Chapter 5, Problem 6PB

a.

To determine

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

Answer to Problem 6PB

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

Incorporation T
General Journal (Adjusting)
December, 31 Current Year
Date		Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	1.	Depreciation Expense of office equipment (1)		250
		Accumulated Depreciation of office equipment			250
		(To record the depreciation expense incurred in December)
December 31	2.	Unearned Agency fees		2,500
		Agency fees earned			2,500
		(To record the conversion of unearned revenue into earned revenue in December)
December 31	3.	Salaries Expense		1,360
		Salaries Payable			1,360
		(To record the accrued but unpaid salaries in December)
December 31	4.	Rent Expense (2)		600
		Prepaid Rent			600
		(To record the rent expense for December)
December 31	5.	Fees Receivable		3,000
		Agency fees earned			3,000
		(To record the revenue accrued at the end of December)
December 31	6.	Office Supplies Expense (3)		370
		Office Supplies			370
		(To record the supplies used for December)
December 31	7.	Insurance Expense (4)		125
		Unexpired Insurance			125
		(To record the portion of insurance policies expired in December)
December 31	8.	Interest Expense (5)		45
		Interest Payable			45
		(To record the interest expense accrued in December)
December 31	9.	Income Taxes Expense (6)		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 T
Adjusted Trial Balance
December 31, Current Year
Cash	14,950
Fees receivable	38,300
Prepaid rent	600
Unexpired insurance policies	250
Office supplies	530
Office equipment	15,000
Accumulated depreciation: office equipment		12,250
Accounts payable		1,500
Notes payable (Due 3/1/Next Year)		6,000
Income taxes payable		3,900
Unearned agency fees		5,500
Salaries payable		1,360
Interest payable		45
Capital stock		20,000
Retained earnings		10,800
Dividends	800
Agency fees earned		52,000
Telephone expense	480
Office supply expense	1,500
Depreciation expense: office equipment	3,000
Rent expense	6,700
Insurance expense	1,300
Salaries expense	26,000
Income taxes expense	3,900
Interest expense	45
Totals	113,355	113,355

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 depreciation Expense:

$\begin{array}{c}\text{Depreciation Expense}=\frac{\text{Office Equipment}}{\text{60 months}}\\ =\frac{\text{\$15,000}}{\text{60 months}}\\ =\$250\end{array}$ (1)

Compute the amount of rent Expense:

$\begin{array}{c}\text{Rent Expense}=\frac{\text{Prepaid rent}}{\text{3 months}}\\ =\frac{\text{\$1,800}}{\text{3 months}}\\ =\$600\end{array}$ (2)

Compute the amount of Office Supplies Expense:

$\begin{array}{c}\text{Office Supplies Expense}=\left[\begin{array}{l}\text{Office supplies in trial balance}-\\ \text{Office supplies on hand at December31}\end{array}\right]\\ =\$9\text{00}-\$530\\ =\$370\end{array}$ (3)

Compute the amount of Insurance Expense:

$\begin{array}{c}\text{Insurance Expense}=\frac{\text{Unexpired insurance}}{\text{6 months}}\\ =\frac{\text{\$750}}{\text{6 months}}\\ =\$125\end{array}$ (4)

Compute the amount of interest Expense:

$\begin{array}{c}\text{Interest Expense}=\frac{\text{Amount borrowed}}{\text{12 months}}\times \text{Interest rate}\\ =\frac{\text{\$6,000}}{\text{12 months}}\times \frac{9}{100}\\ =\$45\end{array}$ (5)

Compute the amount of income taxes Expense:

$\begin{array}{c}\text{Income taxes Expense}=\text{Income tax}-\text{Income tax expense}\\ =\$3,900-\$3,200\\ =\$700\end{array}$ (5)

b.

