Chapter 5, Problem 5AP

a.

To determine

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

Answer to Problem 5AP

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

Incorporation S
General Journal (Adjusting)
December, 31 Current Year
Date		Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	1.	Accounts Receivable		1,800
		Consulting Services Revenue			1,800
		(To record the revenue accrued at the end of December)
December 31	2.	Unearned Consulting Services Revenue		3,000
		Consulting Services Revenue			3,000
		(To record the conversion of unearned revenue into earned revenue in December)
December 31	3.	Office Supplies Expense (1)		114
		Office Supplies			114
		(To record the offices supplies used for December)
December 31	4.	Depreciation Expense of Office Equipment (2)		900
		Accumulated Depreciation of Office Equipment			900
		(To record the depreciation expense incurred for December)
December 31	5.	Rent Expense (3)		360
		Prepaid Rent			360
		(To record the rent expense for December)
December 31	6.	Insurance Expense (4)		108
		Unexpired Insurance			108
		(To record the portion of insurance policies expired in December)
December 31	7.	Salaries Expense		2,280
		Salaries Payable			2,280
		(To record the accrued but unpaid salaries in December)
December 31	8.	Interest Expense (5)		72
		Interest Payable			72
		(To record the interest expense accrued in December)
December 31	9.	Income Taxes Expense (6)		720
		Income Taxes Payable			720
		(To record the income taxes expense accrued in December)

Table (1)

Prepare an adjusted trial balance as on December 31, current year:

Incorporation S
Adjusted Trial Balance
December 31, Current Year
Cash	51,402
Accounts receivable	4,200
Office supplies	132
Prepaid rent	1,080
Unexpired insurance	216
Office equipment	64,800
Accumulated depreciation of office equipment		43,200
Accounts payable		1,680
Notes payable (Due 3/1/Next Year)		10,800
Income taxes payable		2,820
Unearned consulting services revenue		1,200
Salaries payable		2,280
Interest payable		504
Capital stock		36,000
Retaining earnings		9,600
Dividends	1,200
Consulting services revenue		76,800
Office supplies expense	840
Depreciation expense: office equipment	10,800
Rent expense	4,590
Insurance expense	1,320
Salaries expense	34,800
Interest expense	504
Income taxes expense	9,000
Totals	184,884	184,884

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:

$\begin{array}{c}\text{Office Supplies Expense}=\left[\begin{array}{l}\text{Office supplies in trial balance}-\\ \text{Office supplies on hand at December31}\end{array}\right]\\ =\$\text{246}-\$132\\ =\$114\end{array}$ (1)

Compute the amount of depreciation Expense:

$\begin{array}{c}\text{Office Supplies Expense}=\frac{\text{Equipment}}{\text{72 months}}\\ =\frac{\text{\$64,800}}{\text{72 months}}\\ =\$900\end{array}$ (2)

Compute the amount of rent Expense:

$\begin{array}{c}\text{Rent Expense}=\frac{\text{Prepaidrent}}{\text{4 months}}\\ =\frac{\text{\$1,440}}{\text{4 months}}\\ =\$360\end{array}$ (3)

Compute the amount of Insurance Expense:

$\begin{array}{c}\text{Insurance Expense}=\frac{\text{Unexpired insurance}}{\text{12 months}}\times 4\text{Months}\\ =\frac{\text{\$324}}{\text{12 months}}\times 4\text{Months}\\ =\$108\end{array}$ (4)

Compute the amount of interest Expense:

$\begin{array}{c}\text{Interest Expense}=\frac{\text{Amount borrowed}}{\text{12 months}}\times \text{Interest rate}\\ =\frac{\text{\$10,800}}{\text{12 months}}\times \frac{8}{100}\\ =\$72\end{array}$ (5)

Compute the amount of income taxes Expense:

$\begin{array}{c}\text{Income taxes Expense}=\text{Income tax}-\text{Income tax expense}\\ =\$9,000-\$8,280\\ =\$720\end{array}$ (6)

b.

