Chapter C, Problem 8P

a. 1

To determine

Prepare the journal entries in the accounts of Corporation S, if it is organized as a Sole proprietorship.

Explanation of Solution

Sole proprietorship: The form of business entity which is owned and managed by an individual is referred to as sole proprietorship.

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
November 9	Cash	15,000
	Person S, Capital		15,000
	(To record additional investment by owner)
November 15	Person S, Drawing	1,500
	Cash		1,500
	(To record withdrawal from business)
November 30	Person S, Drawing	1,500
	Cash		1,500
	(To record withdrawal from business)
November 30	Person S, Drawing	1,000
	Cash		1,000
	(To record withdrawal from business)

Table (1)

November 9:

• Cash is an asset and it is increased. Therefore, debit cash account by $15,000.
• Person S, Capital is a component of owners’ equity and it is increased. Therefore, credit the Person S, Capital account by $15,000.

November 15:

• Person S, Drawing is a component of owners’ equity and it is decreased. Therefore, debit the Person S, Drawings account by $ 1,500.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,500.

November 30:

• Person S, Drawing is a component of owners’ equity and it is decreased. Therefore, debit the Person S, Drawings account by $ 1,500.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,500.

November 30:

• Person S, Drawing is a component of owners’ equity and it is decreased. Therefore, debit the Person S, Drawings account by $ 1,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,000.

a. 2

To determine

Prepare the closing entries in the accounts of Corporation S, if it is organized as a Sole proprietorship.

Explanation of Solution

Sole proprietorship: The form of business entity which is owned and managed by an individual is referred to as sole proprietorship.

Prepare closing entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
November 30	Person S, Capital	4,000
	Person S, Drawing		4,000
	(To close the owner's Drawing account)
November 30	Income Summary	5,000
	Person S, Capital		5,000
	(To close the Income Summary account to the owners’ capital account)

Table (2)

November 30:

• Person S, Capital is a component of stockholders’ equity and it is decreased. Therefore, debit the Person S, Capital account by $4,000.
• Person S, Drawing is a component of owners’ equity and it is increased. Therefore, credit the Person S, Drawings account by $ 4,000.

November 30:

• Income summary is a component of stockholders’ equity and it is decreased. Therefore, debit income summary account by $5,000.
• Person S, Capital is a component of owners’ equity and it is increased. Therefore, credit Person S, Capital account by $5,000.

b. 1

To determine

Prepare the journal entries in the accounts of Corporation S, if it is organized as a Corporation.

Explanation of Solution

Corporation: The form of business entity ,which is incorporated by state law into a separate legal entity, owned by stockholders, and managed by board of directors elected by stockholders, is referred to as corporation.

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
November 9	Cash	15,000
	Capital Stock		15,000
	( To record additional investment by owner)
November 15	Salaries Expense	1,500
	Cash		1,500
	(To record salary of Person S)
November 20	Dividends	1,000
	Dividends Payable		1,000
	(To record declaration of a dividend payable on November 30)
November 30	Salaries Expense	1,500
	Cash		1,500
	( To record salary of Person S)
November 30	Dividends Payable	1,000
	Cash		1,000
	(To record the payment of the dividend declared on November 30)

Table (3)

November 9:

• Cash is an asset and it is increased. Therefore, debit cash account by $15,000.
• Capital stock is a component of stockholders’ equity and it is increased. Therefore, credit capital stock account by $15,000.

November 15:

• Salaries Expense is a component of stockholders’ equity and it is decreased. Therefore, debit salaries expense account by $1,500.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,500.

November 20:

• Dividends are a component of stockholders’ equity and it is decreased. Therefore, debit dividends account by $1,000.
• Dividends payable is a liability and it is increased. Therefore, credit dividends payable account by $ 1,000.

November 30:

• Salaries Expense is a component of stockholders’ equity and it is decreased. Therefore, debit salaries expense account by $1,500.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,500.

November 30:

• Dividends payable is a liability and it is decreased. Therefore, debit dividends payable $1,000.
• Cash is an asset and it is decreased. Therefore, credit cash account by $1,000.

b. 2

To determine

Prepare the entry to record the accrued income tax expense and then prepare closing entries in the accounts of Corporation S, if it is organized as a Corporation.

Explanation of Solution

Corporation: The form of business entity ,which is incorporated by state law into a separate legal entity, owned by stockholders, and managed by board of directors elected by stockholders, is referred to as corporation.

Prepare closing entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
November 30	Income Tax Expense	600
	Income Tax Payable		600
	(To accrue income taxes expense for November)
November 30	Income Summary	600
	Income Tax Expense (1)		600
	(To close the Income Tax Expense account into the income summary account)
November 30	Income Summary	1,400
	Retained Earnings		1,400
	(To close the Income Summary account)
November 30	Retained Earnings	1,000
	Dividends		1,000
	(To close the Dividends account)

Table (4)

November 30:

• Income tax expense is a component of stockholders’ equity and it is decreased. Therefore, debit income tax expense account by $600.
• Income tax payable is a liability and it is increased. Therefore, credit income tax payable account by $600.

November 30:

• Income summary is a component of stockholders’ equity and it is decreased. Therefore, debit income summary account by $600.
• Income tax expense is a component of stockholders’ equity and it is increased. Therefore, credit income tax expense account by $600.

November 30:

• Income summary is a component of stockholders’ equity and it is decreased. Therefore, debit income summary account by $1,400.
• Retained earnings are a component of stockholders’ equity and it is increased. Therefore, credit retained earnings account by $1,400.

November 30:

• Retained earnings are a component of stockholders’ equity and it is decreased. Therefore, debit retained earnings account by $1,000.
• Dividends payable is a liability and it is increased. Therefore, credit dividends payable $1,000.

Working note:

Calculate the amount of accrued income tax expense:

$\begin{array}{c}\begin{array}{l}\text{Accreud Income}\\ \text{tax}\text{expense}\end{array}\}\text{=}\text{Profit}\text{before}\text{income}\text{tax}\text{×}\text{Income}\text{tax}\text{rate}\\ \text{=}\text{\$2,000}\text{×}3\text{0}\text{\%}\\ \text{=}\text{\$600}\end{array}$

(1)

c.

To determine

Explain the causes of the differences in net income between organization as Sole Proprietorship and as a Corporation.

Explanation of Solution

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Corporation: The form of business entity ,which is incorporated by state law into a separate legal entity, owned by stockholders, and managed by board of directors elected by stockholders, is referred to as corporation.

Sole proprietorship: The form of business entity which is owned and managed by an individual is referred to as sole proprietorship.

The net income between the organization as Sole Proprietorship and Corporation S as a Corporation differs because of two reasons. Those reasons are given below:

• Corporation S is subject to payment of income taxes (expense) which is not included in the accounts of the Sole Proprietorship.
• Payment of Services to Person S is considered to be salaries expense if the business is organized as a Corporation. And if, the business is organized as a Sole Proprietorship, then the payments are withdrawn by the owner.

d.

To determine

Describe the effects of the business operations on Person’s individual income tax return.

Explanation of Solution

The effect of the business operations on Person’s individual income tax return, if the business is organized as a Sole Proprietorship is stated below:

Person S must pay taxes on the net income of the Sole Proprietorship ($5,000) through the individual income tax return.

The effect of the business operations on Person’s individual income tax return, if the business is organized as a Corporation is stated below:

Person S must pay taxes on the dividend received ($1,000), and the salaries received ($3,000) of the Corporation through the individual tax return.