Chapter 4, Problem 7P

1.

To determine

Journal the adjusting entries for Incorporation 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 Incorporation T.

Transaction for adjustment (a):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Supplies Expense (+E, –SE)			600
			Supplies (–A)			600
		(Record part of supplies used)

Table (1)

Working Notes:

Calculation of supplies expense.

$\begin{array}{c}\text{Supplies expense=}\left(\begin{array}{l}\text{Supplies at the beginning of the period+}\\ \text{Supplies purchased during the period}-\\ \text{Supplies on the hand at the end of the period}\end{array}\right)\\ =\$900+\$0-\$300\\ =\$600\end{array}$

Transaction for adjustment (b):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Insurance Expense (+E, –SE)			800
			Prepaid Insurance (–A)			800
		(Record part of prepaid insurance expired)

Table (2)

Transaction for adjustment (c):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Depreciation Expense (+E, –SE)			3,700
			Accumulated Depreciation (+XA, –A)			3,700
		(Record depreciation expense)

Table (3)

Transaction for adjustment (d):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Wages Expense (+E, –SE)			640
			Wages Payable (+L)			640
		(Record accrued expense)

Table (4)

Transaction for adjustment (e):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
December	31	Income Tax Expense (+E, –SE)			5,540
			Income Tax Payable (+L)			5,540
		(Record accrued expense)

Table (5)

2.

To determine

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

Explanation of Solution

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

Incorporation T
Income Statement
For the Current Year Ended December 31
Particulars	Amount ($)	Amount ($)
Operating Revenue:
Service revenue		$61,360
Operating Expenses:
Supplies expense	600
Insurance expense	800
Depreciation expense	3,700
Wages expense	16,840
Remaining expenses	17,160
Total expenses		39,100
Operating Income		22,260
Income tax expense		5,540
Net Income		$16,720
Earnings per share		$3.34

Table (6)

Working Notes:

Calculate earnings per share.

$\begin{array}{c}\text{Earnings}\text{per}\text{share = }\frac{\text{Net}\text{income }}{\text{Average number of shares of stock outstanding during the period }}\\ =\frac{\$16,720}{5,000\text{shares}}\\ =\$3.34\end{array}$

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

Incorporation T
Balance Sheet
At December 31 of the Current Year
Assets	Amount ($)	Liabilities and Stockholders’ Equity	Amount ($)
Current Assets:		Current Liabilities:
Cash	$42,000	Accounts payable	3,000
Accounts receivable	11,600	Wages payable	640
Supplies	300	Income taxes payable	5,540
Total current assets	53,900	Total current liabilities	9,180
Service trucks	19,000	Note payable, long term	17,000
Accumulated depreciation	(12,900)	Total liabilities	26,180
Other assets	8,300	Stockholders' Equity
		Common stock	400
		Additional paid-in capital	19,000
		Retained earnings	22,720
		Total stockholders' equity	42,120
Total assets	$68,300	Total liabilities and stockholders' equity	$68,300

Table (7)

Working Notes:

Calculate retained earnings.

$\begin{array}{c}\text{Retained earnings = Unadjusted balance + Net income}\\ \text{= \$6,000+\$16,720}\\ =\$22,270\end{array}$

3.

To determine

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

Explanation of Solution

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

Date		Account Title and Explanation		Post. Ref.	Debit ($)	Credit ($)
		Service Revenue (–R)			61,360
			Supplies Expense (–E)			600
			Depreciation Expense (–E)			3,700
			Insurance Expense (–E)			800
			Wages Expense (–E)			16,840
			Remaining Expenses (–E)			17,160
			Income Tax Expense (–E)			1,155
			Retained earnings (+SE)			16,720
		(Record closing of revenues and expenses)

Table (8)