amount of Insurance expense:

$\begin{array}{c}\text{Insurance expense}=\text{Total amount}\times \frac{1}{12}\left(\text{Months}\right)\\ =\$5,700\times \frac{1}{12}\\ =\$475\end{array}$

Calculate the amount of rent expense:

$\begin{array}{c}\text{Rent expense}=\text{Total amount}\times \frac{1}{12}\left(\text{Months}\right)\\ =\$4,200\times \frac{1}{12}\\ =\$350\end{array}$

4.

To determine

To prepare: The T-Account from the requirement 3 for the adjusting journal entries.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholders’ 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:

• The title of the account
• The left or debit side
• The right or credit side

Prepare the T-Accounts:

Adjusted trial balance:

Adjusted trial balance is that statement which contains complete list of accounts with their adjusted balances, after all relevant adjustments have been made. This statement is prepared at the end of every financial period.

Prepare the adjusted trial balance:

Incorporation FD
Adjusted trial balance
As on 31st January
Account titles	Debit ($)	Credit ($)
Cash	26,600
Accounts receivable	6,100
Supplies	250
Prepaid insurance	3,850
Prepaid rent	5,225
Equipment	24,000
Accumulated depreciation		500
Accounts payable		2,300
Unearned revenue		1,400
Notes payable		2,200
Salaries and wages payable		150
Interest payable		30,000
Commonstock		17,000
Retained earnings		600
Service revenue		20,100
Salaries and wages expense	4,400
Utilities expense	1,200
Supplies expense	1,150
Depreciation expense	500
Insurance expense	475
Rent expense	350
Interest expense	150
Total	74,250	74,250

Table (4)

Conclusion

The debit column and credit column of the adjusted trial balance are agreed, both having balance of $74,250.

5.

To determine

To prepare: The income statement for the month ended 31^st January.

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement:

Incorporation FD
Income statement
For the month end 31st January
Particulars	Amount( $)	Amount ($)
Revenue
Service revenue	20,100
Total revenue(A)		20,100
Expense
Salaries and wages	4,400
Utilities	1,200
Supplies	1,150
Depreciation	500
Insurance	475
Rent	350
Interest expense	150
Total expense (B)		8,225
Net income $\left(\text{A}-\text{B}\right)$		11,875

Table (5)

Thus the income statement of Incorporation FD is prepared and it shows the net income of $11,875.

Statement of retained earnings:

This is an equity statement which shows the changes in the stockholders’ equity over a period of time.

Prepare the statement of retained earnings:

Incorporation FD
Statement of Retained earnings
For the month end 31st January
Particulars	Amount( $)	Amount ($)
Retained earnings, beginning	600
Add: Net income	11,875
Less:Dividends	0
Retained earnings, end		12,475

Table (6)

Hence, the statement of retained earnings is prepared and the ending retained earnings are $12,475.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Prepare the classified balance sheet:

Incorporation FD
Classified balance sheet
As on 31st January
Particulars	Amount($)	Amount($)
current asset:
Cash	26,600
Accounts receivable	6,100
Supplies	250
Prepaid rent	3,850
Prepaid insurance	5,225
Total current assets		42,025
Non-current assets
Equipment	24,000
Accumulated depreciation-equipment net	500
Total non-current asset		24,500
Total assets		65,525
Liabilities and stock holders' equity:
Current liabilities:
Accounts payable	2,300
Unearned revenue	1,400
Salaries and wages payable	2,200
Interest payable	150
Total current liabilities		6,050
Non-current liabilities:
Notes payable	30,000
Total non-current liabilities		30,000
Total liabilities		36,050
Stock holders' equity	17,000
Retained earnings	12,475
Total stockholders' equity		29,475
Total liabilities and stock holders' equity		65,525

Table (7)

Conclusion

Hence, the classified balance sheet is prepared and the total assets and total liabilities and stockholders’ equity is $65,525.