Chapter C, Problem 6P

a.

To determine

Prepare the journal entries for the year 2014.

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.

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.

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

(1) Prepare journal entry to record the issuance of the common stock.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January 15	Cash	800,000
	Capital Stock		800,000
	( Issued 40,000 shares of capital stock at $20 per share)

Table (1)

• Cash is an asset and it is increased. Therefore, debit cash account by $800,000.
• Capital stock is a component of stockholders’ equity and it is increased. Therefore, credit cash account by $800,000.

(2) Prepare journal entry to record the income tax liability at December 31.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Income Tax Expense (1)	48,000
	Income Tax Payable		48,000
	(To accrue the income tax for the year)

Table (2)

• Income tax expense is a component of stockholders’ equity and it is decreased. Therefore, debit income tax expense account by $48,000.
• Income tax payable is a liability and it is increased. Therefore, credit income tax payable account by $48,000.

Working note:

Calculate the amount of income tax expense:

$\begin{array}{c}\text{Income}\text{tax}\text{expense}\text{=}\text{Profit}\text{before}\text{income}\text{tax}\text{×}\text{Income}\text{tax}\text{rate}\\ \text{=}\text{\$120,000}\text{×}\text{40}\text{\%}\\ \text{=}\text{\$48,000}\end{array}$

(1)

(3) Prepare journal entry to close the income tax expense account.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Income Summary	48,000
	Income Taxes Expense		48,000
	(To close the Income Taxes Expense account)

Table (3)

• Income summary is a component of stockholders’ equity and it is decreased. Therefore, debit income summary account by $48,000.
• Income tax expense is a component of stockholders’ equity and it is increased. Therefore, credit income tax expense account by $48,000.

b.

To determine

Prepare journal entries for the year 2015.

Explanation of Solution

Record the journal entries:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
March 15	Dividends	20,000
	Dividends Payable (2)		20,000
	(Declared a dividend of $0.50 per share, payable)
April 15	Dividends Payable	20,000
	Cash		20,000
	(To record payment of dividend declared March 15)

Table (4)

March 15:

• Dividends are a component of stockholders’ equity and it is decreased. Therefore, debit dividends account by $20,000.
• Dividends payable is a liability and it is increased. Therefore, credit dividends payable account by $20,000.

April 15:

• Dividends payable is a liability and it is decreased. Therefore, debit dividends payable $20,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $20,000.

Working note:

Calculate the amount of dividends payable:

$\begin{array}{c}\text{Dividend}\text{payable}\text{=}\text{Number}\text{of}\text{shares}\text{×}\text{Dividend}\text{per}\text{share}\\ \text{=}40\text{,000}\text{shares}\text{×}\text{\$0}\text{.50}\\ \text{=\$20,000}\end{array}$

(2)

c.

To determine

Prepare the journal entries to close the income summary and dividends accounts at December 31, 2015.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Record the closing entries:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
December 31	Retained Earnings	18,000
	Income Summary		18,000
	(To close the Income Summary account for a period with a net loss)
December 31	Retained Earnings	20,000
	Dividends		20,000
	(To close Dividends into Retained Earnings)

Table (5)

December 31:

• Retained earnings are a component of stockholders’ equity and it is decreased. Therefore, Debit retained earnings account by $18,000.
• Income summary is a component of stockholders’ equity and it is increased. Therefore, credit income summary account by $18,000.

December 31:

• Retained earnings are a component of stockholders’ equity and it is decreased. Therefore, Debit retained earnings account by $20,000.
• Dividends are liability and it is increased. Therefore, credit dividends account by $20,000.

d.

To determine

Prepare the stockholders’ equity section of the balance sheet at December 31, 2015.

Explanation of Solution

Stockholders’ Equity Section:

Stockholders’ Equity Section refers to the section of the balance sheet that shows the available balance of each stockholder’s equity account as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet at December 31, 2015.

Incorporation F
Partial Balance Sheet
For the year ended December 31, 2015
Stockholders’ equity:	Amount ($)
Capital stock	800,000
Retained earnings (3)	34,000
Total stockholders’ equity	834,000

Table (6)

Working note:

Calculate the amount of retained earnings:

Computation of retained earnings at December 31, 2015:	Amount ($)	Amount ($)
Income before income tax—2014		120,000
Less: Income tax expense (1)		48,000
Retained earnings, December 31, 2014		72,000
Less: Dividends for 2015 (2)	20,000
Less: Net loss for 2015	18,000	38,000
Retained earnings, December 31, 2015		34,000

Table (7)

(3)