Chapter 5, Problem 5PB

a.

To determine

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

Answer to Problem 5PB

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

Incorporation N
General Journal (Adjusting)
December, 31 Current Year
Date		Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	1.	Accounts Receivable		25,000
		Consulting Services Revenue			25,000
		(To record the revenue accrued at the end of December)
December 31	2.	Unearned Consulting Services Revenue		15,000
		Consulting Services Revenue			15,000
		(To record the conversion of unearned revenue into earned revenue in December)
December 31	3.	Office Supplies Expense (1)		500
		Office Supplies			500
		(To record the offices supplies used for December)
December 31	4.	Depreciation Expense of Office Equipment (2)		1,000
		Accumulated Depreciation of Office Equipment			1,000
		(To record the depreciation expense incurred for December)
December 31	5.	Rent Expense (3)		1,200
		Prepaid Rent			1,200
		(To record the rent expense for December)
December 31	6.	Insurance Expense (4)		250
		Unexpired Insurance			250
		(To record the portion of insurance policies expired in December)
December 31	7.	Salaries Expense		12,000
		Salaries Payable			12,000
		(To record the accrued but unpaid salaries in December)
December 31	8.	Interest Expense (5)		200
		Interest Payable			200
		(To record the interest expense accrued in December)
December 31	9.	Income Taxes Expense (6)		5,000
		Income Taxes Payable			5,000
		(To record the income taxes expense accrued in December)

Table (1)

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

Incorporation N
Adjusted Trial Balance
December 31, Current Year
Cash	276,500
Accounts receivable	115,000
Office supplies	300
Prepaid rent	2,400
Unexpired insurance	1,250
Office equipment	72,000
Accumulated depreciation of office equipment		25,000
Accounts payable		4,000
Notes payable		60,000
Interest payable		800
Income taxes payable		14,000
Dividends payable		3,000
Unearned consulting services revenue		7,000
Salaries payable		12,000
Capital stock		200,000
Retaining earnings		40,000
Dividends	3,000
Consulting services revenue		540,000
Office supplies expense	5,000
Depreciation expense: office equipment	12,000
Rent expense	15,900
Insurance expense	2,450
Salaries expense	342,000
Utilities expense	4,800
Interest expense	3,200
Income taxes expense	50,000
Totals	905,800	905,800

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:

$\begin{array}{c}\text{Office Supplies Expense}=\left[\begin{array}{l}\text{Office supplies in trial balance}-\\ \text{Office supplies on hand at December31}\end{array}\right]\\ =\$800-\$300\\ =\$500\end{array}$ (1)

Compute the amount of depreciation Expense:

$\begin{array}{c}\text{Office Supplies Expense}=\frac{\text{Equipment}}{\text{72 months}}\\ =\frac{\text{\$72,000}}{\text{72 months}}\\ =\$1,000\end{array}$ (2)

Compute the amount of rent Expense:

$\begin{array}{c}\text{Rent Expense}=\frac{\text{Prepaidrent}}{\text{3 months}}\\ =\frac{\text{\$3,600}}{\text{3 months}}\\ =\$1,200\end{array}$ (3)

Compute the amount of insurance Expense:

$\begin{array}{c}\text{Insurance Expense}=\frac{\text{Unexpired insurance}}{\text{12 months}}\times 4\text{Months}\\ =\frac{\text{\$1,500}}{\text{6 months}}\times 4\text{Months}\\ =\$250\end{array}$ (4)

Compute the amount of interest Expense:

$\begin{array}{c}\text{Interest Expense}=\frac{\text{Amount borrowed}}{\text{12 months}}\times \text{Interest rate}\\ =\frac{\text{\$60,000}}{\text{12 months}}\times \frac{4}{100}\\ =\$200\end{array}$ (5)

Compute the amount of income taxes Expense:

$\begin{array}{c}\text{Income taxes Expense}=\text{Income tax}-\text{Income tax expense}\\ =\$50,000-\$45,000\\ =\$5,000\end{array}$ (6)

b.

