Chapter 7, Problem 1CP

a.

To determine

Record the transactions in general journal.

Explanation of Solution

Prepare journal entries for Company DS.

Date	Account title and Explanation	Post ref.	Amount $
			Debit	Credit
Year 7
1.	Salaries payable		1,400
	Cash			1,400
	( To record the payment of salaries expense for Year 6)
2. March 1	Prepaid Rent (Van)		4,800
	Cash			4,800
	( To record the prepaid rent of delivery van)
3.  May 2	Prepaid Rent (Office)		8,400
	Cash			8,400
	( To record the payment of office rent in advance)
4.	Supplies		550
	Accounts Payable			550
	( To record the purchase of supplies on account)
5.	Merchandise Inventory (1)		29,925
	Cash			29,925
	( To record the purchase of merchandise inventory for cash)
6.	No entry
7.	Allowance for Doubtful Accounts		1,900
	Accounts Receivable			1,900
	( To record the uncollectible account expense)
8a.	Accounts Receivable		63,800
	Alarm Sales Revenue			63,800
	( To record the sales of alarms on account)
8b.	Cost of Goods Sold (2)		31,235
	Merchandise Inventory			31,235
	( To record the cost of merchandise sold)
9.	Accounts Payable		800
	Cash			800
	( To record the payment to accounts payable)
10.	Accounts Receivable – Credit Card		23,040
	Accounts Receivable		44,000
	Credit Card Expense $\left(\$24,000\times 4\%\right)$		960
	Monitoring Service Revenue			68,000
	( To record the sales made by credit card and sales made on account)
11.	Maintenance Expense		50
	Office Supplies Expense		22
	Miscellaneous Expense		9
	Cash Short/Over			2
	Cash			79
	( To record the replenishment of petty cash fund )
12.	Cash		23,040
	Accounts Receivable – Credit card			23,040
	( To record the collection of amount due from credit card company )
13.	Salaries Expense		45,000
	Cash			45,000
	( To record the payment of salaries expense )
14.	Cash		116,800
	Accounts Receivable			116,800
	( To record the collections from accounts receivable )
15.	Advertising Expense		9,500
	Cash			9,500
	( To record the payment of advertising expense )
16.	Utilities Expense		5,200
	Cash			5,200
	( To record the payment of utility expense )
17.	Dividends		20,000
	Cash			20,000
	( To record the cash dividends paid to stockholders )
18.	Supplies Expense (3)		460
	Supplies			460
	( To record the supplies at the end )
19.	Rent Expense (Refer Table (2))		12,800
	Prepaid Rent			12,800
	( To record the recognition of prepaid rent for delivery van and office  )
20.	Uncollectible accounts expense (4)		3,234
	Allowance for Doubtful Accounts			3,234
	( To record the recognition of uncollectible accounts expense )
21	Salaries expense		2,100
	Salaries payable			2,100
	( To record the accrued salaries)

Table (1)

Working Note:

Determine the value of merchandise inventory purchased.

$\begin{array}{c}\begin{array}{l}\text{Value of merchandise}\\ \text{ inventory}\end{array}\}=\text{Units purchased}\times \text{Cost per unit}\\ \text{=105 units}\times \$285\\ =\$29,925\end{array}$ (1)

Determine the cost of goods sold of alarm systems.

$\begin{array}{c}\begin{array}{l}\text{Total cost of }\\ \text{goods sold}\end{array}\}=\left(\text{Units sold}\times \text{Cost per unit}\right)+\left(\text{Units sold}\times \text{Cost per unit}\right)\\ \text{=}\left(\text{23 units}\times \$280\right)+\left(\text{87 units}\times \$285\right)\\ =\$6,440+\$24,795\\ =\$31,235\end{array}$ (2)

Determine the amount of supplies expense.

$\begin{array}{c}\begin{array}{l}\text{Supplies expense }\\ \text{during the year}\end{array}\}=\left(\begin{array}{l}\text{Beginning balance }\\ \text{of supplies}\end{array}\right)+\left(\begin{array}{l}\text{Purchase of }\\ \text{supplies}\end{array}\right)-\left(\begin{array}{l}\text{Ending balance }\\ \text{of supplies}\end{array}\right)\\ =\$160+\$550-\$250\\ =\$460\end{array}$ (3)

Determine the total rent expense recognized for Year 7.

