Concept explainers
Accounting cycle
• LO2–2 through LO2–7
The general ledger of the Karlin Company, a consulting company, at January 1, 2018, contained the following account balances:
Account Title | Debits | Credits |
Cash | 30,000 | |
15,000 | ||
Equipment | 20,000 | |
6,000 | ||
Salaries payable | 9,000 | |
Common stock | 40,500 | |
9,500 | ||
Total | 65,000 | 65,000 |
The following is a summary of the transactions for the year:
a. Sales of services, $100,000, of which $30,000 was on credit.
b. Collected on accounts receivable, $27,300.
c. Issued shares of common stock in exchange for $10,000 in cash.
d. Paid salaries, $50,000 (of which $9,000 was for salaries payable).
e. Paid miscellaneous expenses, $24,000.
f. Purchased equipment for $15,000 in cash.
g. Paid $2,500 in cash dividends to shareholders.
Required:
1. Set up the necessary T-accounts and enter the beginning balances from the
2. Prepare a general
3. Post the journal entries to the accounts.
4. Prepare an unadjusted trial balance.
5. Prepare and post
6. Prepare an adjusted trial balance.
7. Prepare an income statement for 2018 and a
8. Prepare and
9. Prepare a post-closing trial balance.
1.
T-account:
- T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
- The components of the T-account are as follows:
-
- a) The title of the account
- b) The left or debit side
- c) The right or credit side
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.
Income statement:
This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time. It is prepared to find out the net income of an organization.
Classified Balance Sheet:
A balance sheet is a statement showing position of all assets, liabilities and equity of the company at a specific time. When assets, liabilities and shareholders’ equity are further sub-categorized to make it more readable and understandable then it is called classified balance sheet
Unadjusted trial balance:
The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.
Post-closing trial balance:
After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.
To Enter: The beginning balances from the trial balance to the T-accounts.
Explanation of Solution
Enter the beginning balances in T-accounts from the trial balance.
Cash Account:
Cash Account
January 1 | $30,000 | ||||
Accounts receivable:
Accounts receivable Account
January 1 | $15,000 | ||||
Equipment:
Equipment Account
January 1 | $20,000 | ||||
Accumulated depreciation Account:
Accumulated Depreciation Account
January 1 | $6,000 | ||||
Salary Payable:
Salary Payable Account
January 1 | $9,000 | ||||
Common Stock:
Common Stock Account
January 1 | $40,500 | ||||
Retained earnings:
January 1 | $9,500 | ||||
2.
To Prepare: A general journal entry for each of the summary transactions.
Explanation of Solution
Prepare a general journal entry for each of the summary transactions.
Transaction | Account Title and Explanation | Post Ref | Debit($) | Credit($) |
a. | Cash (A+) | 70,000 | ||
Accounts receivable (A+) | 30,000 | |||
Service Revenue (E+) | 100,000 | |||
(To record the service provided on account and cash) | ||||
b. | Cash (A+) | 27,300 | ||
Accounts Receivable (A–) | 27,300 | |||
(To record cash received on account) | ||||
c. | Cash (A+) | 10,000 | ||
Common Stock (E+) | 10,000 | |||
(To record the issuance of common stock) | ||||
d. | Salaries Expense (E–) | 41,000 | ||
Salaries Payable (L–) | 9,000 | |||
Cash (A–) | 50,000 | |||
(To record the payment of salary) | ||||
e. | Miscellaneous Expense (E–) | 24,000 | ||
Cash (A–) | 24,000 | |||
(To record the payment of miscellaneous expense in cash) | ||||
f. | Equipment (A+) | 15,000 | ||
Cash (A–) | 15,000 | |||
(To record the purchase of equipment in cash) | ||||
g. | Retained Earnings (E–) | 2,500 | ||
Cash (A–) | 2,500 | |||
(to record the payment of cash dividend) |
Table (1)
3.
To Post: The journal entries to the accounts.
Explanation of Solution
Post the entries in T-accounts.
