Chapter 9, Problem 9.2CACR

(a)

To determine

Accounting Cycle: The accounting cycle refers to the entire process of recording the accounting transactions of an organization and then processing them. The accounting cycle starts when a transaction takes places and it ends at the time when these transactions are recorded in the financial statements of the company.

To Prepare: the journal entries for the transactions 1-9.

Explanation of Solution

Prepare the journal entries for the transactions 1-9.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
February	1	Cash		12,000
		Unearned Service Revenue			12,000
		(To record the service revenue received in advance.)
February	1	Equipment                                            (1)		9,600
		Cash			3,000
		Accounts Payable			6,600
		(To record the purchase of computer equipment.)
March	1	Patents		9,600
		Cash			9,600
		(To record the acquisition of patents.)
March	28	Accounts Receivable		140,000
		Service Revenue			140,000
		(To record sales on account.)
March	29	Cash		133,000
		Accounts Receivable			133,000
		(To record the cash collected from customers.)
March	29	Accounts Payable		16,370
		Cash			16,370
		(To record amount paid on accounts payable.)
March	29	Operating Expenses		97,525
		Cash			97,525
		(To record the payment of operating expenses.)
March	31	Allowance for Doubtful Accounts		200
		Accounts Receivable			200
		(To record the writing off receivable)
March	31	Depreciation Expense                           (1)		500
		Accumulated Depreciation-Equipment			500
		(To record the depreciation expense of the equipment sold.)
March	31	Cash		1,620
		Accumulated Depreciation-Equipment (3)		8,500
		Loss on Disposal of Plant Assets           (4)		880
		Equipment			11,000
		(To record the sale of equipment.)

Table (1)

Working Notes:

Calculate the total amount of equipment.

$\begin{array}{c}\text{Equipment = Purchase cost + Sales tax }\\ =\$9,000+\$600\\ =\$9,600\end{array}$ (1)

Calculate the depreciation expense for building.

$\begin{array}{c}\text{Depreciation expense= }\left[\frac{\left(\begin{array}{l}\text{Cost}\text{of}\text{buildings}\\ -\text{Salvage value}\end{array}\right)}{\text{Estimated life}}\times \frac{\left(\begin{array}{l}\text{Number}\text{of}\text{months}\\ \text{used:January1-March31}\end{array}\right)}{12}\right]\\ =\left(\frac{\$11,000-1,000}{5}\times \frac{3}{12}\right)\\ =\$500\end{array}$ (2)

Calculate the amount of accumulated depreciation for equipment sold on March 31, 2017.

$\begin{array}{c}\text{Total}\text{Accumulated depreciation }=\left[\begin{array}{l}\left(\begin{array}{l}\text{Beginning}\text{balance}\text{of}\\ \text{Accumulated}\text{Depreciation}\end{array}\right)\\ \text{+Current year depreciation}\end{array}\right]\\ =\$8,000+\$500\\ =\$8,500\end{array}$ (3)

Calculate the amount of gain / (loss) on disposal of equipment.

$\begin{array}{c}\text{Gain/loss on disposal of asset = Sale}\text{proceeds}-\text{Book}\text{value}\\ \text{=Cash}\text{received}-\left(\begin{array}{l}\text{Equiment – }\\ \text{Accumulated Depreciation }\end{array}\right)\\ \text{= \$1,620}-\left(\text{\$11,000– \$8,500}\left(2\right)\right)\\ =\$1,620-\$2,500\\ \text{= }\left(\text{\$880}\right)\end{array}$ (4)

(e)

To determine

To prepare: a bank reconciliation statement.

Explanation of Solution

Prepare a bank reconciliation statement as on March 31, 2017.

A Corporation
Bank Reconciliation
March 31, 2017
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement, March 31, 2017		64,594
Add: Deposits in transit		1,620
Less: Outstanding Checks
#440	3,444
#454	5,845
#455	3,000
#456	9,600	(21,889)
Adjusted cash balance per bank		44,325
Cash balance as per books, March 31, 2017		$44,425
Less: Bank Service Charge		100
Adjusted cash balance per books		44,325

Table (2)

(f)

To determine

To journalize: the entries related to bank reconciliation and all adjusting entries.

