Chapter 5, Problem 1CP

a.

To determine

Prepare the general journal entry of Incorporation PSS.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare the general journal entry of Incorporation PSS as follows:

Event	Account titles and Explanation	Debit	Credit
1.	Salaries payable	$1,500
	Cash		$1,500
	(To record cash made for salaries payable)
2.	Merchandise inventory	$5,000
	Cash		$5,000
	(To record the cash purchase of inventories)
3.	Accounts payable	$980
	Cash		$980
	(To record the payment made to creditors on account)
4.	Prepaid rent (van)	$4,800
	Cash		$4,800
	(To record the payment of van rent)
5.	Prepaid rent (office)	$7,200
	Cash		$7,200
	(To record the payment of office rent)
6.	Supplies	$500
	Cash		$500
	(To record purchase of supplies)
7.	Merchandise Inventory	$6,500
	Cash		$6,500
	(To record the cash purchase of inventories)
8.	Merchandise inventory	$7,950
	Accounts payable		$7,950
	(To record the purchase of inventories on account)
9a.	Accounts receivable	$22,000
	Cash	$11,000
	Alarm sales revenue		$33,000
	(To record the alarm sales revenue earned by cash and on account)
9b.	Cost of goods sold	$15,250
	Merchandise inventory		$15,250
	(To record the adjustment from cost to market value for inventory write-downs)
10a.	Alarm Sales Revenue	$550
	Cash		$550
	(To record revenue refunded to the customer who returned the inventory sold)
10b.	Merchandise inventory	$260
	Cost of goods sold		$260
	(To record the sales return)
11.	Salaries expense	$21,000
	Cash		$21,000
	(To record salaries expense)
12.	Accounts payable	$45,000
	Monitoring Service revenue		$45,000
	(To record services rendered on account)
13.	Cash	$1,200
	Unearned revenue		$1,200
	(To record the unearned service revenue)
14.	Cash	$74,000
	Accounts receivable		$74,000
	(To record the cash collected from accounts receivable)
15.	Accounts payable	$6,000
	Cash		$6,000
	(To record the payment made to creditors on account)
16.	Advertising expense	$3,500
	Cash		$3,500
	(To record the advertising expense)
17.	Utilities expense	$2,320
	Cash		$2,320
	(To record the utilities expense)
18.	Dividends	$15,000
	Cash		$15,000
	(To record the dividends paid)
19.	Supplies expense	$450
	Supplies		$450
	(To record adjustment entry made)
20.	Rent expense	$10,800
	Prepaid rent		$10,800
	(To adjust the prepaid rent)
21.	Unearned revenue	$300
	Monitoring service revenue		$300
	(To record the monitoring service revenue earned)
22.	Salaries expense	$1,000
	Salaries payable		$1,000
	(To record salaries expense)

Table (1)

Working notes:

Calculate merchandise inventory on 1/15.

$\begin{array}{c}\text{Merchandise inventory = Units }\times \text{Cost per unit}\\ \text{= 20 units }\times \text{\$250}\\ \text{= \$5,000}\end{array}$ (1)

Calculate merchandise inventory on 8/1.

$\begin{array}{c}\text{Merchandise inventory = Units }\times \text{Cost per unit}\\ \text{= 25 units }\times \text{\$260}\\ \text{= \$6,500}\end{array}$ (2)

Calculate merchandise inventory on 9/5.

$\begin{array}{c}\text{Merchandise inventory = Units }\times \text{Cost per unit}\\ \text{= 30 units }\times \text{\$265}\\ \text{= \$7,950}\end{array}$ (3)

Calculate total cost of goods sold.

Particulars	Units (A)	Per unit (B)	Amount (A×B)
Beginning inventory	9	$240	$2,160
Add: Inventory purchased (1/15)	20	$250	$5,000
Inventory purchased (8/1)	25	$260	$6,500
Inventory purchased	6	$265	$1,590
Total cost of goods sold	60		$15,250

Table (2) (4)

Calculate supplies expense.

$\begin{array}{c}\text{Supplies expense =}\text{Purchase of supplies }-\text{Ending balance of supplies }\\ \left(\text{\$150 + \$500}\right)-\$200\\ =\$450\end{array}$ (5)

Calculate rent expense.

$\begin{array}{c}\text{Rent expense = Expired van lease paid +}\text{Expired rent paid (Year 4 and Year 5)}\\ \text{= \$4,000}\text{+}\left(\$2,000+\$4,800\right)\\ =\$10,800\end{array}$ (6)

Calculate Expired van lease payment.

$\begin{array}{c}\text{Expired van lease payment = Van}\times \text{Time period}\\ \text{= \$4,800 }\times \frac{10\text{months}}{12\text{months}}\\ =\$4,000\end{array}$ (7)

Calculate expired office rent payment for year 4 and year 5.

$\begin{array}{c}\text{Expired office rent payment for Year 4 = Office}\times \text{Time period}\\ \text{= \$6,000 }\times \frac{4\text{months}}{12\text{months}}\\ =\$2,000\end{array}$ (8)

$\begin{array}{c}\text{Expired office rent payment for Year 5 = Office}\times \text{Time period}\\ \text{= \$7,200 }\times \frac{8\text{months}}{12\text{months}}\\ =\$4,800\end{array}$ (9)

Calculate unearned revenue.

$\begin{array}{c}\text{Unearned revenue = Monitoring service revenue }\times \text{Time period}\\ \text{= \$1,200 }\times \frac{3\text{months}}{12\text{months}}\\ =\$300\end{array}$ (10)

b.

To determine

Post the transactions of T-Accounts for Incorporation PSS.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a)      The title of the account

b)      The left or debit side

c)      The right or credit side

Post the transactions of T-Accounts for Incorporation PSS as follows:

Figure (1)

Figure (2)

Figure (3)

c.

