Chapter 5, Problem 5.1CACR

(a)

To determine

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions, and processed further till the presentation of the financial statements.

The following are the rules of debit and credit:

1. 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.
2. 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.

To Record: The journal entries in books of Company DD using perpetual inventory system during December.

Explanation of Solution

Prepare the journal entries for Company DD during December:

Date	Account Title and Description	Post Ref.	Debit ($)	Credit ($)
December06	Salaries and wages payable		1,000
	Salaries and wages expense		600
	Cash			1,600
	(To record accrued and current salaries and wages expenses)
December08	Cash		6,300
	Accounts receivable			6,300
	(To record payment received from customers)
December10	Cash		6,300
	Sales revenue			6,300
	(To record cash sales)
	Cost of goods sold		4,100
	Inventory			4,100
	(To record cost of goods sold)
December13	Inventory		9,000
	Accounts payable			9,000
	(To record purchase on account)
December15	Supplies		2,000
	Cash			2,000
	(To record purchase of supplies)
December18	Accounts receivable		12,000
	Sales revenue			12,000
	(To record sales on account)
	Cost of goods sold		8,000
	Inventory			8,000
	(To record cost of goods sold)
December20	Salaries and wages expense		1,800
	Cash			1,800
	(To record salaries and wages expense)
December23	Accounts payable		9,000
	Inventory			180 (1)
	Cash			8,820 (2)
	(To record settlement of accounts payable net of discounts)
December27	Cash		11,640 (4)
	Sales discounts		360 (3)
	Accounts receivable			12,000
	(To record settlement of accounts receivable net of discounts)

Table (1)

Working Notes:

Calculate the amount of purchase discount.

Accounts payable = $9,000

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$9,000 × }\frac{2}{\text{100}}\\ \text{= \$180}\end{array}$ (1)

Calculate the amount of cash paid.

Accounts payable = $9,000

Purchase discount = $180 (1)

$\begin{array}{c}\text{Cash paid = Accounts payable – Purchase discount}\\ \text{= \$9,000 – \$180}\\ \text{= \$8,820}\end{array}$ (2)

Calculate the amount of sales discount.

Accounts receivable = $12,000

Discount percentage = 3%

$\begin{array}{c}\text{Sales discount = \$12,000 × }\frac{3}{\text{100}}\\ \text{= \$360}\end{array}$ (3)

Calculate the amount of cash received.

Net accounts receivable = $12,000

Sales discount = $360 (3)

$\begin{array}{c}\text{Cash received = Accounts receivable – Sales discount}\\ \text{= \$12,000 – \$360}\\ \text{= \$11,640}\end{array}$ (4)

(c)

To determine

Adjusting entries are the journal entries that are recorded at an end of an accounting period. It adjusts the income and expense account to comply with the accrual based accounting. This accounting system states that the revenues should be recognized when it is earned, and the expenses should be recognized when it is incurred, irrespective to cash received or paid for it.

To Record: The adjusting entries of Company DD on December 31, 2017.

Explanation of Solution

Journalize the adjusting entries.

1.

The following is the adjusting entry for the accrued salaries during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Salaries and Wages Expense		800
	Salaries and Wages Payable			800
	(To adjust for accrued salaries and wages expense)

Table (2)

Description:

• Salaries and wages expense is an expense and it is increased by $800. Therefore, debit salaries and wages expense account with $800.
• Salaries and wages payable is a liability and it is increased by $800. Therefore, credit salaries and wages payable account with $800.

2.

The following is the adjusting entry for the depreciation expired during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense		200
	Accumulated Depreciation - Equipment			200
	(To record the amount of depreciation for the year)

Table (3)

Description:

• Depreciation expense is an expense and it is increased by $200. Therefore, debit depreciation expense account with $200.
• Accumulated Depreciation-Equipment is a contra asset account and reduces the value of an asset (Equipment). Therefore credit accumulated depreciation-equipment account with $200.

3.

The following is the adjusting entry for the supplies during the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Supplies Expense		1,700 (5)
	Supplies Payable			1,700
	(To adjust for supplies expense)

Table (4)

Description:

• Supplies expense is an expense and it is increased by $1,700. Therefore, debit supplies expense account with $1,700.
• Supplies payable is a liability and it is increased by $1,700. Therefore, credit supplies payable account with $1,700.

