
Concept explainers
a.
Prepare the journal entries for the year 2017.
a.

Explanation of Solution
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
(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 $48,000.
Working note:
Calculate the amount of income tax expense:
(1)
(3) Prepare journal entry to close the income tax expense account.
Date | Account Titles and Explanation | Debit ($) | 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.
Prepare journal entries for the year 2018.
b.

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:
(2)
c.
Prepare the journal entries to close the income summary and dividends accounts at December 31, 2018.
c.

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.
Prepare the stockholders’ equity section of the
d.

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, 2018.
Incorporation F | |
Partial Balance Sheet | |
For the year ended December 31, 2018 | |
Stockholders’ equity: | Amount ($) |
Capital stock | 800,000 |
Retained earnings (3) | 34,000 |
Total stockholders’ equity | 834,000 |
Table (6)
Working note:
Calculate the amount of retained earnings:
Computation of retained earnings at December 31, 2018: | Amount ($) | Amount ($) |
Income before income tax—2017 | 120,000 | |
Less: Income tax expense (1) | 48,000 | |
Retained earnings, December 31, 2017 | 72,000 | |
Less: Dividends for 2018 (2) | 20,000 | |
Less: Net loss for 2018 | 18,000 | 38,000 |
Retained earnings, December 31, 2018 | 34,000 |
Table (7)
(3)
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