Chapter 4, Problem 7AP

1.

To determine

Journal the adjusting entries for Corporation SBRS.

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 Corporation SBRS.

Transaction for adjustment (a):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Depreciation Expense (+E, –SE)			3,000
			Accumulated Depreciation (+XA, –A)			3,000
		(Record depreciation expense)

Table (1)

Transaction for adjustment (b):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Insurance Expense (+E, –SE)			450
			Prepaid Insurance (–A)			450
		(Record part of prepaid insurance expired)

Table (2)

Transaction for adjustment (c):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Wages Expense (+E, –SE)			2,100
			Wages Payable (+L)			2,100
		(Record accrued expense)

Table (3)

Transaction for adjustment (d):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Supplies Expense (+E, –SE)			500
			Supplies (–A)			500
		(Record part of supplies used)

Table (4)

Working Notes:

Calculation of supplies expense.

$\begin{array}{c}\text{Supplies expense=}\left(\begin{array}{l}\text{Supplies at the beginning of the period+}\\ \text{Supplies purchased during the period}-\\ \text{Supplies on the hand at the end of the period}\end{array}\right)\\ =\$1,300+\$0-\$800\\ =\$500\end{array}$

Transaction for adjustment (e):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Income Tax Expense (+E, –SE)			2,300
			Income Tax Payable (+L)			2,300
		(Record accrued expense)

Table (5)

2.

To determine

Prepare an income statement and a classified balance sheet for the current year for Incorporation SBRS.

Explanation of Solution

Prepare an income statement for the current year ended December 31 for Incorporation SBRS.

Incorporation SBRS
Income Statement
For the Current Year Ended December 31
Particulars	Amount ($)	Amount ($)
Operating Revenue:
Service revenue		$48,000
Operating Expenses:
Supplies expense	500
Insurance expense	450
Depreciation expense	3,000
Wages expense	27,300
Remaining expenses	7,700
Total expenses		38,950
Operating Income		9,050
Income tax expense		2,300
Net Income		$6,750
Earnings per share		$2.25

Table (6)

Working Notes:

Calculate earnings per share.

$\begin{array}{c}\text{Earnings}\text{per}\text{share = }\frac{\text{Net}\text{income }}{\text{Average number of shares of stock outstanding during the period }}\\ =\frac{\$6,750}{3,000\text{shares}}\\ =\$2.25\end{array}$

Prepare a classified balance sheet for the current year for Incorporation SBRS.

Incorporation SBRS
Balance Sheet
At December 31 of the Current Year
Assets	Amount ($)	Liabilities and Stockholders’ Equity	Amount ($)
Current Assets:		Current Liabilities:
Cash	$19,600	Accounts payable	2,500
Accounts receivable	7,000	Wages payable	2,100
Supplies	800	Income taxes payable	2,300
Prepaid insurance	450	Total current liabilities	6,900
Total current assets	27,850	Note payable, long term	5,000
Equipment	27,000	Total liabilities	11,900
Accumulated depreciation	(15,000)	Stockholders' Equity
Other assets	5,100	Common stock	300
		Additional paid-in capital	15,700
		Retained earnings	17,050
		Total stockholders' equity	33,050
Total assets	$44,950	Total liabilities and stockholders' equity	$44,950

Table (7)

Working Notes:

Calculate retained earnings.

$\begin{array}{c}\text{Retained earnings = Unadjusted balance + Net income}\\ \text{= \$10,300+\$6,750}\\ =\$17,050\end{array}$

3.

To determine

Prepare the closing entry for Incorporation SBRS for the current year, by using the adjusted balances.

Explanation of Solution

Prepare the closing entry for Incorporation SBRS for the current year, by using the adjusted balances.

Date		Account Title and Explanation		Post. Ref.	Debit ($)	Credit ($)
		Service Revenue (–R)			48,000
			Supplies Expense (–E)			500
			Depreciation Expense (–E)			3,000
			Insurance Expense (–E)			450
			Wages Expense (–E)			27,300
			Remaining Expenses (–E)			7,700
			Income Tax Expense (–E)			2,300
			Retained earnings (+SE)			6,750
		(Record closing of revenues and expenses)

Table (8)