Explanation of Solution

Journalize the entries related to bank reconciliation and all adjusting entries.

Date		Account Titles and Narration	Post Ref.	Debit ($)	Credit ($)
2017
March	31	Operating Expenses		100
		Cash			100
		(To record the payment of operating expenses.)
March	31	Unearned Service Revenue		2,000
		Service Revenue                                 (5)			2,000
		(To record the service revenue earned.)
March	31	Bad Debt Expense                                  (6)		800
		Allowance for Doubtful Accounts			800
		(To record the bad debt expense)
March	31	Depreciation Expense                             (7)		505
		Accumulated Depreciation-Equipment			505
		(To record the depreciation expense of the equipment.)
March	31	Depreciation Expense                             (8)		750
		Accumulated Depreciation-Building			750
		(To record the depreciation expense of the building.)
March	31	Patent Amortization Expense                 (9)		80
		Patents			80
		(To record the amortization expense )
March	31	Income Tax Expense                             (10)		12,258
		Income Taxes Payable			12,258
		(To record the income tax expense.)

Table (3)

Working notes:

Calculate the service revenue earned as on March 31, 2017.

$\begin{array}{c}\text{Service}\text{earned=}\frac{\left(\begin{array}{l}\text{Unearned}\\ \text{Service}\text{revenue}\end{array}\right)}{12}\times \left(\begin{array}{l}\text{Number}\text{of}\text{months}\\ \text{service}\text{performed}\end{array}\right)\\ \text{=}\frac{\$12,000}{12}\times 2\text{Months}\left(\text{Feberuary1-March31}\right)\\ =\$2,000\end{array}$ (5)

Calculate the bad debt expense.

$\begin{array}{c}\text{Bad}\text{Debt}\text{Expense=}\left\{\begin{array}{l}\left(\begin{array}{l}\text{Accounts}\text{receivable}\\ \text{not}\text{past}\text{due}\\ \times \text{Bad}\text{debt\%}\end{array}\right)+\left[\begin{array}{l}\text{Remaianing balance}\text{past}\text{due}\\ \text{of}\text{accounts }\text{receivable}\\ \times \text{Bad}\text{debt}\text{\%}\end{array}\right]\\ -\left(\begin{array}{l}\text{Allowance}\text{for}\text{doubtful}\\ \text{accounts}\text{before}\text{adjustment}\end{array}\right)\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\left(\text{\$26,000}\times \text{4\%}\right)+\\ \left[\left(\begin{array}{l}\$29,200\left(\text{refer}\text{Ledger}\text{balance}\right)\\ -\$26,000\end{array}\right)\times 23.75\%\right]-\$1,000\end{array}\right\}\\ =\left(\$1,040+\$760\right)-\$1,000\\ =\$800\end{array}$ (6)

Calculate the depreciation expense on equipment.

$\begin{array}{c}\text{Depreciation expense= }\left[\begin{array}{l}\frac{\left(\text{Cost of new}\text{equipment }\right)}{\text{Estimated life}}\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}}\end{array}\right]\\ +\left[\begin{array}{l}\frac{\left(\begin{array}{l}\text{Cost of}\text{old}\text{equipment }\\ -\text{Salvage value}\end{array}\right)}{\text{Estimated life}}\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}}\end{array}\right]\\ =\left[\left(\frac{\$9,000}{10\text{years}}\right)\text{×}\frac{\text{3}\left(\text{January-March}\right)}{\text{12}}\right]\\ +\left[\left(\frac{\$9,600-\$1,200}{5\text{years}}\right)\times \frac{2\left(\text{February-March}\right)}{12}\right]\\ =\$280\end{array}$ (7)

Calculate the depreciation expense on building.