To determine

Prepare trail balance of Incorporation PSS.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare trail balance of Incorporation PSS as follows:

Incorporation PSS
Trail Balance
December 31, Year 5
Particulars	Debit	Credit
Cash	$74,210
Accounts Receivable	$13,500
Supplies	$200
Prepaid rent	$3,200
Merchandise inventory	$6,620
Land	$4,000
Accounts Payable		$1,950
Unearned revenue		$900
Salaries payable		$1,000
Common stock		$50,000
Retained earnings		$39,190
Dividends	$15,000
Alarm sales revenue		$32,450
Monitoring service revenue		$45,300
Cost of goods sold	$14,990
Advertising expense	$3,500
Rent expense	$10,800
Salaries expense	$22,000
Supplies expense	$450
Utilities expense	$2,320
Total	$170,790	$170,790

Table (3)

d.

To determine

Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows of Incorporation PSS.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Incorporation PSS as follows:

Incorporation PSS
Income Statement
December 31, Year 5
Particulars	Amount	Amount
Revenues:
Monitoring Service Revenue	$45,300
Alarm Sales Revenue	$32,450
Total Revenues		$77,750
Less: Cost of goods sold		$14,990
Gross margin		$62,760
Less: Expenses:
Advertising expense	$3,500
Rent expense	$10,800
Salaries expense	$22,000
Supplies expense	$450
Utilities expense	$2,320
Total Operating expenses		$39,070
Net operating income		$23,690
Less: Income tax expense		$0
Net income		$23,690

Table (4)

Statement of changes in Stockholder’s equity:

This statement reports the beginning stockholders’ equity and all the changes, which led to ending stockholders’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholders’ equity to arrive at the result, ending stockholders’ equity.

Prepare the statement of changes in stockholders’ equity of Incorporation PSS as follows:

Incorporation PSS
Statement of Changes in Stockholders' Equity
December 31, Year 5
Particulars	Amount	Amount
Opening Common stock	$50,000
Add: Issue of common stock	$0
Ending common stock		$50,000
Opening retained earnings	$39,190
Add: Net income	$23,690
Less: Dividends	$15,000
Ending retained earnings		$47,880
Total stockholders' equity		$97,880

Table (5)

Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the Balance sheet of Incorporation PSS as follows:

Incorporation PSS
Balance Sheet
December 31, Year 5
Particulars	Amount	Amount
Assets:
Cash	$74,210
Accounts receivable	$13,500
Supplies	$200
Prepaid rent	$3,200
Merchandise inventory	$6,620
Land	$4,000
Total Assets		$101,730
Liabilities
Accounts payable	$1,950
Salaries payable	$1,000
Unearned revenue	$900
Total liabilities		$3,850
Stockholders' Equity
Common stock	$50,000
Retained earnings	$47,880
Total stockholders' equity		$97,880
Total liabilities and Stockholders' equity		$101,730

Table (6)

Statement of cash flows:

Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the statement of cash flows for Incorporation PSS as follows:

Incorporation PSS
Statement of Cash Flows
December 31, Year 5
Particulars	Amount	Amount
Cash flows from Operating Activities:
Cash receipts from customers	$85,650
Cash payment for expenses	($59,300)
Net cash flow from Operating Activities		$26,350
Cash flow from Investing Activities:
Cash flow from Financing Activities:
Cash payments for dividends	($15,000)
Net cash flow from Financing Activities		($15,000)
Net increase in cash		$11,350
Add: Opening cash balance		$62,860
Ending cash balance		$74,210

Table (7)

Working notes:

Calculate total cash from customers.

Particulars	Amount
Net sales	$11,650
Add: Collection of Accounts Receivable	$74,000
Total cash from customers	$85,650

Table (8) (11)

Calculate total cash payment for expenses.

Particulars	Amount
Payment of prepaid rent	$12,000
Payment of salaries	$22,500
Payment of accounts payable	$6,980
Payment of advertising	$3,500
Payment for Supplies	$500
Payment for utilities	$2,320
Payment for Inventory	$11,500
Total cash payment for expenses	$59,300

Table (9) (12)

e.

To determine

Prepare to close the temporary accounts to retained earnings of Incorporation PSS.

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Prepare to close the temporary accounts to retained earnings of Incorporation PSS as follows:

Date	Account titles and Explanation	Debit	Credit
December 31	Alarm sales revenue	$32,450
	Monitoring service revenue	$45,300
	Retained earnings		$77,750
	(To close all revenue accounts)
December 31	Retained earnings	$54,060
	Cost of goods sold		$14,990
	Advertising expense		$3,500
	Rent expense		$10,800
	Salaries expense		$22,000
	Supplies expense		$450
	Utilities expense		$2,320
	(To close all expenses accounts)
December 31	Retained earnings	$15,000
	Dividends		$15,000
	(To record dividend account)

Table (10)

f.

To determine

Post the closing entries to the T-Accounts and prepare an after closing trail balance of Incorporation PSS.

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

Post the closing entries to the T- Accounts of Incorporation PSS as follows:

Figure (4)

Figure (5)

Prepare post -closing trail balance of Incorporation PSS as follows:

Incorporation PSS
Post - Closing Trail Balance
December 31, Year 5
Particulars	Debit	Credit
Cash	$74,210
Accounts receivable	$13,500
Supplies	$200
Prepaid Rent	$3,200
Merchandise Inventory	$6,620
Land	$4,000
Accounts payable		$1,950
Salaries Payable		$1,000
Unearned revenue		$900
Common stock		$50,000
Retained earnings		$47,880
Totals	$101,730	$101,730

Table (11)