Chapter 9, Problem 2P

1.

To determine

Prepare journal entries to record each of the given transactions.

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 journal entry to record the purchase of merchandise for resale on account.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
January 8	Inventory	14,860
	Accounts payable		14,860
	(To record the purchase merchandise for resale)

(Table 1)

• Inventory is an asset and there is an increase in the value of the assets. Hence, debit the inventory by $14,860.
• Accounts payable is a liability and there is an increase in the value of liability. Hence, credit liability by $14,860.

Prepare journal entry to record the payment for the purchase made.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
January 17	Accounts payable	14,860
	Cash		14,860
	(To record the payment made for the purchase)

(Table 2)

• Accounts payable is a liability and there is a decrease in the value of liability. Hence, debit liability by $14,860.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit the asset by $14,860.

Prepare journal entry to record the amount borrowed from the Bank N for a general use; by signing a 12 month, 8% annual interest bearing note for the money.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
April 1	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 $35,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $35,000.

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 8	Inventory	17,420
	Accounts payable		17,420
	(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 $17,420.
• Accounts payable is a liability and there is an increase in the value of liability. Hence, credit liability by $17,420.

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	17,420
	Cash		17,420
	(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 $17,420.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit the asset by $17,420.

Prepare journal entry to record the rented office space and collecting of six month’s rent in advance amounting to $6,000.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
August 1	Cash	6,000
	Deferred Rent Revenue		6,000
	(To record the collecting of six month’s rent in advance amounting to $6,000)

(Table 6)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $6,000.
• Deferred Rent Revenue is a liability and there is an increase in the value of liability. Hence, credit the deferred revenue by $6,000.

Prepare journal entry to record the deposit from customer as a guarantee to return trailer borrowed for 30 days.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 20	Cash	100
	Deposit on trailer		100
	(To record the customer deposit a guarantee to return trailer borrowed for 30 days)

(Table 7)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $100.
• Deposit on trailer is a liability and there is an increase in the value of liability. Hence, credit the deferred revenue by $100.

Prepare journal entry to record the wages earned but not yet paid on December 31.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Wages expense	9,500
	Wages payable		9,500
	(To record the wages earned but not yet paid on December 31.)

(Table 8)

• 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 $9,500.
• Wages payable is a liability and there is an increase in the value of equity. Hence, credit the wages payable by $9,500.

2.

To determine

Prepare adjusting entries required on December31.

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	2,100
	Interest  payable (1)		2,100
	(To record the adjusting entry for interest payable on December 31.)

(Table 9)

• 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 $2,100.
• Interest payable is a liability and there is an increase in the value of equity. Hence, credit the interest payable by $2,100.

Working Note:

$\begin{array}{c}\text{Interest Payable = }\left(\begin{array}{l}\text{Principal Amount}\times \text{ Annual Interest rate}\\ \times \text{ Number of period}\end{array}\right)\\ =\$35,000\times 8\%\times \frac{9(\text{April 1 to December 31)}}{12}\\ =\$2,100\end{array}$ (1)

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Deferred rent revenue	5,000
	Rent revenue (2)		5,000
	(To record the adjusting entry for rent revenue on December 31.)

(Table 10)

• Deferred rent revenue is a liability and there is a decrease in the value of liability. Hence, debit deferred rent revenue by $5,000.
• Rent revenue is a component of stockholder’s equity and there is an increase in the value of equity. Hence, credit rent revenue by $5,000.

Working Note:

$\begin{array}{c}\text{Rent revenue = }\left(\text{Deferred rent revenue}\times \text{Number of period}\right)\\ =\$6000\times \frac{5(\text{August1 to December 31)}}{6}\\ =\$5,000\end{array}$ (2)

3.

To determine

Identify the total amount of liabilities arising from the transactions that will be reported on the fiscal year-end balance sheet.

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:
Notes payable , short term	35,000
Deposit on trailer	1,00
Wages payable	9,500
Interest payable	2,100
Deferred Revenue	1,000
Total Current Liabilities	47,700

(Table 11)

4.

To determine

Identify whether the operating cash flows increase, decrease or are not affected for the given transactions.

Explanation of Solution

Identify whether the operating cash flow increase, decrease or are not affected for the given transactions:

Date	Transaction	Effect
January 8th	Purchase of merchandise for resale on account	No Effect
January 17th	Payment for the purchase made	Decrease
April 1	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 1	Collecting of six month’s rent in advance amounting to $6,000	Increase
December 20	Customer deposit a guarantee to return trailer borrowed for 30 days	Increase
December 31	Wages earned but not yet paid on December 31	No Effect

(Table 12)