$\begin{array}{c}\text{Depreciation expense= }\left[\begin{array}{l}\frac{\left(\text{Cost of Building}-\text{Salvage}\text{Value }\right)}{\text{Estimated life}}\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}}\end{array}\right]\\ =\left[\left(\frac{\$100,000-\$10,000}{30\text{years}}\right)\text{×}\frac{\text{3}\left(\text{January-March}\right)}{\text{12}}\right]\\ =\$750\end{array}$ (8)

Calculate the amortization expense for patent purchased on March 1, 2017.

$\begin{array}{c}\text{Amortization expense= }\left[\frac{\text{Cost}\text{of}\text{the}\text{patent}}{\text{Estimated}\text{Life}}\times \frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}}\right]\\ =\frac{\$9,600}{10}\times \frac{1\text{month}\left(\text{March1-March31}\right)}{12}\\ =\$80\end{array}$ (9)

Calculate the amount of income tax expense.

$\begin{array}{c}\text{Interest expense =}\left[\begin{array}{l}\text{Income}\text{before}\text{Taxes}\\ \left(\begin{array}{l}\text{Refer}\text{income}\\ \text{statement}\text{in}\text{part}\text{h}\end{array}\right)\end{array}\right]\times \text{Income}\text{Tax}\text{Rate}\\ \text{=\$40,860}\times 30\%\\ =\$12,258\end{array}$ (10)

Description

March 31: Record the adjusting entry for operating expense paid in cash

• Operating Expense is an expense and is increased by $100 that decreases the stockholders' equity due to payment of bank service charges. Therefore, Operating Expense account is debited with $100.
• Cash is an asset and is decreased by $100 due to the amount paid of bank service charges in cash. Therefore, Cash account is credited with $100.

March 31:  Record the adjusting entry for service revenue earned.

• Unearned Service Revenue is a liability and it decreases by $2,000 due to the service revenue is earned. Therefore, Unearned Service Revenue is debited with $2,000.
• Service Revenue is a component of Stockholders’ Equity. It is increased by $2,000. Therefore, Service Revenue account is credited with $2,000.

March 31: Record the adjusting entry for bad Debt Expense.

• Bad Debt Expense is an expense that decreases the stockholders’ equity account. It is increased by $800 due to writing off of accounts receivable. Therefore, Bad Debt Expense account is debited with $800.
• Allowance for Doubtful Accounts is a contra asset with a normal credit balance. Its increased value decreases the value of the asset by $800. Therefore, Allowance for Doubtful Accounts account is credited with $800.

March 31:  Record the adjusting entry for Depreciation expense for equipment.

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $505. Therefore, Depreciation expense – Equipment is debited with $505.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $505 that decreases the value of assets by $505. Therefore, the Accumulated depreciation-Equipment account is credited with $505.

March 31:  Record the adjusting entry for Depreciation expense for building.

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $750. Therefore, Depreciation expense – Building is debited with $750.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $750 that decreases the value of assets by $750. Therefore, the Accumulated depreciation-Building account is credited with $750.

March 31: Record the adjusting entry for amortization expense for patents

• Amortization expense is an expense, and it decreases the stockholder’s equity by $80. Therefore, Amortization Expense is debited with $80.
• Patent is an intangible asset and is decreased by $80 due to amortization. Therefore, Patents account is credited with $80.

March 31: Record the adjusting entry for income tax expense

• Income Tax expense is an expense, and it decreases the stockholder’s equity by $12,258. Therefore, Income Tax Expense is debited with $12,258.
• Income Tax Payable is a liability and is increased by $12,258 due to income tax expense accrued. Therefore, Interest Payable account is credited with $12,258.

(b), (c), & (f)

To determine

To post: all the journal entries for transaction 1-9, entries related to bank reconciliation, and the adjusting entries into the T-accounts.

Explanation of Solution

Post the all the journal entries for transaction 1-9, entries related to bank reconciliation, and the adjusting entries into the T-accounts to determine the balances of the respective accounts.

Cash is an asset with a normal debit balance.

