Chapter 5, Problem 4PA

1.

To determine

Complete the worksheet for JC Designs 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.

Complete the worksheet for JC Designs for the month ended January 31, 2019.

Table (1)

2.

To determine

Prepare income statement, statement of owners’ equity, and balance sheet JC Designs 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 JC Designs for the month ended January 31, 2019.

JC Designs
Income Statement
For the Month Ended January 31, 2019
Revenues:
Fees Income		74,100
Expenses:
Advertising Expense	$3,100
Depreciation Expense, Equipment	280
Rent Expense	2,100
Salaries Expense	10,700
Supplies Expense	8,150
Utilities Expense	1,900
Total expenses		26,230
Net income		$47,870

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 JC Designs for the month ended January 31, 2019.

JC Designs
Statement of Owners’ Equity
For the Month Ended January 31, 2019
PJ, Capital, January 1, 2019		$61,000
Net income for January	47,870
Less: Withdrawals for January	8,000
Increase in capital		39,870
PJ, Capital, January 31, 2019		$100,870

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 JC Designs as at January 31, 2019.

JC Designs
Balance Sheet
January 31, 2019
Assets
Cash		$36,500
Accounts Receivable		13,600
Supplies		1,600
Prepaid Advertising		9,300
Prepaid Rent		23,100
Equipment	$33,600
Less: Accumulated Depreciation	280	33,320
Total Assets		$117,420
Liabilities and owner’s equity
Liabilities
Accounts Payable		16,550
Owners’ Equity
PJ, Capital		100,870
Total Liabilities and Owners’ Equity		$117,420

Table (4)

3.

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	517	8,150
	Supplies	121		8,150
	(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 advertising expense:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Advertising expense	519	3,100
	Prepaid Advertising	130		3,100
	(to record part of prepaid advertising expired)

Table (6)

Description:

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

Prepare adjusting entry for rent expense:

GENERAL JOURNAL				Page 3
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2019	Rent expense	520	2,100
	Prepaid Rent	131		2,100
	(to record part of prepaid rent expired)

Table (7)

Description:

• Rent Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Prepaid Rent is an asset account. Since amount of rent 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	523	280
	Accumulated depreciation-Equipment	142		280
	(to record depreciation expense)

Table (8)

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		9,750		9,750
	31	Adjusting	3		8,150	1,600

Table (9)

ACCOUNT   Prepaid Advertising                                        ACCOUNT NO. 130
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		12,400		12,400
	31	Adjusting	3		3,100	9,300

Table (10)

ACCOUNT   Prepaid Rent                                        ACCOUNT NO. 131
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		25,200		25,200
	31	Adjusting	3		2,100	23,100

Table (11)

ACCOUNT   Accumulated Depreciation - Equipment         ACCOUNT NO. 142
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance			0		0
	31	Adjusting	3		280		280

Table (12)

ACCOUNT   Supplies Expense                                                       ACCOUNT NO. 517
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	8,150		8,150

Table (13)

ACCOUNT   Advertising Expense                                                  ACCOUNT NO. 519
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	3,100		3,100

Table (14)

ACCOUNT   Rent 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 (15)

ACCOUNT   Depreciation Expense - Equipment              ACCOUNT NO. 523
Date		Description	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
January	1	Balance		0		0
	31	Adjusting	3	280		280

Table (16)

Analyze: If the adjusting entries are not made for the month, the net income would be overstated.