Chapter 4, Problem 6AP

1.

To determine

Journal the adjusting entries for Company T.

Explanation of Solution

Adjusting entries are those entries which are recorded at the end of the year to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Journal the adjusting entries for Company T.

Transaction for item (b):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Accounts Receivable (+A)			1,500
			Service Revenue (+R, +SE)			1,500
		(Record accrued revenue)

Table (1)

Transaction for item (c):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Rent Expense (+E, –SE)			400
			Prepaid Rent (–A)			400
		(Record part of prepaid rent expired)

Table (2)

Working Notes:

Calculate rent expense.

$\begin{array}{c}\text{Rent expense = }\left(\begin{array}{l}\text{Value of prepaid rent before adjustment}-\\ \text{Value of prepaid rent after adjustment}-\end{array}\right)\\ \text{= \$1,200}-\text{\$800}\\ \text{= \$400}\end{array}$

Transaction for item (e):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Depreciation Expense (+E, –SE)			17,500
			Accumulated Depreciation (+XA, –A)			17,500
		(Record depreciation expense)

Table (3)

Working Notes:

Calculate depreciation expense.

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Value of accumulated depreciation after adjustment}-\\ \text{Value of accumulated depreciation before adjustment}-\end{array}\right)\\ \text{= \$70,000}-\text{\$52,500}\\ \text{= \$17,500}\end{array}$

Transaction for item (f):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Income Tax Expense (+E, –SE)			4,650
			Income Tax Payable (+L)			4,650
		(Record accrued expense)

Table (4)

Transaction for item (g):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Unearned Revenue (+L)			8,000
			Service Revenue (+R, +SE)			8,000
		(Record part of unearned revenue earned)

Table (5)

Working Notes:

Calculate service revenue.

$\begin{array}{c}\text{Service revenue = }\left(\begin{array}{l}\text{Value of unearned revenue before adjustment}-\\ \text{Value of unearned revenue after adjustment}-\end{array}\right)\\ \text{= \$16,000}-\text{\$8,000}\\ \text{= \$8,000}\end{array}$

2.

To determine

Ascertain the value of net income, and explain the reason for the correct net income.

Explanation of Solution

Ascertain the value of net income.

Particulars	Amounts Before Adjusting Entries	Amounts After Adjusting Entries
Revenues:
Service revenue	$83,000	$92,500
Expenses:
Salary expense	56,000	56,000
Depreciation expense		17,500
Rent expense		400
Income tax expense		4,650
Total expenses	56,000	78,550
Net income (loss)	$27,000	$13,950

Table (6)

Reason for correct net income: The correct net income is $13,950 because this the net income derived after the adjustments are recorded. This system incorporates the effect of revenue recognition and matching principles. The net income of $27,000 does not reflect this effect.

3.

To determine

Ascertain the earnings per share for Company T.

Explanation of Solution

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Calculate earnings per share.

$\begin{array}{c}\text{Earnings}\text{per}\text{share = }\frac{\text{Net}\text{income }}{\text{Average number of shares of stock outstanding during the period }}\\ \text{=}\frac{\text{\$13,950}}{\text{5,000}\text{shares}}\\ \text{=\$2}\text{.79 per share}\end{array}$

4.

To determine

Ascertain the total asset turnover ratio based on the corrected information and provide the inference of this ratio about Company T.

Explanation of Solution

Total asset turnover ratio: This ratio analyzes number of times sales or revenue generated from the total assets.

Calculate total asset turnover ratio.

$\begin{array}{c}\text{Total asset turnover = }\frac{\text{Sales}}{\text{ Average total assets}}\\ =\frac{\$92,500}{\left(\$136,000+\$158,300\right)÷2}\\ =\frac{\$92,500}{\$14,750}\\ =0.63\end{array}$

Inference: The total asset turnover ratio represents that Company T earns $0.63 for every $1 of assets invested. This ratio of Company T implies that Company T is more effective at generating revenue from the available assets.

5.

To determine

Prepare the closing entry for Company T for the current year, by using the adjusted balances.

Explanation of Solution

Prepare the closing entry for Company T for the current year, by using the adjusted balances.

Date		Account Title and Explanation		Post. Ref.	Debit ($)	Credit ($)
		Service Revenue (–R)			92,500
			Salary Expense (–E)			56,000
			Depreciation Expense (–E)			17,500
			Rent Expense (–E)			400
			Income Tax Expense (–E)			4,650
			Retained earnings (+SE)			13,950
		(Record closing of revenues and expenses)

Table (7)