Chapter 5, Problem 5AP

a.

To determine

Prepare the adjusting journal entries of Incorporation S as on December 31, 2015 and prepare an adjusted trial balance dated December 31, 2015.

Answer to Problem 5AP

Prepare the adjusting journal entries of Incorporation S as on December 31:

Incorporation S
General Journal (Adjusting)
December, 31 2015
Date		Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	1.	Accounts Receivable		1,500
		Consulting Services Revenue			1,500
		(To record the revenue accrued at the end of December)
December 31	2.	Unearned Consulting Services Revenue		2,500
		Consulting Services Revenue			2,500
		(To record the conversion of unearned revenue into earned revenue in December)
December 31	3.	Office Supplies Expense (1)		95
		Office Supplies			95
		(To record the offices supplies used for December)
December 31	4.	Depreciation Expense of Office Equipment (2)		750
		Accumulated Depreciation of Office Equipment			750
		(To record the depreciation expense incurred for December)
December 31	5.	Rent Expense (3)		300
		Prepaid Rent			300
		(To record the rent expense for December)
December 31	6.	Insurance Expense (4)		90
		Unexpired Insurance			90
		(To record the portion of insurance policies expired in December)
December 31	7.	Salaries Expense		1,900
		Salaries Payable			1,900
		(To record the accrued but unpaid salaries in December)
December 31	8.	Interest Expense (5)		60
		Interest Payable			60
		(To record the interest expense accrued in December)
December 31	9.	Income Taxes Expense (6)		600
		Income Taxes Payable			600
		(To record the income taxes expense accrued in December)

Table (1)

Prepare an adjusted trial balance as on December 31, 2015:

Incorporation S
Adjusted Trial Balance
December 31, 2015
Cash	$42,835
Accounts receivable	3,500
Office supplies	110
Prepaid rent	900
Unexpired insurance	180
Office equipment	54,000
Accumulated depreciation of office equipment		$36,000
Accounts payable		1,400
Notes payable (Due 3/1/Next Year)		9,000
Income taxes payable		2,350
Unearned consulting services revenue		1,000
Salaries payable		1,900
Interest payable		420
Capital stock		30,000
Retaining earnings		8,000
Dividends	1,000
Consulting services revenue		64,000
Office supplies expense	700
Depreciation expense: office equipment	9,000
Rent expense	3,825
Insurance expense	1,100
Salaries expense	29,000
Interest expense	420
Income taxes expense	7,500
Totals	154,070	154,070

Table (2)

Explanation of Solution

Journal entry:

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

Trial balance:

Trial balance is a summary of all the asset, liability, and equity accounts and their balances.

Working notes:

Compute the amount of Office Supplies Expense:

$\begin{array}{c}\text{Office Supplies Expense}=\left[\begin{array}{l}\text{Office supplies in trial balance}-\\ \text{Office supplies on hand at December31}\end{array}\right]\\ =\$205-\$110\\ =\$95\end{array}$ (1)

Compute the amount of depreciation Expense:

$\begin{array}{c}\text{Office Supplies Expense}=\frac{\text{Equipment}}{\text{72 months}}\\ =\frac{\text{\$54,000}}{\text{72 months}}\\ =\$750\end{array}$ (2)

Compute the amount of rent Expense:

$\begin{array}{c}\text{Rent Expense}=\frac{\text{Prepaidrent}}{\text{4 months}}\\ =\frac{\text{\$1,200}}{\text{4 months}}\\ =\$300\end{array}$ (3)

Compute the amount of Insurance Expense:

$\begin{array}{c}\text{Insurance Expense}=\frac{\text{Unexpired insurance}}{\text{12 months}}\times 4\text{Months}\\ =\frac{\text{\$270}}{\text{12 months}}\times 4\text{Months}\\ =\$90\end{array}$ (4)

Compute the amount of interest Expense:

$\begin{array}{c}\text{Interest Expense}=\frac{\text{Amount borrowed}}{\text{12 months}}\times \text{Interest rate}\\ =\frac{\$9,000\times \frac{8}{100}}{\text{12 months}}\\ =\$60\end{array}$ (5)

Compute the amount of income taxes Expense:

$\begin{array}{c}\text{Income taxes Expense}=\text{Income tax}-\text{Income tax expense}\\ =\$7,500-\$6,900\\ =\$600\end{array}$ (6)

b.

To determine

Prepare the financial statements of Incorporation S as on December 31, 2015.