Cash Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance	24,300		February 1	Equipment	3,000
February 1	Unearned Service Revenue	12,000		March 1	Patents	9,600
March 29	Accounts Receivable	133,000		March 29	Accounts Payable	16,370
March 31	Equipment	1,620		March 29	Operating Expenses	97,525
				March 31	Balance before adjustment	44,425
March 31,2017	Total	170,920		March 31	Total	170,920
March 31	Balance before adjustment	44,425		March 31	Adjustment	100
				March 31	Ending Balance	44,325
March 31	Total	44,425		March 31	Total	44,425

Table (1)

Accounts Receivable is an asset with a normal debit balance.

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance	22,400		March 29	Cash	133,000
March 28	Service Revenue	140,000		March 31	Allowance for Doubtful Accounts	200
				March 31	Ending Balance	29,200
March 31,2017	Total	162,400		March 31,2017	Total	162,400

Table (2)

Allowance for Doubtful Accounts is an asset with a normal credit balance.

Allowance for Doubtful Accounts
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Accounts Receivable	200		December 31, 2016	Balance	1,200
March 31	Balance before adjustment	1,000
March 31,2017	Total	1,200		March 31,2017	Total	1,200
March 31	Ending Balance	1,800		March 31	Balance before adjustment	1,000
				March 31	Adjustment	800
March 31,2017	Total	1,800		March 31,2017	Total	1,800

Table (3)

Equipment is an asset with a normal debit balance.

Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance	20,000		March 31	Cash	1,620
				March 31	Accumulated Depreciation-Equipment	8,500
				March 31	Loss on Disposal of Plant Assets	880
February 1	Cash	3,000		March 31	Ending Balance	18,600
February 1	Accounts Payable	6,600
March 31	Total	29,600		March 31	Total	29,600

Table (4)

Accumulated Depreciation-Equipment is a contra asset account with a normal credit balance.

Accumulated Depreciation-Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Equipment	8,500		December 31, 2016	Balance	15,000
March 31	Balance before adjustment	7,000		March 31	Depreciation expense	500
March 31	Total	15,500		March 31	Total	15,500
Mach 31	Ending Balance	7,505		March 31	Balance before adjustment	7,000
				March 31	Adjustment	505
March 31	Total	7,505		March 31	Total	7,505

Table (5)

Land is an asset with a normal debit balance.

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance	20,000		March 31	Ending Balance	20,000
March 31	Total	20,000		March 31	Total	20,000

Table (6)

Building is an asset with a normal debit balance.

Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance	100,000		March 31	Ending Balance	100,000
March 31	Total	100,000		March 31	Total	100,000

Table (7)

Accumulated Depreciation-Building is a contra asset account with a normal credit balance.

Accumulated Depreciation-Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance before adjustment	15,000		December 31, 2016	Balance	15,000
March 31	Total	15,000		March 31	Total	15,000
Mach 31	Ending Balance	15,750		March 31	Balance before adjustment	15,000
				March 31	Adjustment	750
March 31	Total	15,750		March 31	Total	15,750

Table (8)

Patents is an intangible asset account with a normal debit balance.

Patents Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance	9,600		March 31	Balance before adjustment	9,600
March 31	Total	9,600		March 31	Total	9,600
March 31	Balance before adjustment	9,600		March 31	Adjustment	80
				March 31	Ending Balance	9,520
March 31	Total	9,600		March 31	Total	9,600

Table (9)

Accounts Payable is a liability with a normal credit balance.

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 29	Cash	16,370		December 31, 2016	Balance	12,370
March 31	Ending Balance	2,600		February 1	Equipment	6,600
March 31,2017	Total	18,970		March 31,2017	Total	18,970

Table (10)

Unearned Service Revenue is a liability with a normal credit balance.

Unearned Service Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance before adjustment	12,000		February 1	Service Revenue	12,000
March 31,2017	Total	12,000		March 31,2017	Total	12,000
March 31	Adjustment	2,000		March 31	Balance before adjustment	12,000
March 31	Ending Balance	10,000
March 31	Total	12,000		March 31	Total	12,000

Table (11)

Income Taxes Payable is a liability with a normal credit balance.