Working Note:

Calculate the amount of supplies expense.

Beginning balance = $1,200

Purchase = $2,000 (Refer Table 1)

Ending balance = $1,500

$\begin{array}{c}\text{Supplies expense = Begining balance + Purchase}–\text{Ending balance}\\ \text{= \$1,200 + \$2,000}–\text{ \$1,500 }\\ \text{= \$1,700}\end{array}$ (5)

4.

The following is the adjusting entry for the accrued income tax for the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Income Tax Expense		200
	Income Tax Payable			200
	(To record the amount of accrued income tax for the year)

Table (5)

Description:

• Income tax expense is an expense and it is increased by $200. Therefore, debit income tax expense account with $200.
• Income tax payable is a liability and it is increased by $200. Therefore, credit income tax payable account with $200.

(b) and (c)

To determine

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Post: The above journal entries and adjusting entries to T-accounts of Company DD.

Explanation of Solution

The following are the T-accounts.

Cash Account:

Cash Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 01	Beginning balance	7,200	December 06	Salaries and wages	1,600
December 08	Accounts receivable	1,900	December 15	Supplies	2,000
December 10	Sales revenue	6,300	December 20	Salaries and wages	1,800
December 27	Accounts receivable	11,640	December 23	Accounts payable	8,820
			December 31	Ending Balance	12,820
	Total	27,040		Total	27,040

Table (6)

Accounts Receivable Account:

Accounts Receivable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 01	Beginning Balance	4,600	December 08	Cash	1,900
December 18	Sales Revenue	12,000	December 27	Sales discounts	360
			December 27	Cash	11,640
			December 31	Ending Balance	2,700
	Total	16,600		Total	16,600

Table (7)

Inventory Account:

Inventory Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 1	Beginning balance	12,000	December 10	Cost of goods sold	4,100
December 13	Accounts payable	9,000	December 18	Cost of goods sold	8,000
			December 23	Accounts payable	180
			December 31	Ending Balance	8,720
	Total	21,000		Total	21,000

Table (8)

Supplies Account:

Supplies Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 01	Beginning balance	1,200	December 31	Adjustment	1,700
December 15	Cash	2,000	December 31	Ending Balance	1,500
	Total	3,200		Total	3,200

Table (9)

Equipment Account:

Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 01	Beginning balance	22,000	December 31	Ending Balance	22,000
	Total	22,000		Total	22,000

Table (10)

Accumulated Depreciation - Equipment Account:

Accumulated Depreciation - Equipment Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Ending Balance	2,400	December 01	Beginning balance	2,200
			December 31	Adjustment	200
	Total	2,400		Total	2,400

Table (11)

Accounts Payable Account:

Accounts Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 23	Cash and inventory	9,000	December 01	Beginning balance	4,500
December 31	Ending Balance	4,500	December 13	Inventory	9,000
	Total	13,500		Total	13,500

Table (12)

Salaries and Wages Payable Account:

Salaries and Wages Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 06	Cash	1,000	December 01	Beginning balance	1,000
December 31	Ending Balance	800	December 31	Adjustment	800
	Total	1,800		Total	1,800

Table (13)

Common Stock Account:

Common Stock Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Ending Balance	15,000	December 01	Beginning balance	15,000
	Total	15,000		Total	15,000

Table (14)

Retained Earnings Account:

Retained Earnings Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Ending Balance	24,300	December 01	Beginning balance	24,300
	Total	24,300		Total	24,300

Table (15)

Sales Revenue Account:

Sales Revenue Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Ending Balance	18,300	December 10	Accounts receivable	6,300
			December 18	Accounts receivable	12,000
	Total	18,300		Total	18,300

Table (16)

Sales Discount Account:

Sales Discount Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 27	Accounts receivable	360	December 31	Ending Balance	360
	Total	360		Total	360

Table (17)

Cost of Goods Sold Account:

Cost of Goods Sold Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 10	Inventory	4,100	December 31	Ending Balance	12,100
December 18	Inventory	8,000
	Total	12,100		Total	12,100

Table (18)

Depreciation Expense Account:

Depreciation Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Adjustment	200	December 31	Ending Balance	200
	Total	200		Total	200

Table (19)

Salaries and Wages Expense Account:

