Chapter 5, Problem 4PB

The account balances of Miss Beverly’s Tutoring Service as of June 30, the end of the current fiscal year, are as follows:

Required

1. 1. Data for the adjustments are as follows:
   1. a. Expired or used up insurance, $470.
   2. b. Depreciation expense on equipment, $948.
   3. c. Depreciation expense on the van, $1,490.
   4. d. Salary accrued (earned) since the last payday, $574 (owed and to be paid on the next payday).
   5. e. Supplies remaining as of June 30, $407.

Your instructor may want you to use a work sheet for these adjustments.

1. 2. Journalize the adjusting entries.
2. 3. Prepare an income statement.
3. 4. Prepare a statement of owner’s equity. Assume that there was an additional investment of $3,000 on June 10.
4. 5. Prepare a balance sheet
5. 6. Journalize the closing entries using the four steps in the proper sequence.

Check Figure

Net income, $19,567

To determine

Indicate the given adjustments and complete the worksheet for B’s Tutoring Service for the year ended June 30, 20--.

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.

Indicate the given adjustments and complete the worksheet for B’s Tutoring Service for the year ended June 30, 20--.

Figure-(1)

To determine

Prepare adjusting journal entries for B’s Tutoring Service for the year ended June 30, 20--.

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 journal entries for B’s Tutoring Service for the year ended June 30, 20--.

Adjusting entry (a) for the prepaid insurance:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Insurance Expense			470
			Prepaid Insurance			470
		(Record part of prepaid insurance expired)

Table (1)

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 has expired, asset account decreased, and a decrease in asset is credited.

Adjusting entry (b) for the depreciation expense for equipment:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Depreciation Expense, Equipment			948
			Accumulated Depreciation, Equipment			948
		(Record depreciation expense)

Table (2)

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.

Adjusting entry (c) for the depreciation expense for van:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Depreciation Expense, Van			1,490
			Accumulated Depreciation, Van			1,490
		(Record depreciation expense for van)

Table (3)

Description:

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

Adjusting entry (d) for the salaries expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Salaries Expense			574
			Salaries Payable			574
		(Record accrued salaries expenses)

Table (4)

Description:

• Salaries Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Salaries Payable is a liability account. Since amount of payables has increased, liability decreased, and an increase in liability is credited.

Adjusting entry (e) for the supplies expense:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
20--
June	30	Supplies Expense			120
			Supplies			120
		(Record part of supplies consumed)

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.

To determine

Prepare an income statement for B’s Tutoring Service for the year ended June 30, 20--, based on the account balances from worksheet of Part (1).

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 of B’s Tutoring Service for the year ended June 30, 20--.

B’s Tutoring Service
Income Statement
For the Year Ended June 30, 20--
Revenues:
Fees Earned		$43,680
Expenses:
Salaries Expense	$16,574
Advertising Expense	2,200
Van Operating Expense	705
Utilities Expense	1,248
Miscellaneous Expense	358
Insurance Expense	470
Depreciation Expense, Equipment	948
Depreciation Expense, Van	1,490
Supplies Expense	120
Total expenses		24,113
Net income		$19,567

Table (6)

To determine

Prepare a statement of owners’ equity for B’s Tutoring Service for the year ended June 30, 20--. (Refer to net income computed in Part (3)).

Explanation of Solution

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 is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.

Prepare a statement of owners’ equity for B’s Tutoring Service for the year ended June 30, 20--.

B’s Tutoring Service
Statement of Owners’ Equity
For the Year Ended June 30, 20--
BM, Capital, June 1, 20--		$11,848
Investment on June 10	$3,000
Net income for the year	19,567
	22,567
Less: Withdrawals for June	18,000
Increase in capital		4,567
BM, Capital, June 30, 20--		$16,415

Table (7)

To determine

Prepare a balance sheet for B’s Tutoring Service, based on the account balances from work sheet in Part (1), and capital of the owner from the statement of owners’ equity prepared in Part (4).

Explanation of Solution

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 for B’s Tutoring Service as at June 30, 20--.

B’s Tutoring Service
Balance Sheet
June 30, 20--
Assets
Cash		$6,491
Accounts Receivable		624
Supplies		407
Prepaid Insurance		810
Equipment	$5,497
Less: Accumulated Depreciation, Equipment	3,420	2,077
Van	13,674
Less: Accumulated Depreciation, Van	5,658	8,016
Total Assets		$18,425
Liabilities
Accounts Payable	$1,436
Salaries Payable	574
Total Liabilities		$2,010
Owners’ Equity
BM, Capital		16,415
Total Liabilities and Owners’ Equity		$18,425

Table (8)

To determine

Prepare closing entries.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to capital account are referred to as closing entries. The revenue, expense, and drawing accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Steps in closing procedure:

1. 1. Close the revenue accounts to Income Summary account.
2. 2. Close the expense accounts to Income Summary account.
3. 3. Close the Income Summary account and transfer the net income or net loss balance to the Capital account.
4. 4. Close the Drawing account to Capital account.

Prepare closing entries.

Step 1: Close the revenue accounts to Income Summary account.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Fees Earned			43,680
			Income Summary			43,680
		(Record closing of revenue to Income Summary account)

Table (9)

Description:

• Fees Earned is a revenue account. Revenue account has a normal credit balance. Since revenue is closed to Income Summary account, the account is debited.
• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is credited to hold the transferred balance from revenue account.

Step 2: Close the expense accounts to Income Summary account.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
		Income Summary			24,113
			Salaries Expense			16,574
			Advertising Expense			2,200
			Supplies Expense			120
			Van Operating Expense			705
			Utilities Expense			1,248
			Insurance Expense			470
			Depreciation Expense, Equipment			948
			Depreciation Expense, Van			1,490
			Miscellaneous Expense			120
		(Record closing of expenses to Income Summary account)

Table (10)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is debited to hold the transferred balance from expense accounts.
• Salaries Expense, Advertising Expense, Supplies Expense, Van Operating Expense, Utilities Expense, Insurance Expense, Depreciation Expense-Equipment, Depreciation Expense-Van, and Miscellaneous Expense are expense accounts. Expense account has a normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.

Step 3: Close the net income to Capital account.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
		Income Summary			19,567
			BM, Capital			19,567
		(Record closing of net income to capital account)

Table (11)

Description:

• Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. Since net income is closed, the account is reversed, hence, the Income Summary account is debited.
• BM, Capital is a capital account. Since net income is transferred to the account, the value increased, and an increase in capital is credited.

Step 4: Close the Drawing account to Capital account.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
		BM, Capital			18,000
			BM, Drawing			18,000
		(Record closing of drawing to capital account)

Table (12)

Description:

• BM, Capital is a capital account. Since drawings is transferred to the account, the value decreased, and a decrease in capital is debited.
• BM, Drawing is a capital account. Since drawings is transferred, the account is credited to reverse the previously debited effect.