Chapter 5, Problem 6PA

a.

To determine

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

Answer to Problem 6PA

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.	Depreciation Expense of studio Equipment (3)		800
		Accumulated Depreciation of studio Equipment			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
Retained earnings		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:

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:

$\begin{array}{c}\text{Office Supplies Expense}=\left[\begin{array}{l}\text{Office supplies in trial balance}-\\ \text{Office supplies on hand at December31}\end{array}\right]\\ =\$\text{6,000}-\$1,000\\ =\$5,000\end{array}$ (1)

Compute the amount of rent Expense:

$\begin{array}{c}\text{Rent Expense}=\frac{\text{Prepaid rent}}{\text{2 months}}\\ =\frac{\text{\$1,440}}{\text{2 months}}\\ =\$1,250\end{array}$ (2)

Compute the amount of depreciation Expense:

$\begin{array}{c}\text{Depreciation Expense}=\frac{\text{Studio Equipment}}{\text{120 months}}\\ =\frac{\text{\$96,000}}{\text{120 months}}\\ =\$800\end{array}$ (3)

Compute the amount of interest Expense:

$\begin{array}{c}\text{Interest Expense}=\frac{\text{Amount borrowed}}{\text{12 months}}\times \text{Interest rate}\\ =\frac{\text{\$24,000}}{\text{12 months}}\times \frac{12}{100}\\ =\$240\end{array}$ (4)

Compute the amount of income taxes Expense:

$\begin{array}{c}\text{Income taxes Expense}=\text{Income tax}-\text{Income tax expense}\\ =\$7,000-\$5,000\\ =\$2,000\end{array}$ (5)

b.

To determine

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

Answer to Problem 6PA

• 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
Stockholders' Equity
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.

To determine

Prepare the year-end closing entries of Incorporation B.

Answer to Problem 6PA

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.

To determine

Prepare an after-closing trial balance of Incorporation B.

Answer to Problem 6PA

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.

To determine

State whether the studio’s monthly rent remained the same throughout the year, and explain whether it has gone up or down.

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:

$\begin{array}{c}\begin{array}{l}\text{Rent expense }\\ \text{per month}\end{array}\}=\frac{\text{Total rent expense}}{\text{10 months}}\\ =\frac{10,000(6)}{10}\\ =\text{\$1,000 Per Months}\end{array}$

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)