Concept explainers
Accounting cycle; unadjusted
• LO2–3, LO2–5, LO2–7
The unadjusted trial balance as of December 31, 2018, for the Bagley Consulting Company appears below. December 31 is the company’s fiscal year-end.
Account Title | Debits | Credits |
Cash | 8,000 | |
9,000 | ||
Prepaid insurance | 3,000 | |
Land | 200,000 | |
Buildings | 50,000 | |
20,000 | ||
Office equipment | 100,000 | |
Accumulated depreciation—office equipment | 40,000 | |
Accounts payable | 35,050 | |
Salaries and wages payable | –0– | |
Deferred rent revenue | –0– | |
Common stock | 200,000 | |
56,450 | ||
Sales revenue | 90,000 | |
Interest revenue | 3,000 | |
Rent revenue | 7,500 | |
Salaries and wages expense | 37,000 | |
Depreciation expense | –0– | |
Insurance expense | –0– | |
Utility expense | 30,000 | |
Maintenance expense | 15,000 | |
Totals | 452,000 | 452,000 |
Required:
1. Enter the account balances in T-accounts.
2. From the trial balance and information given, prepare
a. The buildings have an estimated useful life of 50 years with no salvage value. The company uses the
b. The office equipment is depreciated at 10 percent of original cost per year.
c. Prepaid insurance expired during the year, $1,500.
d. Accrued salaries and wages at year-end, $1,500.
e. Deferred rent revenue at year-end should be $1,200.
3. Prepare an adjusted trial balance.
4. Prepare closing entries.
5. 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
Adjusting entries:
Adjusting entries are the journal entries, which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.
Accounting rules for journal/adjusting 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.
Adjusted Trial Balance:
An adjusted trial balance refers to the final trial balance resulting after posting the adjusting entries at the end of the period.
Closing Entries:
Closing entries are those journal entries which are passed to transfer the balances of temporary accounts to the permanent accounts. These are passed at the end of the period, to transfer the final balance.
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 account balances in T-accounts.
Explanation of Solution
Enter account balances in T-accounts.
Cash Account:
Cash Account
December 31 | $8,000 | ||||
December 31 | $8,000 |
Accounts Receivable:
Accounts Receivable Account
December 31 | $9,000 | ||||
December 31 | $9,000 |
Prepaid Insurance:
Prepaid Insurance Account
December 31 | $3,000 | ||||
December 31 |
$3,000 |
Land:
Land Account
December 31 | $200,000 | ||||
December 31 | $200,000 |
Building:
Building Account
December 31 | $50,000 | ||||
December 31 | $50,000 |
Office Equipment:
Office Equipment Account
December 31 | $100,000 | ||||
December 31 | $100,000 |
Accumulated Depreciation - building:
Accumulated Depreciation - building Account
December 31 | $20,000 | ||||
December 31 | $20,000 |
Accumulated Depreciation – office equipment:
Accumulated Depreciation – office equipment Account
December 31 | $40,000 | ||||
December 31 | $40,000 |
Accounts Payable:
Accounts Payable Account
December 31 | $35,050 | ||||
December 31 | $35,050 |
Salaries and Wages Payable:
Salaries and Wages Payable Account
December 31 | 0 | ||||
December 31 | 0 |
Deferred Rent Revenue:
Deferred Rent Revenue Account
December 31 | 0 | ||||
December 31 | 0 |
Common Stock:
Common Stock Account
December 31 | $200,000 | ||||
December 31 | $200,000 |
Retained Earnings:
Retained Earnings Account
December 31 | $56,450 | ||||
December 31 | $56,450 |
Sales Revenue:
Sales Revenue Account
December 31 | $90,000 | ||||
December 31 | $90,000 |
Interest Revenue:
Interest Revenue Account
December 31 | $3,000 | ||||
December 31 | $3,000 |
Rent Revenue:
Rent Revenue Account
December 31 | $7,500 | ||||
December 31 | $7,500 |
Salaries and Wages Expense:
Salaries and Wages Expense Account
December 31 | $37,000 | ||||
December 31 | $37,000 |
Depreciation Expense:
Depreciation Expense Account
December 31 | 0 | ||||
December 31 | 0 |
Insurance Expense:
Insurance Expense Account
December 31 | 0 | ||||
December 31 | 0 |
Utility Expense:
Utility Expense Account
December 31 | $30,000 | ||||
December 31 | $30,000 |
Maintenance Expense:
Maintenance Expense Account
December 31 | $15,000 | ||||
December 31 | $15,000 |
2.
