Chapter 4, Problem 4SP

1.

To determine

Record and post the necessary closing entries as of December 31, 2015.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to permanent 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.

Record the closing entries as of December 31, 2015:

Date	Accounts and Explanation	Account Number	Debit  ($)	Credit ($)
2015	Computer service revenue (SE–)	401	31,284
December 31	Income Summary (SE+)	901		31,284
	(To close the revenue account)
2015
December 31	Income summary (SE–)	901	16,824
	Depreciation expense – Office equipment(SE+)	612		400
	Depreciation expense – Computer equipment(SE+)	613		1,250
	Wages expense (SE+)	623		3,875
	Insurance expense (SE+)	637		555
	Rent expense (SE+)	640		2,475
	Computer supplies expense (SE+)	652		3,065
	Advertising expense (SE+)	655		2,753
	Mileage expense (SE+)	676		896
	Miscellaneous expense (SE+)	677		250
	Repairs expense (SE+)	684		1,305
	(To close the expense accounts)
2015	Income Summary (SE–)	901	14,460
December 31	S.R’s Capital (SE+)	301		14,460
	(To close the income summary accounts)
2015	S.R’s Capital (SE–)	301	7,100
December 31	S.R’s Withdrawals (SE+)	302		7,100
	(To close withdrawals account.)

Table (1)

Working Note:

Calculate the amount of S.R’s capital (transferred):

$\begin{array}{c}\text{S}\text{.R's Capital =}\left(\begin{array}{l}\text{Total Revenues}\text{-}\\ \text{Total Expenses}\end{array}\right)\\ \text{=}\left(\text{\$31,284}-\text{\$16,824}\right)\\ \text{=\$14,460}\end{array}$

Revenue account:

In this closing entry, the service revenue earned account is closed by transferring the amount of service revenue account to Income summary account in order to bring the revenue account balance to zero. Hence, debit service revenue account and credit Income summary account.

Expense account:

In this closing entry, all expense accounts are closed by transferring the amount of total expense to the Income summary account in order to bring the expense account balance to zero. Hence, debit the Income summary account and credit all expenses account.

Income summary account:

Income summary account is a temporary account. This account is debited to close the net income value to S.R’s capital account.

S.R’s capital is a component of stockholders’ equity account. The value of S.R’s capital increased because net income is transferred. Therefore, it is credited.

Withdrawals account:

S.R’s capital is a component of owner’s equity. Thus, owners ‘equity is debited since the capital is decreased on owners’ drawings.

S.R’s withdrawals are a component of owner’s equity. It is credited because the balance of owners’ withdrawals account is transferred to owners ‘capital account.

Ledger:

Ledger is the book, where the debit and credit entries are recorded in the journal book are transferred to their relevant accounts. The entire accounts of the company are collectively called the ledger.

Posting the closing entries to the ledger account:

Table (2)

2.

To determine

Prepare a post-closing trial balance as of December 31, 2015.

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 December 31, 2015:

B Solutions
Post-Closing Trial Balance
December 31, 2015
Particulars	Debit($)	Credit ($)
Cash	48,372
Accounts receivable	5,668
Computer supplies	580
Prepaid insurance	1,665
Prepaid rent	825
Office equipment	8,000
Accumulated depreciation – Office equipment		400
Computer equipment	20,000
Accumulated depreciation – Computer equipment		1,250
Accounts payable		1,100
Wages payable		500
Unearned computer service revenue		1,500
S.R’s Capital		80,360
Totals	$85,110	$85,110

Table (3)