Income Taxes Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Ending Balance	12,258		March 31	Adjustment	12,258
March 31,2017	Total	12,258		March 31,2017	Total	12,258

Table (12)

Common Stock is a component of stockholders’ equity with a normal credit balance.

Common Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Ending Balance	90,000		December 31,2016	Balance	90,000
March 31,2017	Total	90,000		March 31,2017	Total	90,000

Table (13)

Retained Earnings is a component of stockholders’ equity with a normal credit balance.

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Ending Balance	53,130		December 31,2016	Balance	53,130
March 31,2017	Total	53,130		March 31,2017	Total	53,130

Table (14)

Service Revenue is a component of stockholders’ equity with a normal credit balance.

Service Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Balance before adjustment	140,000		March 28	Accounts Receivable	140,000
March 31,2017	Total	140,000		March 31,2017	Total	140,000
March 31	Ending Balance	142,000		March 31	Balance before adjustment	140,000
				March 31	Adjustment	2,000
March 31,2017	Total	142,000		March 31,2017	Total	142,000

Table (15)

Operating Expense is a component of stockholders’ equity with a normal debit balance.

Operating Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 29	Cash	97,525		March 31	Balance before adjustment	97,525
March 31,2017	Total	97,525		March 31,2017	Total	97,525
March 31	Balance before adjustment	97,525		March 31	Ending Balance	97,625
March 31	Adjustment	100
March 31,2017	Total	97,625		March 31,2017	Total	97,625

Table (16)

Depreciation Expense is a component of stockholders’ equity account with a normal debit balance.

Depreciation Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Accumulated Depreciation-Equipment	500		March 31	Balance before adjustment	500
March 31,2017	Total	14,975		March 31,2017	Total	14,975
March 31	Balance before adjustment	500		March 31	Ending Balance	1,755
March 31	Adjustment	505
March 31	Adjustment	750
March 31,2017	Total	1,755		March 31,2017	Total	1,755

Table (17)

Loss on Disposal of Plant Assets is a component of stockholders’ equity account with a normal debit balance.

Loss on Disposal Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Equipment	880		March 31	Ending Balance	880
January 31,2017	Total	880		January 31,2017	Total	880

Table (18)

Amortization Expense is a component of stockholders’ equity account with a normal debit balance.

Amortization Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Adjustment	80		March 31	Ending Balance	80
March 31,2017	Total	80		March 31,2017	Total	80

Table (19)

Bad Debt Expense is a component of stockholders’ equity account with a normal debit balance.

Bad Debt Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Adjustment	800		March 31	Ending Balance	800
March 31	Total	800		March 31	Total	800

Table (20)

Income Tax Expense is a component of stockholders’ equity account with a normal debit balance.

Income Tax Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
March 31	Adjustment	12,258		March 31	Ending Balance	12,258
March 31	Total	12,258		March 31	Total	12,258

Table (21)

(d) & (g)

To determine

To prepare: an unadjusted and an adjusted trial balance at March 31, 2017.

Explanation of Solution

Prepare an unadjusted and an adjusted trial balance at March 31, 2017.

Figure (1)

(h)

To determine

To prepare: the income statement of A Corporation for the year ended March 31, 2017.

Explanation of Solution

Prepare the income statement of A Corporation for the year ended March 31, 2017.

A Corporation
Income Statement
For the year ended March 31, 2017
Details	Amount ($)	Amount ($)
Revenue
Service Revenue	–	142,000
Less: Operating Expenses
Operating Expense	97,625
Depreciation Expense	1,755
Bad Debt Expense	800
Amortization Expense	80
Total Operating Expenses		(100,260)
Income from operations		41,740
Less: Other expenses and losses
Loss on Disposal of Plant Assets		(880)
Income before income taxes		40,860
Less: Income Tax Expense		(12,258)
Net Income		28,602

Table (22)