Chapter 4, Problem 7P

1.

To determine

Record the adjusting entries.

Answer to Problem 7P

Record the adjusting entries:

Date		Account Title and Explanation	Debit ($)	Credit ($)
	a.	Supplies expense (+E, -SE) $(\$900-\$300)$	600
		Supplies (-A)		600
		(To record supplies expenses)
	b.	Insurance expense (+E, -SE)	800
		Prepaid insurance (-A)		800
		(To record insurance expense)
	c.	Depreciation expense (+E, -SE)	3,700
		Accumulated depreciation (+xA, -A)		3,700
		(To record the accumulated depreciation)
	d.	Wages expense (+E, -SE)	640
		Wages payable (+L)		640
		(To record wages payable)
	e.	Income tax expense (+E,-SE)	5,540
		Income tax payable (+L)		5,540
		(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)

• 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 $600.
• Supplies are asset. There is a decrease in the asset. Hence, credit asset with $600.

(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 $800.
• Prepaid insurance is an asset. There is a decrease in the asset. Hence, credit asset with $800.

(c)

• 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 $3,700.
• Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $3,700.

(d)

• 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 $640.
• Wages payable is a liability. There is an increase in the liability. Hence, credit wages payable with $640

(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 $5,540.
• Income tax payable is a liability. There is an increase in the liability. Hence, credit, interest payable with $5,540.

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 T
Income Statement
For December 31, 2014
Particulars	Amount ($)	Amount ($)
Operating Revenue:
Service revenue	$61,360
Operating Expenses:
Supplies expense	600
Insurance expense	800
Depreciation expense	3,700
Wages expense	640
Remaining expenses	33,360
Total expenses		39,100
Operating Income	22,260
Income tax expense	5,540
Net Income		$16,720
Earnings per share  $\left(\frac{\$16,720}{5,000\text{shares}}\right)$		$3.34

Table (2)

The net income for the Incorporation T is $16,720.

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 T
Balance Sheet
At December 31, 2014
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 (1)	22,720
		Total stockholders' equity	42,120
Total assets	$68,300	Total liabilities and stockholders' equity	$68,300

Table (3)

Working notes:

Calculation of retained earnings:

$\begin{array}{c}\text{Retained earnings = Unadjusted balance + Net income}\\ \text{= \$6,000+\$16,720}\\ =\$22,270\end{array}$ (1)

The balance sheet agreed with $68,300 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)	61,360
	Retained earnings(+SE)		16,720
	Supplies expense(-E)		600
	Insurance expense(-E)		800
	Depreciation expense(-E)		3,700
	Wages expense (-E)		640
	Remaining expense (-E)		33,360
	Income tax expense(-E)		5,540
	(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.