Chapter 5, Problem 5.6AP

(a)

To determine

A financial statement is the complete record of financial transactions that take place in a company, at a particular period of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.

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 PCW on December 31, 2017.

Explanation of Solution

Journalize the adjusting entries.

1.

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		15,000
	Accumulated Depreciation - Buildings			8,000
	Accumulated Depreciation - Equipment			7,000
	(To record the amount of depreciation for the year)

Table (1)

Description:

• Depreciation expense is an expense and it is increased by $15,000. Therefore, debit depreciation expense account with $15,000.
• Accumulated Depreciation-Building is a contra asset account and would have a credit balance. Therefore credit accumulated depreciation-building account with $8,000.
• Accumulated Depreciation-Equipment is a contra asset account and would have a credit balance. Therefore credit accumulated depreciation-equipment account with $7,000.

2.

The following is the adjusting entry for the accrued interest for the year:

Date	Accounts title and Description	Post Ref.	Debit ($)	Credit ($)
December 31	Interest Expense		4,500
	Interest Payable			4,500
	(To record the amount of accrued interest for the year)

Table (2)

Description:

• Interest expense is an expense and it is increased by $4,500. Therefore, debit interest expense account with $4,500.
• Interest payable is a liability and it is increased by $4,500. Therefore, credit interest payable account with $4,500.

3.

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		24,000
	Income Tax Payable			24,000
	(To record the amount of accrued income tax for the year)

Table (3)

Description:

• Income tax expense is an expense and it is increased by $24,000. Therefore, debit income tax expense account with $24,000.
• Income tax payable is a liability and it is increased by $24,000. Therefore, credit income tax payable account with $24,000.

(b)

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 adjusting entries to T-accounts of Company PCW.

Explanation of Solution

The following are the T-accounts.

Accumulated Depreciation-Building is a contra asset account and would have a credit balance.

Accumulated Depreciation-Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Ending Balance	68,000		December 31	Balance	60,000
				December 31	Depreciation expense	8,000
December 31	Total	68,000		December 31	Total	68,000

Table (4)

Accumulated Depreciation-Equipment is a contra asset account and would have a credit balance.

Accumulated Depreciation-Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Ending Balance	47,500		December 31	Balance	40,500
				December 31	Depreciation expense	7,000
December 31	Total	47,500		December 31	Total	47,500

Table (5)

Interest Payable is a liability. Therefore, debit decreases the account balance and credit increases the account balance.

Interest Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Ending Balance	4,500		December 31	Balance	0
				December 31	Interest expense	4,500
December 31	Total	4,500		December 31	Total	4,500

Table (6)

Income Tax Payable is a liability. Therefore, debit decreases the account balance and credit increases the account balance.

Income Tax Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Ending Balance	24,000		December 31	Balance	0
				December 31	Income tax expense	24,000
December 31	Total	24,000		December 31	Total	24,000

Table (7)

Depreciation Expense is an expense. Therefore, debit increases the depreciation expense account and credit decreases the account.

Depreciation Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Balance	0		December 31	Ending Balance	15,000
December 31	Accumulated depreciation-Building	8,000
December 31	Accumulated depreciation-Equipment	7,000
December 31	Total	15,000		December 31	Total	15,000

Table (8)

Interest Expense is an expense. Therefore, debit increases the interest expense account and credit decreases the account.

Interest Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Balance	0		December 31	Ending Balance	4,500
December 31	Interest payable	4,500
December 31	Total	4,500		December 31	Total	4,500

Table (9)

Income Tax Expense is an expense. Therefore, debit increases the income tax expense account and credit decreases the account.

Income Tax Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Balance	0		December 31	Ending Balance	24,000
December 31	Income tax payable	24,000
December 31	Total	24,000		December 31	Total	24,000

Table (10)

(c)

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 PCW as on December 31, 2017.

Explanation of Solution

The following table shows the trial balance of Company PCW as on December 31, 2017.

Company PCW
Adjusted Trial Balance
December 31, 2017
Account Title	Balance ($)
	Debit	Credit
Cash	31,400
Accounts Receivable	37,600
Inventory	70,000
Land	92,000
Buildings	200,000
Accumulated Depreciation - Buildings		68,000
Equipment	83,500
Accumulated Depreciation - Equipment		47,500
Notes Payable		54,700
Accounts Payable		17,500
Interest Payable		4,500
Income Tax Payable		24,000
Common Stock		160,000
Retained Earnings		67,200
Dividends	10,000
Sales Revenue		922,100
Sales Discounts	6,000
Salaries and Wages Expense	51,300
Utilities Expense	11,400
Maintenance and Repairs Expense	8,900
Advertising Expense	5,200
Insurance Expense	4,800
Depreciation Expense	15,000
Interest Expense	4,500
Income Tax Expense	24,000
Total	1,365,500	1,365,500

Table (11)

Description:

The trial balance as shown in Table (11) is prepared after placing the adjusting entries to 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 PCW is $1,365,500.

(d)

To determine

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

Explanation of Solution

Prepare the multi-step income statement of Company PCW.

Multi step income statement: A multiple step income statement refers to the income statement that shows the operating, and non-operating activities of the business, under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.

Company PCW
Income Statement
For the Year Ended December 31, 2017
Particulars	Amount($)	Amount($)
Sales revenue		922,100
Less: Sales discounts		(6,000)
Net sales		916,100
Less: Cost of goods sold		(709,900)
Gross profit		206,200
Less: Operating expenses:
Salaries and wages expenses	51,300
Depreciation expenses	15,000
Advertising expense	5,200
Insurance expense	4,800
Maintenance and repairs expense	8,900
Utilities expense	11,400
Total operating expenses		(96,600)
Income from operations		109,600
Less: Other expenses and losses:
Interest expense		(4,500)
Income before income taxes		105,100
Less: Income tax expense		(24,000)
Net income		81,100

Table (12)

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

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.

Company PCW
Retained Earnings Statement
For the Year Ended December 31, 2017
Details	Amount ($)
Beginning Balance of Retained earnings	67,200
Add: Net Income for the year	81,100
Total Retained Earnings	148,300
Less: Dividends	(10,000)
Ending balance of Retained Earnings	138,300

Table (13)

Conclusion

Therefore, the net income of Company PCW for the year ended December 31, 2017 is $81,100.

Therefore, the retained earnings statement of Company PCW for the year ended December 31, is $138,300.

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

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.

Company PCW
Balance Sheet
As of December 31, 2017
Assets	Amount ($)	Amount
		($)
Current assets:
Cash		31,400
Accounts receivable		37,600
Inventory		70,000
Total current assets		139,000
Plant assets:
Land		92,000
Buildings	200,000
Less: Accumulated depreciation	-68,000	132,000
Equipment	83,500
Less: Accumulated depreciation	-47,500	36,000
Total plant assets		260,000
Total assets		399,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		17,500
Notes payable		15,000
Interest payable		4,500
Income tax  payable		24,000
Total current liabilities		61,000
Long-term liabilities:
Notes payable		39,700
Total liabilities		100,700
Stockholders’ Equity:
Common stock	160,000
Retained earnings	138,300
Total stockholders’ equity		298,300
Total liabilities and stockholders’ equity		399,000

Table (14)