Chapter 4, Problem 4PB

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

The unadjusted trial balance of Recessive Interiors at January 31, 20Y2, the end of the year, follows:

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

1. (a) Supplies on hand at January 31 are $2,850.
2. (b) Insurance premiums expired during the year are $3,150.
3. (c) Depreciation of equipment during the year is $5,250.
4. (d) Depreciation of trucks during the year is $4,000.
5. (e) Wages accrued but not paid at January 31 are $900.

Instructions

1. 1. For each account listed in the unadjusted 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. 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. 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. 4. Prepare an adjusted trial balance.
5. 5. Prepare an income statement, a statement of stockholders’ equity, and a balance sheet. During the year ended January 31, 20Y2, additional common stock of $7,500 was issued.
6. 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. 7. Prepare a post-closing trial balance.

To determine

Prepare the T-accounts.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Prepare the T-accounts:

Account:         Cash                                                              Account no. 11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓			13,100

Account:   Supplies                                                            Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓			113,000

Account:  Accumulated Depreciation-Office equipment        Account no. 17
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓			90,000

Account:  Accumulated Depreciation- Truck                      Account no. 19
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓				4,500

Account:     Wages Payable                                                        Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Adjusting	26		900		900

Account:     Common Stock                                                        Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
January	31	Balance	✓		900		30,000

Account:          Retained Earnings                                                   Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓			3,000
	31	Closing	27		3,000

Account:          Income Summary                                                   Account no. 34
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓				155,000
	31	Closing	27	155,000

Account:  Wages expense                                                           Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	31	Balance	✓			7,600
	31	Closing	27		7,600

Account:   Truck Expense                                                          Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
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 ($)	Credit ($)
20Y2
January	1	Balance	✓			5,450
	31	Closing	27		5,450

Table (1)

To determine

Enter the unadjusted trial balance on an end of period spreadsheet and complete the spread sheet.

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.

Prepare the end of period spreadsheet and enter the unadjusted trial balance:

Table (2)

To determine

Prepare the adjusting entries and post it into the T-accounts.

Explanation of Solution

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.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Prepare the adjusting entries:

Date		Account title and explanation	Post. Ref.	Debit ($)	Credit ($)
20Y2
January	31	Supplies Expense	55	5,150
		Supplies $\left(\text{\$8,000}-\text{\$2,850}\right)$	13		5,150
		(To record the supplies expense)
	31	Insurance Expense	57	3,150
		Prepaid Insurance	14		3,150
		(To record the insurance expense)
	31	Depreciation Expense-Equipment	54	5,250
		Accumulated Depreciation-equipment	17		5,250
		(To record the depreciation expense)
	31	Depreciation Expense-Trucks	56	4,000
		Accumulated Depreciation-Trucks	19		4,000
		(To record the depreciation expense)
	31	Wages Expense	51	900
		Wages Payable	22		900
		(To record the wages expense)

Table (3)

To determine

Prepare an adjusted trial balance as of January 31, 20Y2.

Explanation of Solution

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.

Prepare an adjusted trial balance as of January 31, 20Y2:

Company RI
Adjusted Trial Balance
As of January 31, 20Y2
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
Totals		$335,150	$335,150

Table (4)

To determine

Prepare an income statement, a statement of stockholders, equity and a balance sheet for the year ended January 31, 20Y2.

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 an income statement for the year ended January 31, 20Y2:

Company RI
Income Statement
For the year ended January 31, 20Y2
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	($108,850)
Total Expenses		$46,150

Table (5)

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Prepare a statement of stockholders’ equity for the year ended January 31, 20Y2:

Company RI
Statement of Stockholders’ Equity
For the Year Ended January 31, 20Y2
Particulars	Common stock	Retained earnings	Total
Beginning balances, February 1, 20Y1	$22,500	$96,400	$118,900
Issued common stock	$7,500	$0	$7,500
Net income	$0	$46,150	$46,150
Dividends	$0	($3,000)	($3,000)
Ending balances, January 31, 20Y2	$30,000	$139,550	$169,550

Table (6)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet as of January 31, 20Y2:

Company RI
Balance Sheet
For the year ended January 31, 20Y2
Assets
Current Assets:	Amount ($)	Amount ($)	Amount ($)
Cash		$13,100
Supplies		2,850
Prepaid Insurance		4,350
Total Current Assets			$20,300
Property, plant and equipment:
Equipment	$113,000
Less: Accumulated Depreciation- Equipment	17,250	95,750
Trucks	90,000
Less: Accumulated Depreciation- Trucks	31,100	58,900
Total property, plant, and equipment			154,650
Total Assets			$174,950
Liabilities
Current Liabilities:
Accounts Payable		$4,500
Wages Payable		900
Total Liabilities			$5,400
Stockholder’s Equity
Common Stock		30,000
Retained earnings		139,550
Total Stock holder’s Equity			169,550
Total Liabilities and Stockholders’ Equity			$174,950

Table (7)

To determine

Prepare the closing entries.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Closing entry for revenue, expense accounts and dividend account:

Date		Account title and explanation	Post ref	Debit ($)	Credit ($)
20Y2
January 31		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
		Retained Earnings (1)	32		46,150
		(To close the revenue account and expense account to retained earnings account)
20Y2		Retained Earnings	32	3,000
January 31		Dividends	33		3,000
		(To close the dividends accounts to retained earnings account)

Table (7)

To determine

Prepare a post-closing trial balance as of January 31, 20Y2.

Explanation of Solution

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.

Prepare a post-closing trial balance as of January 31, 20Y2:

Company RI Post-closing Trial Balance January 31, 20Y2
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 (8)