Total rent expense for Year 7
Particulars	Amount $	Amount $
Prepaid rent as of January 1, Year 6 is expired in Year 7	3,200
Add: Expired lease paid in Year 7 for company van $\left(\$4,800\times \frac{10}{12}\right)$	4,000
Expired lease paid in Year 7 for office $\left(\$8,400\times \frac{8}{12}\right)$	5,600
Total rent expense for Year 7		12,800

Table (2)

Determine the amount of uncollectible account expense.

The total credit sales include the alarm sales on account and the monitoring service rendered.

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}=\left(\text{Total credit sales}\right)\times \left(\begin{array}{l}\text{Estimated rate }\\ \text{of percentage}\end{array}\right)\\ =\left(\$63,800+\$44,000\right)\times 3\%\\ =\$107,800\times 3\%\\ =\$3,234\end{array}$ (4)

b.

To determine

Post the transactions to T-accounts.

Explanation of Solution

Post the transactions to T-accounts.

Cash
Balance	$78,972	1.	$1,400
12.	$23,040	2.	$4,800
14.	$116,800	3.	$8,400
		5.	$29,925
		9.	$800
		11.	$79
		13.	$45,000
		15.	$9,500
		16.	$5,200
		17.	$20,000
Balance	$93,708

Petty Cash
Balance	$100

Accounts Receivable
Balance	$33,440
8a.	$63,800	7.	$1,900
10.	$44,000	14.	$116,800
Balance	$22,540

Accounts Receivable Credit Cards
10.	$23,040	12.	$23,040
Balance	$0

Supplies
Balance	$160
4.	$550	18.	$460
Balance	$250

Prepaid Rent
Balance	$3,200
2.	$4,800	19.	$12,800
3.	$8,400
Balance	$3,600

Merchandise Inventory
Balance	$6,440	8b.	$31,235
5.	$29,925
Balance	$5,130

Land
Balance	$4,000

Accounts Payable
9.	$800	Balance	$250
		4.	$550
		Balance	$0

Salaries Payable
		Balance	$1,400
1.	$1,400	21.	$2,100
		Balance	$2,100

Common Stock
		Balance	$50,000

Retained Earnings
		Balance	$74,662

Dividends
17.	$20,000
Balance	$20,000

Alarm Sales Revenue
		8a.	$63,800
		Balance	$63,800

Monitoring Service Revenue
		10.	$68,000
		Balance	$68,000

Cost of Goods Sold
8b.	$31,235
Balance	$31,235

Advertising Expense
15.	$9,500
Balance	$9,500

Credit Card Expense
10.	$960
Balance	$960

Maintenance Expense
11.	$50
Balance	$50
Miscellaneous Expense
11.	$9
Balance	$9

Office Supplies Expense
11.	$22
Balance	$22

Rent Expense
19.	$12,800
Balance	$12,800

Salaries Expense
13.	$45,000
21.	$2,100
Balance	$47,100

	Supplies Expense
	18.	$460
Balance		$460

Uncollectible Accounts Expense
20.	$3,234
Balance	$3,234

Utilities Expense
16.	$5,200
Balance	$5,200

Cash Short/Over
		11.	$2
		Balance	$2

c.

To determine

Prepare a trial balance.

Explanation of Solution

Trial balance: Trial balance is a schedule that lists the balances of all ledger accounts and verifies the mathematical accuracy of the accounting records and provides a convenient reference of current account balances.

Prepare the trial balance of Incorporation PSS for the year ended December 31, Year 7.

Incorporation PSS
Trial balance
For the year ended December 31,Year 7
Particulars	Amount $	Amount $
Cash	93,708
Petty Cash	100
Accounts Receivable	22,540
Allowance for Doubtful Accounts		$1,334
Supplies	250
Prepaid Rent	3,600
Merchandise Inventory	5,130
Land	4,000
Salaries Payable		2,100
Common Stock		50,000
Retained Earnings		74,662
Dividends	20,000
Alarms Sales Revenue		63,800
Monitoring Service Revenue		68,000
Cost of Goods Sold	31,235
Advertising Expense	9,500
Credit Card Expense	960
Maintenance Expense	50
Miscellaneous Expense	9
Office Supplies Expense	22
Rent Expense	12,800
Salaries Expense	47,100
Supplies Expense	460
Uncollectible Accounts Expense	3,234
Utilities Expense	5,200
Cash Short/Over		2
Totals	$259,898	$259,898

Table (3)

d.