Answer to Problem 5AP

• Prepare the income statement of Incorporation S as on December 31, 2015 as follows:

Incorporation S
Income Statement
For the Year Ended December 31, 2015
Particulars	$	$
Revenues:
Consulting services revenue		$64,000
Less: Expenses:
Office supplies expense	700
Depreciation expense: office equipment	9,000
Rent expense	3,825
Insurance expense	1,100
Salaries expense	29,000
Interest expense	420	44,045
Income before taxes		19,955
Less: Income taxes expense		7,500
Net income		$12,455

Table (3)

• Prepare the statement of retained earnings of Incorporation S as on December 31, 2015 as follows:

Incorporation S
Statement of retained earnings
For the Year Ended December 31, 2015
Particulars	$
Retained earnings as on January 1, 2015	8,000
Add: Net Income	12,455
Less: Dividends	1,000
Retained earnings as on December 31, 2015	19,455

Table (2)

• Prepare the Balance Sheet of Incorporation S as on December 31, 2015 as follows:

Incorporation S
Balance Sheet
December 31, 2015
Assets	$	$
Cash		$42,835
Accounts receivable		3,500
Office Supplies		110
Prepaid rent		900
Unexpired insurance		180
Office Equipment	$54,000
Less: Accumulated depreciation of equipment & music	36,000	18,000
Total Assets		$65,525
Liabilities
Accounts payable	$1,400
Notes payable	9,000
Income taxes payable	2,350
Unearned service revenue	1,000
Salaries payable	1,900
Interest payable	420
Total Liabilities		$16,070
Stockholders' Equity
Capital stock	$30,000
Retained earnings	19,455
Total Stockholders' Equity		$49,455
Total Liabilities and Stockholders' Equity		$65,525

Table (3)

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.

Statement of retained earnings:

This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends are deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

Balance sheet:

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

c.

To determine

Prepare the year-end closing entries of Incorporation S.

Answer to Problem 5AP

Prepare the year-end closing entries of Incorporation S as follows:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December31	Service Revenue Earned		64,000
	Income Summary			64,000
	(To record the closure of revenues account )
December31	Income Summary		51,545
	Office Supply Expense			700
	Depreciation Expense: Office Equipment			9,000
	Rent Expense			3,825
	Insurance Expense			1,100
	Salaries Expense			29,000
	Interest Expense			420
	Income Taxes Expense			7,500
	(To record the closure of expense account to income summary)
December31	Income Summary		12,455
	Retained earnings			12,455
	(To record the closure of net income from income summary to retained earnings)
December31	Retained earnings		1,000
	Dividends			1,000
	(To record the closure of dividend to retained earnings)

Table (4)

Explanation of Solution

• Revenue Earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
• Office supply Expense, Depreciation Expense, Rent expenses, Salaries Expense, Insurance Expense, Interest Expense, Income and Taxes Expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.
• Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Since Income Summary account has a credit balance, it is transferred to Retained Earnings account by debiting it. Therefore, debit Income Summary account with $12,455.
• Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $12,455.
• Closing entries are also passed in order to close the excess of expenses over the revenues, and the dividend account.

d.

To determine

Prepare an after-closing trial balance of Incorporation S.

Answer to Problem 5AP

Prepare an after-closing trial balance of Incorporation S as follows:

Incorporation S
After-Closing Trial Balance
December 31, 2015
Particulars	$	$
Cash	$42,835
Accounts receivable	3,500
Office supplies	110
Prepaid rent	900
Unexpired insurance	180
Office equipment	54,000
Accumulated depreciation of office equipment		$36,000
Accounts payable		1,400
Notes payable		9,000
Income taxes payable		2,350
Unearned consulting services revenue		1,000
Salaries payable		1,900
Interest payable		420
Capital stock		30,000
Retained earnings		19,455
Totals	$101,525	$101,525

Table (5)

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

e.

To determine

Compute the company’s average monthly insurance expense for the month January and February of 2015.

Explanation of Solution

Compute the company’s average monthly insurance expense for the month January and February of 2015 as follows:

$\begin{array}{c}\begin{array}{l}\text{Insurance expense for the}\\ \text{month January and February}\end{array}\}=\frac{\text{Total expense}}{\text{2}}\\ =\frac{200}{2}\\ =\text{\$100 Per Months}\end{array}$

Working notes:

Particulars	$
Insurance expense incurred in 2015 $\left(\$1,010+\$90\right)$	1,100
Less: Total insurance expense for March through December $\left(\text{\$90}\times \text{10}\right)$	900
Total expense incurred in January and February	$200

Table (6)

f.

To determine

Compute the company’s average monthly rent expense from January to September of 2015.

Explanation of Solution

Compute the company’s average monthly rent expense from January to September of 2015 as follows:

$\begin{array}{c}\begin{array}{l}\text{Rent expense }\\ \text{per month}\end{array}\}=\frac{\text{Total rent expense}}{\text{9 months}}\\ =\frac{2,925}{9}\\ =\text{\$325 Per Months}\end{array}$

Working notes:

Particulars	$
Rent expense incurred in 2015 $\left(\$3,525+\$300\right)$	3,825
Less: Total rent expense from October to September $\left(\text{\$300}\times 3\right)$	900
Total expense incurred from January to September	2,925

Table (7)

g.

To determine

State how long has the business been in operation, if the company purchased all of its office equipment when it first incorporated.

Explanation of Solution

Compute the total months that the company has been in operation as follows:

$\begin{array}{c}\begin{array}{l}\text{Total month}\\ \text{in operation}\end{array}\}=\frac{\text{Accumulated depreciation}}{\text{Depreciation expenses}}\\ =\frac{36,000}{750}\\ =\text{\$48 Months}\end{array}$