Cash Account:
Cash Account
January 1 | $30,000 | ||||
a. | $70,000 | d. | $50,000 | ||
b. | $27,300 | e. | $24,000 | ||
c. | $10,000 | f. | $15,000 | ||
g. | $2,500 | ||||
December 31 | $45,800 |
Accounts receivable:
Accounts receivable Account
January 1 | $15,000 | ||||
a. | $30,000 | b. | $27,300 | ||
December 31 | $17,700 |
Equipment:
Equipment Account
January 1 | $20,000 | ||||
f. | $15,000 | ||||
December 31 |
$35,000 |
Accumulated depreciation Account:
Accumulated Depreciation Account
January 1 | $6,000 | ||||
December 31 |
$6,000 |
Salaries Payable:
Salaries Payable Account
January 1 | $9,000 | ||||
d. | $9,000 | ||||
December 31 |
0 |
Common Stock:
Common Stock Account
January 1 | $40,500 | ||||
c. | $10,000 | ||||
December 31 |
$50,500 |
Retained Earnings:
January 1 | $9,500 | ||||
g. | $2,500 | ||||
December 31 |
$7,000 |
Retained Earnings Account
Post the entries in T-accounts for income statement accounts as follows;
Service Revenue:
Service Revenue Account
January 1 | 0 | ||||
a. | $100,000 | ||||
December 31 |
$100,000 |
Miscellaneous Expense:
Miscellaneous Expense Account
January 1 | 0 | ||||
e. | $24,000 | ||||
December 31 |
$24,000 |
Salaries Expense:
Salaries Expense Account
January 1 | 0 | ||||
d. | $41,000 | ||||
December 31 |
$41,000 |
4.
To Prepare: An unadjusted trial balance.
Explanation of Solution
Prepare an unadjusted trial balance.
Account Title | Debit ($) | Credit ($) |
Cash | 45,800 | |
Accounts Receivable | 17,700 | |
Equipment | 35,000 | |
Accumulated depreciation | 6,000 | |
Salaries payable | 0 | |
Common stock | 50,500 | |
Retained earnings | 7,000 | |
Service revenue | 100,000 | |
Salaries expense | 41,000 | |
Miscellaneous expense | 24,000 | |
Totals | $163,500 | $163,500 |
Table (2)
5.
To Prepare: The adjusting entries, and also post the adjusting entries.
Explanation of Solution
Prepare the adjusting journal entry at December 31, 2018.
Date | Account Title and Explanation | Post Ref | Debit($) | Credit($) |
December 31, 2018 | Salaries Expense (E –) | 1,000 | ||
Salaries Payable (L+) | 1,000 | |||
(To record the amount of accrued salaries for the month.) |
Table (3)
Date | Account Title and Explanation | Post Ref | Debit($) | Credit($) |
December 31, 2018 | Depreciation Expense (E–) | 2,000 | ||
Accumulated Depreciation (A–) | 2,000 | |||
(To record the amount of depreciation for the year) |
Table (4)
Post the Adjusting entries in T-accounts for balance sheet accounts:
Accumulated depreciation Account:
Accumulated Depreciation Account
January 1 | $6,000 | ||||
December 31 | $2,000(Adjusting) | ||||
December 31 |
$8,000 |
Salaries Payable:
Salaries Payable Account
January 1 | $9,000 | ||||
d. | $9,000 | December 31 |
$1,000(Adjusting) | ||
December 31 |
$1,000 |
Post the Adjusting entries in T-accounts for income statement accounts:
Depreciation Expense:
Depreciation Expense Account
January 1 | 0 | ||||
December 31 |
$2,000 (Adjusting) |
||||
December 31 |
$2,000 |
Salaries Expense:
Salaries Expense Account
January 1 | 0 | ||||
d. | $41,000 | ||||
December 31 |
$1,000 (Adjusting) |
||||
December 31 |
$42,000 |
6.
To Prepare: An adjusted trial balance.
Explanation of Solution
Prepare an adjusted trial balance:
Account Title | Debit ($) | Credit ($) |
Cash | 45,800 | |
Accounts Receivable | 17,700 | |
Equipment | 35,000 | |
Accumulated depreciation | 8,000 | |
Salaries payable | 1,000 | |
Common stock | 50,500 | |
Retained earnings | 7,000 | |
Service revenue | 100,000 | |
Salaries expense | 42,000 | |
Miscellaneous expense | 24,000 | |
Depreciation expense | 2,000 | |
Totals | $166,500 | $166,500 |
Table (5)
7.