To determine

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

Answer to Problem 6PB

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

Incorporation T
Income Statement
For the Year Ended December 31, Current Year
Particulars	$	$
Revenues:
Agency fees earned		$52,000
Less: Expenses:
Telephone expense	$480
Office supply expense	1,500
Depreciation expense: office equipment	3,000
Rent expense	6,700
Insurance expense	1,300
Salaries expense	26,000
Interest expense	45	39,025
Income before taxes		12,975
Income taxes expense		3,900
Net income		$9,075

Table (3)

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

Incorporation T
Statement of retained earnings
For the Year Ended December 31, Current Year
Particulars	$
Retained earnings as on January 1, Current Year	10,800
Add: Net Income	9,075
Retained earnings as on December 31, Current Year	19,075

Table (4)

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

Incorporation T
Balance Sheet
December 31, Current Year
Assets	$	$
Cash		14,950
Fees receivable		38,300
Prepaid rent		600
Unexpired insurance policies		250
Office supplies		530
Office equipment	15,000
Less: Accumulated depreciation of office equipment	12,250	2,750
Total Assets		57,380
Liabilities
Accounts payable	$1,500
Note payable (Due 3/1/Next Year)	6,000
Income taxes payable	3,900
Unearned agency fees	5,500
Salaries payable	1,360
Interest payable	45
Total Liabilities		18,305
Stockholders' Equity
Capital stock	20,000
Retained earnings	19,075	39,075
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity		57,380

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 T.

Answer to Problem 6PB

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

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Agency fees earned		52,000
	Income Summary			52,000
	(To record the closure of revenues account )
December 31	Income Summary		42,925
	Telephone Expense			480
	Office Supply Expense			1,500
	Depreciation Expense: Office Equipment			3,000
	Rent Expense			6,700
	Insurance Expense			1,300
	Salaries Expense			26,000
	Interest Expense			45
	Income Taxes Expense			3,900
	(To record the closure of expense account to income summary)
December 31	Income Summary		9,075
	Retained earnings			9,075
	(To record the closure of net income from income summary to retained earnings)
December31	Retained earnings		800
	Dividends			800
	(To record the closure of dividend 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 $9,075.
• 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 $9,075.
• 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 T.

Answer to Problem 6PB

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

Incorporation T
After-Closing Trial Balance
December 31, Current Year
Particulars	$	$
Cash	$14,950
Fees receivable	38,300
Prepaid rent	600
Unexpired insurance policies	250
Office supplies	530
Office equipment	15,000
Accumulated depreciation: office equipment		$12,250
Accounts payable		1,500
Note payable (Due 3/1/Next Year)		6,000
Income taxes payable		3,900
Unearned agency payable		5,500
Salaries payable		1,360
Interest payable		45
Capital stock		20,000
Retained earnings		19,075
Totals	$69,630	$69,630

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 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:

$\begin{array}{c}\begin{array}{l}\text{Total month}\\ \text{in operation}\end{array}\}=\frac{\text{Accumulated depreciation}}{\text{Depreciation expenses}}\\ =\frac{\$12,250}{25}\\ =\text{\$49 Months}\end{array}$

f.

To determine

State whether the Agency’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 agency has been increased by $50 per month.

Working notes:

Compute the company’s total rent expense:

Particulars	$
Rent expense as per unadjusted  trail balance	6,700
Less: Rent expense incurred in November and December $\left(\text{\$600}\left(\text{2}\right)\times \text{2}\right)$	1,200
Total rent expense incurred from January to October	5,500

Table (8) (6)

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

$\begin{array}{c}\begin{array}{l}\text{Rent expense }\\ \text{per month}\end{array}\}=\frac{\text{Total rent expense}}{\text{10 months}}\\ =\frac{5,500(6)}{10}\\ =\text{\$550 Per Months}\end{array}$

Compute the Increase in month rent expenses as follows:

Particulars	$
Rent expense per month	600
Rent expense incurred in November	550
Increase in month rent expenses	50

Table (9)

g.

To determine

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

Explanation of Solution

The insurance expense of agency has been increased by $25 per month.

Working notes:

Compute the company’s total insurance expense:

Particulars	$
Insurance expense as per unadjusted  trail balance	1,300
Less: Insurance expense incurred from September to December $\left(\text{\$125}\left(4\right)\times 4\right)$	500
Total Insurance expense incurred from January to August	800

Table (10) (7)

Compute the company’s monthly Insurance expense from January to October of current year as follows:

$\begin{array}{c}\begin{array}{l}\text{Insurance expense }\\ \text{per month}\end{array}\}=\frac{\text{Total Insurance expense}}{\text{8 months}}\\ =\frac{800(7)}{8}\\ =\text{\$100 Per Months}\end{array}$

Compute the Increase in month Insurance expenses as follows:

Particulars	$
Insurance expense per month	125
Insurance expense incurred in September	100
Increase in month Insurance expenses	25

Table (11)