Chapter 5, Problem 5SP

This serial problem began in Chapter 1 and continues through most of the book. If previous chapter segments were not completed, the serial problem can begin at this point.

SP 5 Santana Rey created Business Solutions on October 1, 2019. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2019. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts.

In response to requests from customers, S. Rey will begin sell1ng computer software. The company will extend credit terms of 1/10, n/30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company's new merchandising activities. Its transactions for January through March follow.

The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation.

1. a. The March 31 amount of computer supplies still available totals $2,005.
2. b. Prepaid insurance coverage of $555 expired during this three-month period.
3. c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.
4. d. Prepaid rent of $2,475 expired during this three-month period.
5. e. Depreciation on the computer equipment for January 1 through March 31 is $1,250.
6. f. Depreciation on the office equipment for January 1 through March 31 is $400.
7. g. The March 31 amount of merchandise inventory still available totals $704.

Required

1. 1. Prepare journal entries to record each of the January through March transactions.
2. 2. Post the journal entries in part 1 to the accounts in the company's general ledger. Note: Begin with the ledger’s post-closing adjusted balances as of December 31,2019.
3. 3. Prepare a 6-column work sheet (similar to the one shown in Exhibit 3.13) that includes the unadjusted trial balance, the March 31 adjustments (a) through (g), and the adjusted trial balance. Do not prepare closing entries and do not journalize the adjustments or post them to the ledger.
4. 4. Prepare an income statement (from the adjusted trial balance in part 3) for the three months ended March 31, 2020. (a) Use a single-step format. List all expenses without differentiating between selling expenses and general and administrative expenses. (b) Use a multiple-step format that begins with gross sales (service revenues plus gross product sales) and includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses. Categorize the following accounts as selling expenses: Wages Expense, Mileage Expense, and Advertising Expense. Categorize the remaining expenses as general and administrative.
5. 5. Prepare a statement of owner’s equity (from the adjusted trial balance in part 3) for the three months ended March 31, 2020.
6. 6. Prepare a classified balance sheet (from the adjusted trial balance) as of March 3 1, 2020.

To determine

Prepare journal entries to record the transactions from January to March.

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.

Prepare journal entries to record the transactions from January to March.