Salaries and Wages Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 06	Cash	600	December 31	Ending Balance	3,200
December 20	Cash	1,800
December 31	Adjustment	800
	Total	3,200		Total	3,200

Table (20)

Supplies Expense Account:

Supplies Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Adjustment	1,700	December 31	Ending Balance	1,700
	Total	1,700		Total	1,700

Table (21)

Income Tax Expense Account:

Income Tax Expense Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December31	Adjustment	200	December31	Ending Balance	200
	Total	200		Total	200

Table (22)

Income Tax Payable Account:

Income Tax Payable Account
Date	Particulars	Debit ($)	Date	Particulars	Credit ($)
December 31	Ending Balance	200	December 31	Adjustment	200
	Total	200		Total	200

Table (23)

(d)

To determine

Trial balance: This is a statement prepared to show all the year-end account balances of a business. The balances are shown in separate columns as debit and credit. Trial balance is made to check whether books of accounts of the business are arithmetically accurate.

To determine: Prepare trial balance for Company DD as on December 31, 2017.

Answer to Problem 5.1CACR

The following is the adjusted trial balance of Company DD as on December 31, 2017.

Company DD
Adjusted Trial Balance
At December 31, 2017
Account Title	Balance ($)
	Debit	Credit
Cash	12,820
Accounts Receivable	2,700
Inventory	8,720
Supplies	1,500
Equipment	22,000
Accumulated Depreciation - Equipment		2,400
Accounts Payable		4,500
Salaries and Wages Payable		800
Income Tax Payable		200
Common Stock		15,000
Retained Earnings		24,300
Sales Revenue		18,300
Sales Discounts	360
Cost of Goods Sold	12,100
Depreciation Expense	200
Salaries and Wages Expense	3,200
Supplies Expense	1,700
Income Tax Expense	200
Total	65,500	65,500

Table (24)

Explanation of Solution

The trial balance as shown in Table (24) is prepared after placing the journal entries and adjusting entries to the ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.

Conclusion

Therefore, the total debit balance and credit balance of Company DD is $65,500.

(e)

To determine

To Prepare: The income statement, retained earnings statement, and classified balance sheet of Company DD for the year ended December 31, 2017.

Answer to Problem 5.1CACR

Prepare the income statement of Company DD.

Company DD
Income Statement
For the Year Ended December 31, 2017
Particulars	Amount($)	Amount($)
Sales revenue		18,300
Less: Sales Discounts		(360)
Net sales		17,940
Less: Cost of goods sold		(12,100)
Gross profit		5,840
Less: Operating expenses:
Salaries and wages expenses	3,200
Depreciation expenses	200
Supplies expense	1,700
Total operating expenses		(5,100)
Income before income taxes		740
Less: Income tax expense		(200)
Net income		540

Table (25)

Prepare a retained earnings statement of Company DD for the year ended December 31, 2017.

Company DD
Retained Earnings Statement
For the Year Ended December 31, 2017
Details	Amount ($)
Beginning Balance of Retained earnings	24,300
Add: Net Income for the year	540
Total Retained Earnings	24,840
Less: Dividends	0
Ending balance of Retained Earnings	24,840

Table (26)

Prepare the classified balance sheet of Company DD for the year ended December 31, 2017.

Company DD
Balance Sheet
As of December 31, 2017
Assets	Amount ($)	Amount ($)
Current assets:
Cash		12,820
Accounts receivable		2,700
Inventory		8,720
Supplies		1,500
Total current assets		25,740
Plant assets:
Equipment	22,000
Less: Accumulated depreciation	-2,400	19,600
Total assets		45,340
Liabilities and Stockholders’ equity
Current liabilities:
Accounts payable		4,500
Salaries and wages payable		800
Income tax  payable		200
Total current liabilities		5,500
Long-term liabilities		-
Total liabilities		5,500
Stockholders’ Equity:
Common stock	15,000
Retained earnings	24,840
Total stockholders’ equity		39,840
Total liabilities and stockholders’ equity		45,340

Table (27)

Explanation of Solution

Income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Retained Earnings Statement is one of the financial statement, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and used to pay its debts and obligations. It shows the amount of earnings that is not paid as dividends to the shareholders.

Classified Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are organized and reported as different groups, and sub-groups on the basis of the nature of the classification made of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.