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Incorporation PSS for Year 7.

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.

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.

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare the income statement for Incorporation PSS for the year ended December 31, Year 7.

Incorporation PSS
Statement of income
For the year ended December 31, Year 7
Particulars	Amount $	Amount $
Revenues
Monitoring service revenue	68,800
Alarm sales revenue	63,800
Total revenues		131,800
Less: Cost of goods sold		(31,235)
Gross margin		100,565
Expenses:
Advertising Expense	9,500
Credit Card Expense	960
Maintenance Expense	50
Miscellaneous Expense	9
Office Supplies Expense	22
Rent Expense	12,800
Salaries Expense	47,100
Supplies Expense	460
Uncollectible Accounts Expense	3,234
Utilities Expense	5,200
Cash Short and Over	(2)
Total operating expense		(79,333)
Net income		21,232

Table (4)

Hence, the net income of Incorporation PSS for the year ended December 31, Year 7 is $21,232.

Prepare the statement of changes in stockholders’ equity of Incorporation PSS for the year ended December 31, Year 7.

Incorporation PSS
Statement of changes in stockholders' equity
For the year ended December 31, Year 7
Particulars	Amount $	Amount $
Beginning Common Stock	50,000
Add: Stock Issued	0
Ending Common Stock		50,000
Beginning retained earnings	74,662
Add/Less: Net Income (Loss)	21,232
	95,894
Less: Dividends	(20,000)
Ending Retained Earnings		75,894
Total stockholder's equity		125,894

Table (5)

Hence, the total stockholders’ equity of Incorporation PSS for the year ended December 31, Year 7 is $125,894.

Prepare the balance sheet of Incorporation PSS as on December 31, Year 7.

Incorporation PSS
Balance sheet
As on December 31, Year 7
Assets	Amount $	Amount $
Cash		93,708
Petty cash		100
Accounts Receivable	22,540
Less: Allowance for Doubtful Accounts	(1,334)	21,206
Supplies		250
Prepaid Rent		3,600
Merchandise Inventory		5,130
Land		4,000
Total Assets		127,994
Liabilities and stockholders' equity
Liabilities
Salaries Payable	2,100
Total Liabilities		2,100
Stockholders’ Equity
Common Stock	50,000
Retained Earnings	75,894
Total Stockholders’ Equity		125,894
Total liabilities and stockholders' equity		127,994

Table (6)

Hence, the total of assets and liabilities and stockholders’ equity of Company DS as on December 31, Year 1 is $127,994.

Prepare the statement of cash flows of Company IS for the year ended December 31, Year 1.

Company DS
Statement of cash flows
For the year ended December 31, Year 1
Particulars	Amount $	Amount $
Cash flow from operating activities:
Cash Receipts from Customers (5)	139,840
Cash payments for expenses (6)	(105,104)
Net Cash Flow from Operating Activities		34,736
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		0
Cash Flows From Financing Activities:
Cash paid for dividends	(20,000)
Net Cash Flow From Financing Activities		(20,000)
Net Change in Cash		14,736
Add: Beginning Cash Balance		79,072
Ending Cash Balance		93,808

Table (7)

Working note:

Determine the amount of cash collected from customers.

$\begin{array}{c}\text{Cash receipts from customers}=\left(\begin{array}{l}\text{Collections from }\\ \text{Accounts receivable}\end{array}\right)+\left(\begin{array}{l}\text{Cash from }\\ \text{credit card sales}\end{array}\right)\\ =\$116,800+\$23,040\\ =\$139,840\end{array}$ (5)

Determine the amount of cash payments for expense.

