a.
Prepare the
a.
Answer to Problem 6AP
Prepare the adjusting journal entries of Incorporation B as on December 31:
Incorporation B | |||||
General Journal (Adjusting) | |||||
December, 31 Current Year | |||||
Date | Accounts title and Explanation | Post Ref. |
Debit ($) |
Credit ($) | |
December 31 | 1. | Supplies Expense (1) | 5,000 | ||
Supplies | 5,000 | ||||
(To record the supplies used for December) | |||||
December 31 | 2. | Studio Rent Expense (2) | 1,250 | ||
Prepaid studio Rent | 1,250 | ||||
(To record the rent expense for December) | |||||
December 31 | 3. | 800 | |||
| 800 | ||||
(To record the depreciation expense incurred for December) | |||||
December 31 | 4. | Interest Expense (4) | 240 | ||
Interest Payable | 240 | ||||
(To record the interest expense accrued in December) | |||||
December 31 | 5. | Unearned Client fees | 3,000 | ||
Client fees earned | 3,000 | ||||
(To record the conversion of unearned revenue into earned revenue in December) | |||||
December 31 | 6. | Client fees Receivable | 690 | ||
Client fees earned | 690 | ||||
(To record the revenue accrued at the end of December) | |||||
December 31 | 7. | Salaries Expense | 750 | ||
Salaries Payable | 750 | ||||
(To record the accrued but unpaid salaries in December) | |||||
December 31 | 8. | Income Taxes Expense (5) | 2,000 | ||
Income Taxes Payable | 2,000 | ||||
(To record the income taxes expense accrued in December) | |||||
Table (1)
Prepare an adjusted trial balance as on December 31, current year:
Incorporation B | ||
Adjusted Trial Balance | ||
December 31, Current Year | ||
Cash | 22,380 | |
Client fees receivable | 71,940 | |
Supplies | 1,000 | |
Prepaid studio rent | 1,250 | |
Studio equipment | 96,000 | |
Accumulated depreciation: studio equipment | 52,800 | |
Accounts payable | 6,420 | |
Salaries payable | 750 | |
Notes payable | 24,000 | |
Interest payable | 720 | |
Unearned client fees | 5,000 | |
Income taxes payable | 7,000 | |
Capital stock | 50,000 | |
20,000 | ||
Client fees earned | 86,000 | |
Supply expense | 9,000 | |
Salary expense | 18,000 | |
Interest expense | 720 | |
Studio rent expense | 12,500 | |
Utilities expense | 3,300 | |
Depreciation expense: studio equipment | 9,600 | |
Income taxes expense | 7,000 | |
Totals | 252,690 | 252,690 |
Table (2)
Explanation of Solution
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:
Compute the amount of rent Expense:
Compute the amount of depreciation Expense:
Compute the amount of interest Expense:
Compute the amount of income taxes Expense:
b.
Prepare the financial statements of Incorporation B as on December 31, current year.
b.
Answer to Problem 6AP
- Prepare the income statement of Incorporation B as on December 31, current year as follows:
Incorporation B | ||
Income Statement | ||
For the Year Ended December 31, Current Year | ||
Particulars | $ | $ |
Revenues: | ||
Client fees earned | $86,000 | |
Less: Expenses: | ||
Supplies expense | 9,000 | |
Salaries expense | 18,000 | |
Studio Rent expense | 12,500 | |
Utilities expense | 3,300 | |
Depreciation expense: studio equipment | 9,600 | |
Interest expense | 720 | 53,120 |
Income before taxes | 32,880 | |
Less: Income taxes expense | 7,000 | |
Net income | $25,880 |
Table (3)
- Prepare the statement of retained earnings of Incorporation B as on December 31, current year as follows:
Incorporation B | |
Statement of retained earnings | |
For the Year Ended December 31, Current Year | |
Particulars | $ |
Retained earnings as on January 1, Current Year | 20,000 |
Add: Net Income | 25,880 |
Retained earnings as on December 31, Current Year | 45,880 |
Table (4)
- Prepare the
Balance Sheet of Incorporation B as on December 31, current year as follows:
Incorporation B | ||
Balance Sheet | ||
December 31, Current Year | ||
Assets | $ | $ |
Cash | 22,380 | |
Client fees receivable | 71,940 | |
Supplies | 1,000 | |
Prepaid studio rent | 1,250 | |
Studio Equipment | 96,000 | |
Less: Accumulated depreciation of Studio Equipment | 52,800 | 43,200 |
Total Assets | 139,770 | |
Liabilities | ||
Accounts payable | 6,420 | |
Salaries payable | 750 | |
Notes payable | 24,000 | |
Interest payable | 720 | |
Unearned client fees | 5,000 | |
Income taxes payable | 7,000 | 43,890 |
Total Liabilities | ||
Capital stock | 50,000 | |
Retained earnings | 45,880 | 95,880 |
Total Stockholders' Equity | ||
Total Liabilities and Stockholders' Equity | 139,770 |
Table (5)
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.
Prepare the year-end closing entries of Incorporation B.
c.
Answer to Problem 6AP
Prepare the year-end closing entries of Incorporation B as follows:
Date | Accounts title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Client fees earned | 86,000 | ||
Income Summary | 86,000 | |||
(To record the closure of revenues account ) | ||||
December 31 | Income Summary | 60,120 | ||
Supply Expense | 9,000 | |||
Salaries Expense | 18,000 | |||
Interest Expense | 720 | |||
Studio Rent Expense | 12,500 | |||
Utilities Expense | 3,300 | |||
Depreciation Expense: Office Equipment | 9,600 | |||
Income Taxes Expense | 7,000 | |||
(To record the closure of expense account to income summary) | ||||
December 31 | Income Summary | 25,880 | ||
Retained earnings | 25,880 | |||
(To record the closure of net income from income summary to retained earnings) |
Table (6)
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 $25,880.
- 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 $25,880.
d.
Prepare an after-closing trial balance of Incorporation B.
d.
Answer to Problem 6AP
Prepare an after-closing trial balance of Incorporation B as follows:
Incorporation B | ||
After-Closing Trial Balance | ||
December 31, Current Year | ||
Particulars | $ | $ |
Cash | 22,380 | |
Client fees receivable | 71,940 | |
Supplies | 1,000 | |
Prepaid studio rent | 1,250 | |
Studio equipment | 96,000 | |
Less: Accumulated depreciation: studio equip. | 52,800 | |
Accounts payable | 6,420 | |
Salaries payable | 750 | |
Notes payable | 24,000 | |
Interest payable | 720 | |
Unearned client fees | 5,000 | |
Income taxes payable | 7,000 | |
Capital stock | 50,000 | |
Retained earnings | 45,880 | |
Totals | 192,570 | 192,570 |
Table (7)
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.
State whether the studio’s monthly rent remained the same throughout the year, and explain whether it has gone up or down.
e.
Explanation of Solution
The rent expense of studio has been increased by $250 per month.
Working notes:
Compute the company’s total rent expense:
Particulars | $ |
Studio Rent expense as per unadjusted trail balance | 11,250 |
Less: Rent expense incurred in November (2) | 1,250 |
Total rent expense incurred from January to October | 10,000 |
Table (8) (6)
Compute the company’s monthly rent expense from January to October of current year as follows:
Compute the Increase in month rent expenses as follows:
Particulars | $ |
Rent expense per month | 1,000 |
Rent expense incurred in November | 1,250 |
Increase in month rent expenses | 250 |
Table (9)
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