To determine

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

Answer to Problem 5AP

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

Incorporation S
Income Statement
For the Year Ended December 31, Current Year
Particulars	$	$
Revenues:
Consulting services revenue		$76,800
Less: Expenses:
Office supplies expense	840
Depreciation expense: office equipment	10,800
Rent expense	4,590
Insurance expense	1,320
Salaries expense	34,800
Interest expense	504	52,854
Income before taxes		23,946
Less: Income taxes expense		9,000
Net income		$14,946

Table (3)

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

Incorporation S
Statement of retained earnings
For the Year Ended December 31, Current Year
Particulars	$
Retained earnings as on January 1, Current Year	9,600
Add: Net Income	14,946
Less: Dividends	1,200
Retained earnings as on December 31, Current Year	23,346

Table (2)

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

Incorporation S
Balance Sheet
December 31, Current Year
Assets	$	$
Cash		51,402
Accounts receivable		4,200
Office Supplies		132
Prepaid rent		1,080
Unexpired insurance		216
Office Equipment	64,800
Less: Accumulated depreciation of equipment & music	43,200	21,600
Total Assets		78,630
Liabilities
Accounts payable	1,680
Notes payable	10,800
Income taxes payable	2,820
Unearned service revenue	1,200
Salaries payable	2,280
Interest payable	504
Total Liabilities		$19,284
Stockholders' Equity
Capital stock	36,000
Retained earnings	23,346
Total Stockholders' Equity		$56,346
Total Liabilities and Stockholders' Equity		$78,630

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		76,800
	Income Summary			76,800
	(To record the closure of revenues account )
December31	Income Summary		61,854
	Office Supply Expense			840
	Depreciation Expense: Office Equipment			10,800
	Rent Expense			4,590
	Insurance Expense			1,320
	Salaries Expense			34,800
	Interest Expense			504
	Income Taxes Expense			9,000
	(To record the closure of expense account to income summary)
December31	Income Summary		14,946
	Retained earnings			14,946
	(To record the closure of net income from income summary to retained earnings)
December31	Retained earnings		1,200
	Dividends			1,200
	(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 $14,946.
• 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 $14,946.
• 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, Current Year
Particulars	$	$
Cash	51,402
Accounts receivable	4,200
Office supplies	132
Prepaid rent	1,080
Unexpired insurance	216
Office equipment	64,800
Accumulated depreciation of office equipment		43,200
Accounts payable		1,680
Notes payable		10,800
Income taxes payable		2,820
Unearned consulting services revenue		1,200
Salaries payable		2,280
Interest payable		504
Capital stock		36,000
Retained earnings		23,346
Totals	121,830	121,830

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 current year.

Explanation of Solution

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

$\begin{array}{c}\begin{array}{l}\text{Insurance expense for the}\\ \text{month January and February}\end{array}\}=\frac{\text{Total expense}}{\text{2}}\\ =\frac{240}{2}\\ =\text{\$120 Per Months}\end{array}$

Working notes:

Particulars	$
Insurance expense incurred in Current Year $\left(\$1,212+\$108\right)$	1,320
Less: Total insurance expense for March through December $\left(\text{\$108}\times \text{10}\right)$	1,080
Total expense incurred in January and February	$240

Table (6)

f.

To determine

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

Explanation of Solution

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

$\begin{array}{c}\begin{array}{l}\text{Rent expense }\\ \text{per month}\end{array}\}=\frac{\text{Total rent expense}}{\text{9 months}}\\ =\frac{3,510}{9}\\ =\text{\$390 Per Months}\end{array}$

Working notes:

Particulars	$
Rent expense incurred in Current Year $\left(\$4,230+\$360\right)$	4,590
Less: Total rent expense from October to September $\left(\text{\$360}\times 3\right)$	1,080
Total expense incurred from January to September	3,510

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:

$\begin{array}{c}\begin{array}{l}\text{Total month}\\ \text{in operation}\end{array}\}=\frac{\text{Accumulated depreciation}}{\text{Depreciation expenses}}\\ =\frac{43,200}{900}\\ =\text{\$48 Months}\end{array}$