Concept explainers
1.
Prepare journal entries to record each of the given transactions.
1.

Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Accounting rules for journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Prepare
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
January 15 | Tax expense | 125,000 | |
Taxes payable | 93,000 | ||
32,000 | |||
(To record tax expense and tax liability) |
(Table 1)
- Tax expense is a component of
stockholder’s equity ; there is an increase in the value expense and decrease in the value of equity. Hence, Debit the tax expense by $125,000. - Taxes payable is a liability and there is an increase in the value of liability. Hence, credit taxes payable by $93,000.
- Deferred tax liability is a liability and there is an increase in the value of liability. Hence, credit deferred tax liability by $32,000.
Prepare journal entry to record the previously paid accrued interest expense of $52,000.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
January 31 | Interest payable | 52,000 | |
Cash | 52,000 | ||
(To record the previously paid accrued interest expense of $52,000) |
(Table 2)
- Interest payable is a liability and there is a decrease in the value of liability. Hence, debit interest payable by $52,000.
- Cash is an asset and there is a decrease in the value of asset. Hence, credit the cash by $52,000.
Prepare journal entry to record the amount borrowed from the Bank C for a general use; by signing a 12 month, 12% annual interest bearing note for the money.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
April 30 | Cash | 35,000 | |
Notes payable | 35,000 | ||
(To record the borrowing of money on a short term) |
(Table 3)
- Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $550,000.
- Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $550,000.
Prepare journal entry to record the purchase of merchandise for resale on account.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
June 3 | Inventory | 75,820 | |
Accounts payable | 75,820 | ||
(To record the purchase merchandise for resale) |
(Table 4)
- Inventory is an asset and there is an increase in the value of the assets. Hence, debit the inventory by $75,820.
- Accounts payable is a liability and there is an increase in the value of liability. Hence, credit accounts payable by $75,820.
Prepare journal entry to record the payment for the purchase made.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
July 5 | Accounts payable | 75,820 | |
Cash | 75,820 | ||
(To record the payment made for the purchase) |
(Table 5)
- Accounts payable is a liability and there is a decrease in the value of liability. Hence, debit liability by $75,820.
- Cash is an asset and there is a decrease in the value of asset. Hence, credit the asset by $75,820.
Prepare journal entry to record the contract signed for security service to a small apartment and collecting of six month’s fees in advance amounting to $12,000.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
August 31 | Cash | 12,000 | |
Deferred Revenue | 12,000 | ||
(To record the collecting of six month’s fee in advance amounting to $12,000) |
(Table 6)
- Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $12,000.
- Deferred Revenue is a liability and there is an increase in the value of liability. Hence, credit the deferred revenue by $12,000.
2.
Prepare
2.

Explanation of Solution
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
December 31 | Interest expense | 44,000 | |
Interest payable (1) | 44,000 | ||
(To record the adjusting entry for interest payable on December 31.) |
(Table 7)
- Interest expense is a component of stockholder’s equity; there is a decrease in the value of equity and increase in the value of expense. Hence, debit the interest expense by $44,000.
- Interest payable is a liability and there is an increase in the value of equity. Hence, credit the interest payable by $44,000.
Working Note:
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
December 31 | Deferred revenue | 8,000 | |
Security revenue (2) | 8,000 | ||
(To record the adjusting entry for security revenue on December 31.) |
(Table 8)
- Deferred revenue is a liability and there is a decrease in the value of liability. Hence, debit deferred revenue by $8,000.
- Security revenue is a component of stockholder’s equity and there is an increase in the value of equity. Hence, credit security revenue by $8,000.
Working Note:
Prepare journal entry to record the long-term liability of $100,000 to current liability on December 31.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
December 31 | Long-term liability | 100,000 | |
Current liability | 100,000 | ||
(To record the adjusting entry for long-term liability on December 31.) |
(Table 9)
- Long-term liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $100,000.
- Current liability is a liability and there is an increase in the value of liability. Hence, credit the liability by $100,000.
Prepare journal entry to record the salaries and wages earned but not yet paid on December 31.
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
December 31 | Wages expense | 85,000 | |
Wages payable | 85,000 | ||
(To record the wages earned but not yet paid on December 31.) |
(Table 10)
- Wages expense is a component of stockholder’s equity; there is a decrease in the value of equity and increase in the value of expense. Hence, debit the wages expense by $85,000.
- Wages payable is a liability and there is an increase in the value of equity. Hence, credit the wages payable by $85,000.
3.
Identify the total amount of liabilities arising from the transactions that will be reported on the fiscal year-end
3.

Explanation of Solution
Identify the total amount of liabilities arising from the transactions that will be reported on the fiscal year-end balance sheet:
Balance Sheet December 31 | |
Particulars | Amount in $ |
Current Liabilities: | |
Wages payable | 85,000 |
Taxes payable | 93,000 |
32,000 | |
Interest payable | 44,000 |
Deferred Revenue | 4,000 |
Notes payable | 550,000 |
Current portion of long-term debt | 100,000 |
Total Current Liabilities | 908,000 |
(Table 11)
4.
Identify whether the operating
4.

Explanation of Solution
Identify whether the operating cash flow increase, decrease or are not affected for the given transactions:
Date | Transaction | Effect |
January15 | Tax expense for the year of $125,000 and the tax liability owed to the IRS during the year. | No Effect |
January 31 | Previously paid accrued interest expense of $52,000 | Decrease |
April 30 | Borrowing of money on a short term | No Effect |
June 3 | Purchase merchandise for resale | No Effect |
July 5 | Payment made for the purchase | Decrease |
August 31 | Collecting of six month’s rent in advance amounting to $12,000 | Increase |
December 31 |
Wages earned but not yet paid on December 31. | No Effect |
December 31 | Reclassified long-term liability to current liability. | No Effect |
December 31 |
Adjusting entry for interest payable. | No Effect |
December 31 | Adjusting entry for security revenue. | No Effect |
(Table 12)
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