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for expenses}\end{array})=\left(\begin{array}{l}\text{Payment of}\\ \text{ prepaid rent}\end{array}\right)+\left(\begin{array}{l}\text{Payment of}\\ \text{ salaries}\end{array}\right)+\left(\begin{array}{l}\text{Payment of}\\ \text{ inventory}\end{array}\right)+\left(\begin{array}{l}\text{Payment of}\\ \text{ accounts payable}\end{array}\right)+\\ \left(\begin{array}{l}\text{Payment of}\\ \text{ advertising}\end{array}\right)+\left(\begin{array}{l}\text{Payment of}\\ \text{ utilities expense}\end{array}\right)+\left(\begin{array}{l}\text{Payment of expense }\\ \text{from petty cash}\end{array}\right)\\ =\$13,200+\$46,400+\$29,925+\$800+\$9,500+\$5,200+\$79\\ =\$105,104\end{array}$ (6)

Hence, the net change in cash during Year 1 is $93,808.

e.

To determine

Close the temporary accounts to retained earnings.

Explanation of Solution

Temporary accounts: Temporary accounts include all income statements accounts, and dividend account which are closed at the end of each year because they are used to track the financial results only in the current year.

Prepare journal entries to record the closing of temporary accounts.

Date	Account title and Explanation	Post ref.	Amount $
			Debit	Credit
Year 7
December 31	Alarm Sales Revenue		63,800
	Monitoring Service Revenue		68,000
	Retained Earnings			131,800
	( To record the closing entries for revenue account)
December 31	Retained Earnings		110,568
	Cash Short and Over		2
	Cost of Goods Sold			31,235
	Advertising Expense			9,500
	Credit Card Expense			960
	Maintenance Expense			50
	Miscellaneouse Expense			9
	Office Supplies Expense			22
	Rent Expense			12,800
	Salaries Expense			47,100
	Supplies Expense			460
	Uncollectible Accounts Expense			3,234
	Utilities Expense			5,200
	( To record the closing for expenses account)
December 31	Retained Earnings		20,000
	Dividends			20,000
	( To record the closing for dividends)

Table (8)

f.

To determine

Post the closing entries to the T-accounts and prepare a post-closing trial balance.

Explanation of Solution

Post the closing entries to the T-accounts.

Cash
Balance	$93,708

Petty Cash
Balance	$100

Accounts Receivable
Balance	$22,540

Allowance for Doubtful Accounts.
		Balance	$1,334

Supplies
Balance	$250

Prepaid Rent
Balance	$3,600

Merchandise Inventory
Balance	$5,130

Land
Balance	$4,000

Salaries Payable
		Balance	$2,100

Common Stock
		Balance	$50,000

Retained Earnings
		Balance	$74,662

Dividends
17.	$20,000
Balance	$20,000

Alarm Sales Revenue
		8a.	$63,800
		Balance	$63,800

Monitoring Service Rev
		10.	$68,000
		Balance	$68,000

Cost of Goods Sold
8b.	$31,235
Balance	$31,235

Advertising Expense
15.	$9,500
Balance	$9,500

Credit Card Expense
10.	$960
Balance	$960

Maintenance Expense
11.	$50
Balance	$50

Miscellaneous Expense
11.		$9
Balance	$9

Office Supplies Expense
11.	$22
Balance	$22

Rent Expense
19.	$12,800
Balance	$12,800

Salaries Expense
13.	$45,000
21.	$2,100
Balance	$47,100

Supplies Expense
18.	$460
Balance	$460

Uncollectible Accts. Exp.
20.	$3,234
Balance	$3,234

Utilities Expense
16.	$5,200
Balance	$5,200

Cash Short/Over
		11.	$2
		Balance	$2

Prepare the post-closing trial balance of Incorporation PSS for the year ended December 31, Year 7.

Incorporation PSS
Post-closing trial balance
For the year ended December 31,Year 7
Particulars	Amount $	Amount $
Cash	93,708
Petty Cash	100
Accounts Receivable	22,540
Allowance for Doubtful Accounts		1,334
Supplies	250
Prepaid Rent	3,600
Merchandise Inventory	5,130
Land	4,000
Salaries Payable		2,100
Common Stock		50,000
Retained Earnings		75,894
Totals	$129,328	$129,328

Table (9)