Date	Account title and explanation	PR	Amount
			Debit	Credit
2020
4-Jan	Wages Expense	623	$125
	Wages Payable	210	$500
	Cash	101		$625
	(To record the Paid employee)
5-Jan	Cash	101	$25,000
	Person R, Capital	301		$25,000
	(To record the Additional investment by owner.)
7-Jan	Merchandise Inventory	119	$5,800
	Accounts Payable - Corporation K	201		$5,800
	(To record the Purchase of merchandise on credit)
9-Jan	Cash	101	$2,668
	Accounts Receivable— Company G	106.6		$2,668
	(To record the Collected accounts receivable)		$5,500
11-Jan	Accounts Receivable—Company AE	106.1	$5,500
	Unearned Computer Services Revenue	236	$1,500
	Computer Services Revenue	403		$7,000
	( To record the Completed work on project)
13-Jan	Accounts Receivable—Corporation L	106.5	$5,200
	Sales	413		$5,200
	(To record the merchandise sold on credit.)
13-Jan	Cost of Goods Sold	502	$3,560
	Merchandise Inventory	119		$3,560
	( To Record the cost of January 13 sale)
15-Jan	Merchandise Inventory	119	$600
	Cash	101		$600
	( To record the freight paid on incoming merchandise)
16-Jan	Cash	101	$4,000
	Computer Services Revenue	403		$4,000
	(To record the cash collected revenue from customer)
Jan. 17	Accounts Payable - Corporation K	201	$5,800
	Merchandise Inventory	119		$58
	Cash	101		$5,742
	(To record the payment of  account payable within discount period)
20-Jan	Sales Returns and Allowances	414	$500
	Accounts Receivable—Corporation L	106.5		$500
	( To record the defective goods returned from customers)
22-Jan	Cash	101	$4,653
	Sales Discounts	415	$47
	Accounts Receivable—Corporation L	106.5		$4,700
	(To record the Collections from accounts receivable)
24-Jan	Accounts Payable	201	$496
	Merchandise Inventory	119		$496
	(To record the return of merchandise for credit)
26-Jan	Merchandise Inventory	119	$9,000
	Accounts Payable - Corporation K	201		$9,000
	( To record the purchase of merchandise for resale)
26-Jan	Accounts Receivable—Incorporation KC	106.8	$5,800
	Sales	413		$5,800
	(To record the merchandise sold on credit)
26-Jan	Cost of Goods Sold	502	$4,640
	Merchandise Inventory	119		$4,640
	( To record the  cost of January 26 sales)
31-Jan	Wages Expense	623	$1,250
	Cash	101		$1,250
	( To record the payment of employee wages)
1-Feb	Prepaid Rent	131	$2,475
	Cash	101		$2,475
	( To record the payment of three months’ rent in advance)
3-Feb	Accounts Payable	201	$8,504
	Merchandise Inventory	119		$90
	Cash	101		$8,414
	(To record the payment of  account payable within discount period)
5-Feb	Advertising Expense	655	$600
	Cash	101		$600
	( To record the payment for advertising expense)
11-Feb	Cash	101	$5,500
	Accounts Receivable—Alex’s Eng. Co.	106.1		$5,500
	( To record the collection of cash from customers)
15-Feb	Person R, Withdrawals	302	$4,800
	Cash	101		$4,800
	(To record the withdrawals of owner)
23-Feb	Accounts Receivable—Corporation D	106.7	$3,220
	Sales	413		$3,220
	( To record the sale of merchandise on credit)
23-Feb	Cost of Goods Sold	502	$2,660
	Merchandise Inventory	119		$2,660
	( To record the  cost of February 23 sales)
26-Feb	Wages Expense	623	$1,000
	Cash	101		$1,000
	( To record the payment of wages to employee)
27-Feb	Mileage Expense	676	$192
	Cash	101		$192
	(To record the Reimbursement of business mileage)
8-Mar	Computer Supplies	126	$2,730
	Accounts Payable-Company H	201		$2,730
	( To record the purchase of  supplies on credit)
9-Mar	Cash	101	$3,220
	Accounts Receivable—Corporation D	106.7		$3,220
	( To record the collection of accounts receivable)
11-Mar	Repairs Expense–Computer	684	$960
	Cash	101		$960
	(To record the payment for computer repairs)
16-Mar	Cash	101	$5,260
	Computer Services Revenue	403		$5,260
	( To record the collection cash revenue from customer)
19-Mar	Accounts Payable	201	$3,830
	Cash	101		$3,830
	( To record the payment of accounts payable ($1,100 + $2,730))
24-Mar	Accounts Receivable—Company EL	106.3	$9,047
	Computer Services Revenue	403		$9,047
	(To record the billed customer for services)
25-Mar	Accounts Receivable—Company WS	106.2	$2,800
	Sales	413		$2,800
	( To record the sale of merchandise on credit)
25-Mar	Cost of Goods Sold	502	$2,002
	Merchandise Inventory	119		$2,002
	( To record the  cost of sales of March 25 )
30-Mar	Accounts Receivable—Company IFM	106.4	$2,220
	Sales	413		$2,220
	( To record the sale of merchandise on credit)
30-Mar	Cost of Goods Sold	502	$1,048
	Merchandise Inventory	119		$1,048
	( To record the  cost of sales of March 30 )
31-Mar	Mileage Expense	676	$128
	Cash	101		$128
	(To record the Reimbursement of business mileage)

Table (1)

To determine

Post the journal entries to the accounts in the general ledger of Company BS.

Explanation of Solution

Account: A record, that documents or records the change in assets, liabilities, or equity for a particular period, is referred to as an account.

