Chapter 4, Problem 4COP

From Recording Transactions (Including Adjusting Journal Entries) to Preparing Financial Statements and Closing Journal Entries (Chapters 2, 3, and 4)

Alison and Chuck Renny began operations of their furniture repair shop (Lazy Sofa Furniture, Inc.) on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, follows (amounts are rounded to thousands of dollars to simplify).

Transactions during 2018 (summarized in thousands of dollars) follow:

1. a. Borrowed $21 cash on July 1, 2018, signing a six-month note payable.
2. b. Purchased equipment for $18 cash on July 2.
3. c. Issued additional shares of common stock on July 3 for $5.
4. d. Purchased additional equipment on August 4, $3 cash.
5. e. Purchased, on account, supplies on September 5 for future use, $10.
6. f. On December 6, recorded revenues in the amount of $65, including $9 on credit and $56 received in cash.
7. g. Paid salaries and wages expenses on December 7, $35.
8. h. Collected accounts receivable on December 8, $8.
9. i. Paid accounts payable on December 9, $11.
10. j. Received a $3 deposit on December 10 for work to start January 15, 2019.

Data for adjusting journal entries on December 31:

1. k. Amortization for 2018, $3.
2. l. Supplies of $4 were counted on December 31, 2018.
3. m. Depreciation for 2018, $2.
4. n. Accrued interest on notes payable of $1.
5. o. Wages earned but not yet paid, $3.
6. p. Income tax for 2018 was $4 and will be paid in 2019.

Required:

1. 1. Set up T-accounts for the accounts on the trial balance and enter beginning balances. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you.
2. 2. Record journal entries for transactions (a) through (j).
3. 3. Post the journal entries from requirement 2 to T-accounts and prepare an unadjusted trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your answers to requirement 2.
4. 4. Record adjusting journal entries (k) through (p).
5. 5. Post the adjusting entries from requirement 4 and prepare an adjusted trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your previous answers.
6. 6. Prepare an income statement, statement of retained earnings, and balance sheet.
7. 7. Prepare the closing journal entry.
8. 8. Post the closing entry from requirement 7 and prepare a post-closing trial balance. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed for you using your previous answers.
9. 9. How much net income did Lazy Sofa Furniture, Inc., generate during 2018? Is the company financed primarily by liabilities or stockholders’ equity?

To determine

Prepare the necessary T-accounts.

Explanation of Solution

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:

(a)The title of the account

(b)The left or debit side

(c)The right or credit side

Prepare the necessary T-accounts as follows:

Cash (A)
Beg.	5	b	18
a	21	d	3
c	5	g	35
f	56	i	11
h	8
j	3
Bal.	31

Equipment (A)
Beg.	6
b	18
f	3
Bal.	27

Software (A)
Beg.	12
Bal.	12

Accounts  Payable (L)
		Beg.	7
i	11	e	11
		Bal.	6

Salaries and Wages  Payable (L)
		Beg.	0
		o	3
		Bal.	3

Deferred Revenue (L)
		Beg.	0
		j	3
		Bal.	3

Retained  Earnings (SE)
		Beg.	4
		CE1	9
		Bal.	13

Supplies Expense (E)
Beg.	0
l	8
		CE1	8
Bal.	0

Amortization  Expense (E)
Beg.	0
k	3
		CE1	3
Bal.	0

Accounts   Receivable (A)
Beg.	4
f	9	h	8
Bal.	5

Accumulated  Depreciation (xA)
		Beg.	0
		m	2
		Bal.	2

Notes Payable (short–term) (L)
		Beg.	0
		a	21
		Bal.	21

Interest  Payable (L)
		Beg.	0
		n	1
		Bal.	1

Common Stock (SE)
		Beg.	15
		c	5
		Bal.	20

Service  Revenue (R)
		Beg.	0
CE1	65	f	65
		Bal.	0

Depreciation  Expense (E)
Beg.	0
m	2
		CE1	2
Bal.	0

Interest Expense (E)
Beg.	0
n	1
		CE1	1
Bal.	0

Supplies (A)
Beg.	2
e	10
	12
		l	8
Bal.	4

Income Tax  Payable (L)
		Beg.	0
		p	4
		Bal.	4

Salaries and Wages  Expense (E)
Beg.	0
g	35
o	3
		CE1	38
Bal.	0

Income Tax  Expense (E)
Beg.	0
p	4
		CE1	4
Bal.	0

Note:

CE-Closing entry

To determine

Record the necessary journal entries for transactions (a) to (j).

Explanation of Solution

Record the necessary journal entries for transactions (a) to (j) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
a)	Cash (+A)			21
			Notes payable (Short-term) (+L)		21
	(To record  cash borrowed on note)
b)	Equipment (+A)			18
			Cash (-A)		18
	(To record purchase of equipment)
c)	Cash (+A)			5
		Common Stock (+SE)			5
	(To record issued common stock for cash)
d)	Equipment (+A)			3
			Cash (-A)		3
	(To record Purchase of additional equipment)
e)	Supplies (+A)			10
			Accounts payable  (+L)		10
	(To record supplies purchased for future use)
f)	Cash (+A)			56
	Accounts Receivable (+A)			9
		Service Revenue (+R, +SE)			65
	(To record service revenue earned during the year 2018)
j)	Salaries and Wages Expense (+E, -SE)			35
		Cash (-A)			35
	(To record salaries and wages expense incurred during 2018)
h)	Cash (+A)			8
		Accounts Receivable (-A)			8
	(To record cash collected on customer’s account)
j)	Accounts payable (-L)			11
		Cash (-A)			11
	(To record cash paid to creditors)
k)	Cash (+A)			3
		Deferred Revenue (+L)			3
	(To record receiving of customers deposit before doing work)

Table (1)

To determine

Prepare an unadjusted trial balance from requirement 2.