To Prepare: An income statement and a balance sheet as of December 31, 2018.
Explanation of Solution
Prepare an income statement for K Company as of December 31, 2018.
K Company | ||
Income statement | ||
Year ended December 31, 2018 | ||
Particulars | Amount ($) | Amount ($) |
Revenue: | ||
Service revenue | 100,000 | |
Total revenue | 100,000 | |
Expenses : | ||
Salaries expense | (42,000) | |
Miscellaneous expense | (24,000) | |
Depreciation expense | (2,000) | |
Total expenses | (68,000) | |
Net income | $32,000 |
Table (6)
Prepare the balance sheet for K Company as of December 31, 2018.
K Company | ||
Balance Sheet | ||
December 31, 2018 | ||
Assets | ||
Current assets: | Amount ($) | Amount ($) |
Cash | 45,800 | |
Accounts receivable | 17,700 | |
Total current assets | 63,500 | |
Property and equipment: | ||
Equipment | 35,000 | |
Less: Accumulated depreciation | (8,000) | 27,000 |
Total assets | $90,500 | |
Liabilities and shareholders’ Equity | ||
Current liabilities: | ||
Salaries payable | 1,000 | |
Total current liabilities | 1,000 | |
Shareholders’ equity: | ||
Common stock | 50,500 | |
Retained earnings | 39,000 | 89,500 |
Total liabilities and shareholders’ equity | $90,500 |
Table (7)
Working note:
Calculate the amount of retained earnings:
8.
To Prepare and post: The closing entries.
Explanation of Solution
Prepare closing entries for the month ended December 31, 2018.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2018 | Service Revenue (SE-) | 100,000 | ||
Income Summary (SE+) | 100,000 | |||
(To close the revenue accounts) | ||||
December 31, 2018 | Income Summary (SE- ) | 68,000 | ||
Salary Expense (SE+) | 42,000 | |||
Miscellaneous Expense | 24,000 | |||
Depreciation Expense (SE+) | 2,000 | |||
(To close the expense accounts) | ||||
December 31, 2018 | Income Summary (SE-) | 32,000 | ||
Retained Earnings (SE+) | 32,000 | |||
(To close the income summary account) |
Table (8)
Post the closing entries in T-accounts.
Retained Earnings:
January 1 | $9,500 | ||||
g. | $2,500 | ||||
December 31 |
$32,000(Closing) | ||||
December 31 |
$39,000 |
Retained Earnings Account
Post the closing entries in T-accounts for income statement accounts:
Salaries Expense:
Salaries Expense Account
January 1 | 0 | ||||
d. | $41,000 | ||||
December 31 |
$1,000 (Adjusting) |
December 31 |
$42,000(Closing) | ||
December 31 |
0 |
Miscellaneous Expense:
Miscellaneous Expense Account
January 1 | 0 | ||||
e. | $24,000 | December 31 |
$24,000(Closing) | ||
December 31 |
0 |
Depreciation Expense:
Depreciation Expense Account
January 1 | 0 | ||||
December 31 |
$2,000 (Adjusting) |
December 31 |
$2,000(Closing) | ||
December 31 |
0 |
Income Summary:
Income Summary Account
December 31 |
$100,000(Closing) | ||||
December 31 |
$68,000(Closing) | ||||
December 31 |
$32,000(Closing) | ||||
December 31 |
0 |
9.
To Prepare: A post-closing trial balance.
Explanation of Solution
Prepare a post-closing trial balance.
Account Title | Debit ($) | Credit ($) |
Cash | 45,800 | |
Accounts Receivable | 17,700 | |
Equipment | 35,000 | |
Accumulated depreciation | 8,000 | |
Salaries payable | 1,000 | |
Common stock | 50,500 | |
Retained earnings | 39,000 | |
Totals | $98,500 | $98,500 |
Table (9)
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Chapter 2 Solutions
Loose Leaf Intermediate Accounting
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