To Prepare: The adjusting entries, and post them to the accounts.
Explanation of Solution
Prepare the adjusting journal entry at December 31, 2018.
Date | Account Title and Explanation | Post Ref | Debit($) | Credit($) |
a. | Depreciation Expense (E–) | 1,000 | ||
Accumulated Depreciation (A–) buildings | 1,000 | |||
(To record the amount of depreciation for the year) | ||||
b. | Depreciation Expense (E–) | 10,000 | ||
Accumulated Depreciation (A–) office equipment | 10,000 | |||
(To record the amount of depreciation for the year) | ||||
c. | Insurance Expense (E–) | 1,500 | ||
Prepaid Insurance (A–) | 1,500 | |||
(To record the amount of prepaid insurance expired during the period) | ||||
d. | Salaries and Wages Expense (E –) | 1,500 | ||
Salaries and Wages Payable (L+) | 1,500 | |||
(To record the amount of accrued salaries for the month.) | ||||
e. | Rent Revenue (E+) | 1,200 | ||
Deferred Rent Revenue (L–) | 1,200 | |||
(To record the amount of Deferred service revenue earned during the period.) |
Table (1)
Working notes:
Calculate the amount of depreciation expense - Building:
Calculate the amount of depreciation expense – Office equipment:
Post the adjusting entries in T-accounts.
Cash Account:
Cash Account
December 31 | $8,000 | ||||
December 31 | $8,000 |
Accounts Receivable:
Accounts Receivable Account
December 31 | $9,000 | ||||
December 31 | $9,000 |
Prepaid Insurance:
Prepaid Insurance Account
December 31 | $3,000 | ||||
c. | $1,500 (Adjusting) | ||||
December 31 |
$1,500 |
Land:
Land Account
December 31 | $200,000 | ||||
December 31 | $200,000 |
Building:
Building Account
December 31 | $50,000 | ||||
December 31 | $50,000 |
Office Equipment:
Office Equipment Account
December 31 | $100,000 | ||||
December 31 | $100,000 |
Accumulated Depreciation - building:
Accumulated Depreciation - building Account
December 31 | $20,000 | ||||
a. | $1,000 (Adjusting) | ||||
December 31 | $21,000 |
Accumulated Depreciation – office equipment:
Accumulated Depreciation – office equipment Account
December 31 | $40,000 | ||||
b. | $10,000 (Adjusting) | ||||
December 31 | $50,000 |
Accounts Payable:
Accounts Payable Account
December 31 | $35,050 | ||||
December 31 | $35,050 |
Salaries and Wages Payable:
Salaries and Wages Payable Account
December 31 | 0 | ||||
d. | $1,500 (Adjusting) | ||||
December 31 | $1,500 |
Deferred Rent Revenue:
Deferred Rent Revenue Account
December 31 | 0 | ||||
e. | $1,200 (Adjusting) | ||||
December 31 | $1,200 |
Common Stock:
Common Stock Account
December 31 | $200,000 | ||||
December 31 | $200,000 |
Retained Earnings:
Retained Earnings Account
December 31 | $56,450 | ||||
December 31 | $56,450 |
Sales Revenue:
Sales Revenue Account
December 31 | $90,000 | ||||
December 31 | $90,000 |
Interest Revenue:
Interest Revenue Account
December 31 | $3,000 | ||||
December 31 | $3,000 |
Rent Revenue:
Rent Revenue Account
December 31 | $7,500 | ||||
e. | $1,200 (Adjusting) | ||||
December 31 | $6,300 |
Salaries and Wages Expense:
Salaries and Wages Expense Account
December 31 | $37,000 | ||||
d. | $1,500 (Adjusting) | ||||
December 31 | $38,500 |
Depreciation Expense:
Depreciation Expense Account
December 31 | 0 | ||||
a. | $1,000 (Adjusting) | ||||
b. | $10,000 (Adjusting) | ||||
December 31 | $11,000 |
Insurance Expense:
Insurance Expense Account
December 31 | 0 | ||||
c. | $1,500 (Adjusting) | ||||
December 31 | $1,500 |
Utility Expense:
Utility Expense Account
December 31 | $30,000 | ||||
December 31 | $30,000 |
Maintenance Expense:
Maintenance Expense Account
December 31 | $15,000 | ||||
December 31 | $15,000 |
3.