To determine

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

Answer to Problem 5PB

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

Incorporation N
Income Statement
For the Year Ended December 31, Current Year
Particulars	$	$
Revenues:
Consulting services revenue		$540,000
Less: Expenses:
Office supplies expense	5,000
Depreciation expense: office equipment	12,000
Rent expense	15,900
Insurance expense	2,450
Salaries expense	342,000
Utilities expense	4,800
Interest expense	3,200	385,350
Income before taxes		154,650
Less: Income taxes expense		50,000
Net income		$104,650

Table (3)

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

Incorporation N
Statement of retained earnings
For the Year Ended December 31, Current Year
Particulars	$
Retained earnings as on January 1, Current Year	40,000
Add: Net Income	104,650
Less: Dividends	3,000
Retained earnings as on December 31, Current Year	141,650

Table (2)

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

Incorporation N
Balance Sheet
December 31, Current Year
Assets	$	$
Cash		276,500
Accounts receivable		115,000
Office Supplies		300
Prepaid rent		2,400
Unexpired insurance		1,250
Office Equipment	72,000
Less: Accumulated depreciation of equipment & music	25,000	47,000
Total Assets		442,450
Liabilities
Accounts payable	4,000
Notes payable	60,000
Income taxes payable	14,000
Dividends payable	3,000
Unearned service revenue	7,000
Salaries payable	12,000
Interest payable	800
Total Liabilities		$100,800
Stockholders' Equity
Capital stock	200,000
Retained earnings	141,650
Total Stockholders' Equity		$341,650
Total Liabilities and Stockholders' Equity		442,450

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 N.

Answer to Problem 5PB

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

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December31	Service Revenue Earned		540,000
	Income Summary			540,000
	(To record the closure of revenues account )
December31	Income Summary		435,350
	Office Supply Expense			5,000
	Depreciation Expense: Office Equipment			12,000
	Rent Expense			15,900
	Insurance Expense			2,450
	Salaries Expense			342,000
	Utilities Expense			4,800
	Interest Expense			3,200
	Income Taxes Expense			50,000
	(To record the closure of expense account to income summary)
December31	Income Summary		104,650
	Retained earnings			104,650
	(To record the closure of net income from income summary to retained earnings)
December31	Retained earnings		3,000
	Dividends			3,000
	(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 $104,650.
• 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 $104,650.
• 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 N.

Answer to Problem 5PB

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

Incorporation N
After-Closing Trial Balance
December 31, Current Year
Particulars	$	$
Cash	276,500
Accounts receivable	115,000
Office supplies	300
Prepaid rent	2,400
Unexpired insurance	1,250
Office equipment	72,000
Accumulated depreciation of office equipment		25,000
Accounts payable		4,000
Notes payable		60,000
Income taxes payable		14,000
Unearned consulting services revenue		7,000
Dividend Payable		3,000
Salaries payable		12,000
Interest payable		800
Capital stock		200,000
Retained earnings		141,650
Totals	467,450	467,450

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 from January to November of current year.

Explanation of Solution

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

$\begin{array}{c}\begin{array}{l}\text{Insurance expense for the}\\ \text{month January to November}\end{array}\}=\frac{\text{Total expense}}{11}\\ =\frac{2,200}{11}\\ =\text{\$200 Per Months}\end{array}$

Working notes:

Particulars	$
Insurance expense incurred in Current Year $\left(\$2,200+\$250\right)$	2,450
Less: Total insurance expense for December	250
Total expense incurred in January and February	$2,200

Table (6)

f.

To determine

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

Explanation of Solution

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

$\begin{array}{c}\begin{array}{l}\text{Rent expense }\\ \text{per month}\end{array}\}=\frac{\text{Total rent expense}}{\text{5 months}}\\ =\frac{7,500}{5}\\ =\text{\$1,500 Per Months}\end{array}$

Working notes:

Particulars	$
Rent expense incurred in Current Year $\left(\$14,700+\$1,200\right)$	15,900
Less: Total rent expense from June to December $\left(\text{\$1,200}\times 7\right)$	8,400
Total expense incurred from January to May	7,500

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:

$\begin{array}{c}\begin{array}{l}\text{Total month}\\ \text{in operation}\end{array}\}=\frac{\text{Accumulated depreciation}}{\text{Depreciation expenses}}\\ =\frac{25,000}{1,000}\\ =\text{\$25 Months}\end{array}$

h.

To determine

State the amount of interest expense accrued on the given note for the current year.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Interest expense }\\ \text{per month}\end{array}\}=\frac{\text{Total Interest}}{\text{3 months}}\\ =\frac{2,400}{3}\\ =\text{\$800 Per Months}\end{array}$

Working notes:

Particulars	$
Interest expense incurred in Current Year	3,200
Less: Total interest expense in September through December	800
Total interest on prior note in January through March	2,400

Table (8)