Chapter 4, Problem 7AP

1.

To determine

Record the adjusting entries.

Answer to Problem 7AP

Record the adjusting entries:

Date		Account Title and Explanation	Debit ($)	Credit ($)
	(a)	Depreciation expense (+E, -SE)	3,000
		Accumulated depreciation (+xA, -A)		3,000
		(To record the accumulated depreciation)
	(b)	Insurance expense (+E, -SE)	450
		Prepaid insurance (-A)		450
		(To record insurance expense)
	(c)	Wages expense (+E, -SE)	2,100
		Wages payable (+L)		2,100
		(To record wages payable)
	(d)	Supplies expense (+E, -SE) $(\$1,300-\$800)$	500
		Supplies (-A)		500
		(To record supplies expenses)
	(e)	Income tax expense (+E,-SE)	3,150
		Income tax payable (+L)		3,150
		(To record  accrued income tax expense)

Table (1)

Explanation of Solution

Adjusting entries:

Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

(a)

• Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $3,000.
• Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $3,000.

(b)

• Insurance expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit insurance expense with $450.
• Prepaid insurance is an asset. There is a decrease in the asset. Hence, credit asset with $450.

(c)

• Wages expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit wages expense with $2,100.
• Wages payable is a liability. There is an increase in the liability. Hence, credit wages payable with $2,100.

(d)

• Supplies expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit supplies expense with $500.
• Supplies are asset. There is a decrease in the asset. Hence, credit asset with $500.

(e)

• Income tax expense is an expense account which is a component of stock holders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Hence, debit interest expense with $3,150.
• Income tax payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $3,150.

2.

To determine

Prepare an income statement and a classified balance sheet.

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:

Incorporation S
Income Statement
For the year ended December 31, 2014
Particulars	Amount ($)	Amount ($)
Operating Revenue:
Service revenue	48,000
Less: Operating Expenses:
Supplies expense	500
Insurance expense	450
Depreciation expense	3,000
Wages expense	2,100
Remaining expenses	32,900
Total expenses	38,950
Operating Income	9,050
Less:  Income tax expense	3,150
Net Income		$5,900
Earnings per share  $(\frac{\$5,900}{3,000\text{shares}})$		$1.97

Table (2)

The net income for the Incorporation S is $5,900.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Prepare a classified balance sheet:

Incorporation S
Balance Sheet
At December 31, 2014
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	3,150
Prepaid insurance	450
Total current assets	27,850	Total current liabilities	7,750
Equipment	27,000	Note payable, long term	5,000
Accumulated depreciation	(15,000)	Total liabilities	12,750
Other assets	5,100	Stockholders' Equity
		Common stock	300
		Additional paid-in capital	15,700
		Retained earnings (2)	16,200
		Total stockholders' equity	32,200
Total assets	$44,950	Total liabilities and stockholders' equity	$44,950

Table (3)

Working notes:

Calculation of retained earnings:

$\begin{array}{c}\text{Retained earnings = Unadjusted balance + Net income}\\ \text{= \$10,300+\$5,900}\\ =\$16,200\end{array}$ (2)

The balance sheet agreed with $44,950 by assets and liabilities.

3.

To determine

Record the closing entry at December 31, 2014.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the retained earnings account. Closing entries produce a zero balance in each temporary account.

Prepare closing entries at December 31, 2014:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales revenue(-R)	48,000
	Retained earnings(+SE)		5,900
	Supplies expense(-E)		500
	Insurance expense(-E)		450
	Depreciation expense(-E)		3,000
	Wages expense (-E)		2,100
	Remaining expense (-E)		32,900
	Income tax expense(-E)		3,150
	(To record the closing entries)

Table (4)

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