Cash No. 101
Date		PR	Debit	Credit	Balance
31-Dec					$48,372
4-Jan				$625	$47,747
5-Jan			$25,000		$72,747
9-Jan			$2,668		$75,415
15-Jan				$600	$74,815
16-Jan			$4,000		$78,815
17-Jan				$5,742	$73,073
22-Jan			$4,653		$77,726
31-Jan				$1,250	$76,476
1-Feb				$2,475	$74,001
3-Feb				$8,414	$65,587
5-Feb				$600	$64,987
11-Jan			$5,500		$70,487
15-Feb				$4,800	$65,687
26-Feb				$1,000	$64,687
27-Feb				$192	$64,495
9-Mar			$3,220		$67,715
11-Mar				$960	$66,755
16-Mar			$5,260		$72,015
19-Mar				$3,830	$68,185
31-Mar				$128	$68,057
Accounts Receivable—Company AE  No. 106.1
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
11-Jan			$5,500		$5,500
11-Feb				$5,500	$0
Accounts Receivable—Company WS No. 106.2
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
25-Mar				$2,800	$2,800
Accounts Receivable—Company EL No. 106.3
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
24-Mar			$9,047		$9,047
Accounts Receivable—Company IFM No. 106.4
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$3,000
30-Mar			$2,220		$5,220
Accounts Receivable—Corporation L No. 106.5
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
13-Jan			$5,200		$5,200
20-Jan				$500	$4,700
22-Jan				$4,700	$0
Accounts Receivable—Company G 106.6
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$2,668
9-Jan				$2,668	$0
Accounts Receivable—Company D No. 106.7
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
23-Feb			$3,220		$3,220
9-Mar				$3,220	$0
Accounts Receivable—Incorporation KC No. 106.8
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
26-Jan			$5,800	$0	$5,800
Accounts Receivable—Incorporation D No. 106.8
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
Merchandise inventory—Incorporation D No. 119
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$0
7-Jan			$5,800		$5,800
13-Jan				$3,560	$2,240
15-Jan			$600		$2,840
17-Jan				$58	$2,782
24-Jan				$496	$2,286
26-Jan			$9,000		$11,286
26-Jan				$4,640	$6,646
3-Feb				$90	$6,556
23-Feb				$2,660	$3,896
25-Mar				$2,002	$1,894
30-Mar				$1,048	$846
Compute supplies No. 126
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$580
8-Mar	Balance		$2,730		$3,310
Prepaid Insurance No. 128
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$1,665
Prepaid Rent No. 131
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$825
1-Feb			$2,475		$3,300
Office equipment No. 163
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$8,000
Accumulated depreciation- Office equipment No. 164
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$400
Computer equipment No. 167
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$20,000
Accumulated depreciation- Computer equipment No. 168
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$1,250
Accounts payable No. 201
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$1,100
7-Jan	Balance			$5,800	$6,900
17-Jan	Balance		$5,800		$1,100
24-Jan	Balance		$496		$604
26-Jan	Balance			$9,000	$9,604
3-Feb	Balance		$8,504		$1,100
8-Mar	Balance			$2,730	$3,830
9-Mar	Balance		$3,830		$0
Wages payable No. 210
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$500
4-Jan			$500		$0
Unearned computer services revenue No. 236
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$1,500
11-Jan			$1,500		$0
Person R, Capital No. 301
Date		PR	Debit	Credit	Balance
31-Dec	Balance				$80,360
5-Jan				$25,000	$105,360
Person R, Withdrawals No. 302
Date		PR	Debit	Credit	Balance
15-Feb			$4,800		$4,800
Computer services revenue No. 403
Date		PR	Debit	Credit	Balance
11-Jan				$7,000	$7,000
16-Jan				$4,000	$11,000
16-Mar				$5,260	$16,260
24-Mar				$9,047	$25,307
Sales No. 413
Date		PR	Debit	Credit	Balance
13-Jan				$5,200	$5,200
26-Jan				$5,800	$11,000
23-Feb				$3,220	$14,220
25-Mar				$2,800	$17,020
30-Mar				$2,220	$19,240
Sales returns and allowances No. 414
Date		PR	Debit	Credit	Balance
20-Jan				$500	$500
Sales discounts No. 415
Date		PR	Debit	Credit	Balance
20-Jan			$47	$0	$47
Cost of goods sold No. 502
Date		PR	Debit	Credit	Balance
13-Jan			$3,560		$3,560
26-Jan			$4,640		$8,200
23-Feb			$2,660		$10,860
25-Mar			$2,002		$12,862
30-Mar			$1,048		$13,910
Depreciation expense - Office equipment No. 612
Date		PR	Debit	Credit	Balance
Depreciation expense - Computer equipment No. 613
Date		PR	Debit	Credit	Balance
Wages expense  No. 623
Date		PR	Debit	Credit	Balance
4-Jan			$125		$125
31-Jan			$1,250		$1,375
26-Feb			$1,000		$2,375
Insurance expense No. 637
Date		PR	Debit	Credit	Balance
Rent expense  No. 640
Date		PR	Debit	Credit	Balance
Computer supplies expense  No. 652
Date		PR	Debit	Credit	Balance
Advertising expense No. 655
Date		PR	Debit	Credit	Balance
5-Feb			$600		$600
Mileage expense No. 676
Date		PR	Debit	Credit	Balance
27-Feb			$192		$192
31-Mar			$128		$320
Miscellaneous Expenses  No. 677
Date		PR	Debit	Credit	Balance
Repairs Expense—Computer  No. 684
Date		PR	Debit	Credit	Balance
11-Mar				$960	$960