To Prepare: An adjusted trial balance.
Explanation of Solution
Prepare an adjusted trial balance for the year ended December 31, 2018.
Account Title | Debit ($) | Credit ($) |
Cash | 8,000 | |
Accounts Receivable | 9,000 | |
Prepaid insurance | 1,500 | |
Land | 200,000 | |
Building | 50,000 | |
Accumulated depreciation – building | 21,000 | |
Office equipment | 100,000 | |
Accumulated depreciation – office equipment | 50,000 | |
Accounts payable | 35,050 | |
Salaries and wages payable | 1,500 | |
Deferred rent revenue | 1,200 | |
Common stock | 200,000 | |
Retained earnings | 56,450 | |
Sales revenue | 90,000 | |
Interest revenue | 3,000 | |
Rent revenue | 6,300 | |
Salaries and wages expense | 38,500 | |
Depreciation expense | 11,000 | |
Insurance expense | 1,500 | |
Utility expense | 30,000 | |
Maintenance expense | 15,000 | |
Totals | $464,500 | $464,500 |
Table (2)
4.
To Prepare: The closing entries.
Explanation of Solution
Prepare closing entries for the month ended December 31, 2018.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2018 | Sales Revenue (SE-) | 90,000 | ||
Interest Revenue (SE-) | 3,000 | |||
Rent Revenue (SE-) | 6,300 | |||
Income Summary (SE+) | 99,300 | |||
(To close the revenue accounts) | ||||
December 31 2018 | Income Summary (SE-) | 96,000 | ||
Salaries and Wages Expense (SE+) | 38,500 | |||
Depreciation Expense (SE+) | 11,000 | |||
Insurance Expense (SE+) | 1,500 | |||
Utility Expense (SE+) | 30,000 | |||
Maintenance Expense (SE+) | 15,000 | |||
(To close the expense accounts) | ||||
December 31 2018 | Income Summary (SE-) | 3,300 | ||
Retained Earnings (SE+) | 3,300 | |||
(To close the income summary account) |
Table (3)
5.
To Prepare: A post-closing trial balance.
Explanation of Solution
Prepare a post closing trial balance for Company BC at December 31, 2018.
Account title | Debit ($) | Credit ($) |
Cash | 8,000 | |
Accounts receivable | 9,000 | |
Prepaid insurance | 1,500 | |
Land | 200,000 | |
Buildings | 50,000 | |
Accumulated depreciation - Buildings | 21,000 | |
Office equipment | 100,000 | |
Accumulated depreciation – Office equipment | 50,000 | |
Accounts payable | 35,050 | |
Salaries and wages payable | 1,500 | |
Deferred rent revenue | 1,200 | |
Common stock | 200,000 | |
Retained earnings | 59,750 | |
Totals | $368,500 | $368,500 |
Table (4)
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