Chapter 5, Problem 2CTP

The account balances for the Patterson International Company on January 31. 2019, follow. The balances shown are after the first month of operations.

INSTRUCTIONS

1. 1. Prepare the Trial Balance section of the worksheet.
2. 2. Record the following adjustments in the Adjustments section of the worksheet:
   1. a. Supplies used during the month amounted to $2,100.
   2. b. The amount in the Prepaid Insurance account represents a payment made on January 1. 2019, for six months of insurance coverage.
   3. c. The equipment, purchased on January 1.2019, has an estimated useful life of 10 years with no salvage value. The firm uses the straight-line method of depreciation.
3. 3. Complete the worksheet.
4. 4. Prepare an income statement, statement of owner’s equity, and balance sheet (use the report form).
5. 5. Record the balances in the general ledger accounts, then journalize and post the adjusting entries. Use 3 for the journal page number.

Analyze: If the useful life of the equipment had been 12 years instead of 10 years, how would net income have been affected?

To determine

Prepare trial balance section, indicate the given adjustments, and complete the worksheet for Company PI for the month ended January 31, 2019.

Explanation of Solution

Worksheet: Worksheet is an accounting tool that helps accountants to record adjustments and up-date balances required to prepare financial statements. Worksheet is a central place where trial balance, adjustments, adjusted trial balance, income statement, and balance sheet are presented.

Prepare trial balance section, indicate the given adjustments, and complete the worksheet for Company PI for the month ended January 31, 2019.

Table (1)

To determine

Prepare income statement, statement of owners’ equity, and balance sheet for Company PI for the month of January, 2019.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operation 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 for Company PI for the month ended January 31, 2019.

Company PI
Income Statement
For the Month Ended January 31, 2019
Revenues:
Fees Income		61,850
Expenses:
Advertising Expense	$3,000
Depreciation Expense, Equipment	400
Rent Expense	5,000
Salaries Expense	13,400
Supplies Expense	2,100
Insurance Expense	5,000
Utilities Expense	1,700
Telephone Expense	700
Total expenses		31,300
Net income		$30,550

Table (2)

Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owners’ equity. Additional capital, net income from income statement is added to, and drawings are deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement for Company PI for the month ended January 31, 2019.

Company PI
Statement of Owners’ Equity
For the Month Ended January 31, 2019
RP, Capital, January 1, 2019		$80,000
Net income for January	30,550
Less: Withdrawals for January	4,000
Increase in capital		26,550
RP, Capital, January 31, 2019		$106,550

Table (3)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and owners (owners’ equity) over those resources. The resources of the company are assets which include money contributed by owners and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and owners’ equity.

Prepare the balance sheet Company PI as at January 31, 2019.

Company PI
Balance Sheet
January 31, 2019
Assets
Cash		$36,950
Accounts Receivable		6,800
Supplies		2,200
Prepaid Insurance		25,000
Equipment	$48,000
Less: Accumulated Depreciation	400	47,600
Total Assets		$118,550
Liabilities and owner’s equity
Liabilities
Accounts Payable		12,000
Owners’ Equity
RP, Capital		106,550
Total Liabilities and Owners’ Equity		$118,550

Table (4)

To determine

Prepare adjusting entry and post the transactions in general ledger.

Explanation of Solution

Adjusting entries: 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 owners’ or stockholders’ equity) to maintain the records according to accrual basis principle and matching concept.

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

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare adjusting entry for supplies.

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Supplies expense	520	2,100
	Supplies	121		2,100
	(to record supplies used)

Table (5)

Description:

• Supplies Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Supplies is an asset account. Since amount of supplies is used, asset account decreased, and a decrease in asset is credited.

Prepare adjusting entry for insurance expense:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Insurance expense	517	5,000
	Prepaid insurance	131		5,000
	(to record part of prepaid insurance expired)

Table (6)

Description:

• Insurance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Insurance is an asset account. Since amount of insurance is expired, asset account decreased, and a decrease in asset is credited.

Prepare adjusting entry for depreciation expense-equipment:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Depreciation expense-Equipment	514	400
	Accumulated depreciation-Equipment	142		400
	(to record depreciation expense)

Table (7)

Description:

• Depreciation Expense, Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation, Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

Post the above transactions in the general ledger.

ACCOUNT   Supplies                                                            ACCOUNT NO. 121
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		4,300		4,300
	31	Adjusting	3		2,100	2,200

Table (8)

ACCOUNT   Prepaid Insurance                                            ACCOUNT NO. 131
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		30,000		30,000
	31	Adjusting	3		5,000	25,000

Table (9)

ACCOUNT   Accumulated Depreciation - Equipment         ACCOUNT NO. 142
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance			0		0
	31	Adjusting	3		400		400

Table (10)

ACCOUNT   Depreciation Expense - Equipment              ACCOUNT NO. 514
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	400		400

Table (11)

ACCOUNT   Insurance Expense                                                  ACCOUNT NO. 517
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	5,000		5,000

Table (12)

ACCOUNT   Supplies Expense                                                  ACCOUNT NO. 520
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	2,100		2,100

Table (13)

Analyze: If the useful life of the equipment is 12 years instead of 10 years, then the depreciation expense for the month would be $334 rather than $400. As a result, the net income would increase by $66.