Explanation of Solution

Incorporation L&S
Unadjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	31
Accounts Receivable	5
Supplies	12
Equipment	27
Accumulated Depreciation–Equipment		0
Software	12
Accumulated Amortization		3
Accounts Payable		6
Notes Payable (short–term)		21
Salaries and Wages Payable		0
Interest Payable		0
Income Tax Payable		0
Deferred revenue		3
Common Stock		20
Retained Earnings		4
Service Revenue		65
Supplies Expense	0
Salaries and Wages Expense	35
Depreciation Expense	0
Amortization Expense	0
Interest Expense	0
Income Tax Expense	0
Total	122	122

Table (2)

To determine

Record the necessary the adjusting journal entries (k) to (p).

Explanation of Solution

Record the necessary the adjusting journal entries (k) to (p) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
k.	Amortization Expense (+E, -SE)			3
			Accumulated Amortization (+xA, -A)		3
	(To record adjusting entry for amortization expenses)
l.	Supplies expense (+E, -SE) (refer working note 1)			8
			Supplies(-A)		8
	(To record the use of supplies)
m.	Depreciation expense (+E, -SE)			2
		Accumulated depreciation –Equipment (+xA, -A)			2
	(To record adjusting entry for depreciation expense)
n.	Interest expense (+E, -SE)			1
			Interest payable(+L)		1
	(To record the adjusting entry for interest expense)
o.	Salaries and wages expense (+E, -SE)			3
			Salaries and wages payable (+L)		3
	(To record the adjusting entry for salaries and wages expenses)
p.	Income tax expense(+E, -SE)			4
			Income tax payable(+L)		4
	(To record the adjusting entry for income tax expense)

Table (3)

Working note 1:

Calculate the value of supplies expenses:

$\begin{array}{c}\text{Supplies expenses = }\left(\text{Beginning supplies+Purchase of supplies}-\text{Ending supplies}\right)\\ \text{=\$2+\$10}-\$4\\ =\$8\end{array}$

To determine

Prepare an adjusted trial balance from requirement 4.

Explanation of Solution

Prepare an adjusted trial balance for Incorporation L&S for December 31, 2018 as follows:

Incorporation L&S
Adjusted Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	31
Accounts Receivable	5
Supplies	4
Equipment	27
Accumulated Depreciation–Equipment		2
Software	12
Accumulated Amortization		6
Accounts Payable		6
Notes Payable (short–term)		21
Salaries and Wages Payable		3
Interest Payable		1
Income Tax Payable		4
Deferred revenue		3
Common Stock		20
Retained Earnings		4
Service Revenue		65
Supplies Expense	8
Salaries and Wages Expense	38
Depreciation Expense	2
Amortization Expense	3
Interest Expense	1
Income Tax Expense	4
Total	135	135

Table (4)

To determine

Prepare an income statement, Statement of retained earnings and balance sheet.

Explanation of Solution

Prepare an income statement for the year ended December 31, 2018 as follows:

Incorporation L&S
Income Statement
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	65
Total revenues		65
Less: Expenses
Salaries and wage expense	38
Supplies expense	8
Amortization expense	3
Depreciation expense	2
Interest expense	1
Income tax expense	4
Total expenses		56
Net income		9

Table (5)

Prepare a statement of retained earnings as follows:

Incorporation L&S
Statement of Retained Earnings
For the year ended December 31, 2018
(in thousands)
Particulars	Amount ($)	Amount ($)
Balance, January 1, 2018	4
Add: Net income	9
		13
Less: Dividends		(0)
Balance, December 31, 2018		13

Table (6)

Prepare a balance sheet for the year December 31, 2018 as follows:

Table (7)

To determine

Prepare the closing entry for Incorporation L&S on December 31, 2018.

Explanation of Solution

Prepare closing entries for Incorporation L&S on December 31, 2018 as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2018	Sales revenue(-R)	65
	Salaries and wages expense(-E)		38
	Depreciation expense(-E)		2
	Supplies expense(-E)		8
	Amortization expense (-E)		3
	Income tax expense(-E)		4
	Interest expense (-E)		1
	Retained earnings(+SE)		9
	(To record the closing entries for Incorporation L&S)

Table (8)

For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts are transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.

To determine

Prepare a post-closing trial balance from the requirement 7.

Explanation of Solution

Prepare a Post-closing trial balance for Incorporation L&S for December 31, 2018 as follows:

Incorporation L&S
Post-closing Trial Balance
At December 31, 2018
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	31
Accounts Receivable	5
Supplies	4
Equipment	27
Accumulated Depreciation–Equipment		2
Software	12
Accumulated Amortization		6
Accounts Payable		6
Notes Payable (short–term)		21
Salaries and Wages Payable		3
Interest Payable		1
Income Taxes Payable		4
Deferred revenue		3
Common Stock		20
Retained Earnings		13
Service Revenue		0
Salaries and Wages Expense	0
Supplies Expense	0
Depreciation Expense	0
Amortization expense	0
Interest Expense	0
Income Tax Expense	0
Total	79	79

Table (9)

To determine

Ascertain the net income of Incorporation L&S that has been generated during 2018 and explain whether the company has been financed primarily by liabilities or stockholders’ equity.

Explanation of Solution

The net income of Incorporation L&S for 2018:

Incorporation L&S generated net income of $9(thousand) in the year 2018 (refer table 5).

Whether the Incorporation L&S is financed primarily by liabilities or stockholders’ equity:

The invested amount of assets primarily comes from liabilities of Incorporation L&S, because the liabilities have financed $38 thousand of the Incorporation L&S’s total assets, whereas stockholder’s equity has financed $33 thousand.