To determine

Prepare a partial worksheet of Company BS for the three months ended March 31, 2020.

Explanation of Solution

Worksheet: A worksheet is the summarized form of accounting information which is made in order to ensure that the accounts are made properly.

Prepare a partial worksheet of Company BS for the three months ended March 31, 2020.

Table (2)

To determine

Prepare a single step income statement of Company BS for the three months ended March 31, 2020.

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.

Single-step income statement:  This statement displays the total revenues as one line item from which the total expenses including cost of goods sold is subtracted to arrive at the net profit /net loss for the period.

Prepare a statement of income of Company BS for the three months ended March 31, 2020.

Company BS
Statement of Income
For the three months ended March 31, 2020
Particulars	Amount	Amount
Revenues
Computer services revenue		$25,307
Net sales ()		$18,693
Total revenues		$44,000
Expenses
Cost of goods sold	$14,052
Depreciation expense—Office equipment	$400
Depreciation expense—Computer equipment	$1,250
Wages expense	$3,250
Insurance expense	$555
Rent expense	$2,475
Computer supplies expense	$1,305
Advertising expense	$600
Mileage expense	$320
Repairs expense—Computer	$960
Total expenses		($25,167)
Net income		$18,833

Table (3)

The net income of Company BS for the three months ended March 31, 2020 is $18,833.

To determine

Prepare a statement of owner’s equity of Company BS for the three months ended March 31, 2020.

Explanation of Solution

Prepare a statement of owner’s equity of Company BS for the three months ended March 31, 2020.

Company BS
Statement of owner’s equity
For the three months ended March 31, 2020
Particulars	Amount	Amount
Person R, Capital, December 31, 2019		$80,360
Add: Investments by owner		25,000
Net income		18,833
		$124,193
Less: Withdrawals by owner		($4,800)
Person R, Capital, as on March 31, 2020		$119,393

Table (4)

The owner’s equity of Company BS for the three months ended March 31, 2020 is $119,393.

To determine

Prepare a classified balance sheet of Company BS as of March 31, 2020.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets.

Prepare a classified balance sheet as of March 31, 2020.

Company BS
Balance sheet
As of March 31, 2020
Assets	Amount	Amount
Current assets
Cash		$68,057
Accounts receivable		$22,867
Merchandise inventory		$704
Computer supplies		$2,005
Prepaid insurance		$1,110
Prepaid rent		$825
Total current assets		$95,568
Plant assets
Office equipment	$8,000
Accumulated depreciation—Office equipment	($800)	$7,200
Computer equipment	$20,000
Accumulated depreciation—Computer equipment	($2,500)	$17,500
Total plant assets		$24,700
Total assets		$120,268
Liabilities and Stockholder's Equity
Liabilities
Current liabilities
Wages payable		$875
Stockholders’ Equity
Person R, Capital		$119,393
Total liabilities and equity		$120,268

Table (5)