Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
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Chapter 3, Problem 1AP

Requirement – 1

To determine

Prepare the journal entry to record the transactions from July 1 through December 31.

Requirement – 1

Expert Solution
Check Mark

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.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

The journal entries for given transactions of Company G are as follows:

DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
2021Cash 10,000 
July 1Common stock  10,000
 (To record the issuance of common stock in cash to Company S)   
     
2021Cash 10,000 
July, 1Common stock  10,000
 (To record the issuance of common stock in cash to Company T)   
     
2021Prepaid insurance 4,800 
July 1Cash  4,800
 (To record the purchase of one year insurance policy in cash)   
     
2021Legal fees expense 1,500 
July, 2Cash  1,500
 (To record the payment of legal fees)   
     
2021Supplies (office) 1,800 
July, 4Accounts payable  1,800
 (To record purchase of office supplies on account)   
     
2021Advertising expense 300 
July, 7Cash  300
 (To record payment of advertising expense)   
     
2021Equipment (Bikes) 12,000 
July, 7Cash  12,000
 (To record the purchase of mountain bike)   
     
2021Cash 2,000 
July, 15Service revenue (Clinic)  2,000
 ( To record the cash received for service revenue)   
     
2021Cash 2,300 
July, 22Service revenue (Clinic)  2,300
 ( To record the cash received for service revenue)   
     
2021Advertising expense 700 
July, 22Cash  700
 (To record the payment of advertising expense in cash)   
     
2021Cash 4,000 
July, 30Deferred revenue  4,000
 (To record advance cash received from customer)   
     
2021Cash 30,000 
August, 1Notes payable  30,000
 (To record loan received from city council)   
     
2021Equipment (Kayaks) 28,000 
August, 4Cash  28,000
 (To record the purchase of equipment in cash)   
     
2021Cash 3,000 
August, 10Deferred revenue 4,000 
 Service revenue  7,000
 (To record the cash received from service revenue and recognized service revenue)   
     
2021Cash 10,500 
August, 17Service revenue  10,500
 (To record cash received from service revenue)   
     
2021Accounts payable 1,800 
August, 24Cash  1,800
 ( To record payment of cash to creditors)   
     
2021Prepaid rent 2,400 
September 1Cash  2,400
 (To record the payment of one year advance rent)   
     
2021Cash 13,200 
September 21Service revenue (Clinic)  13,200
 (To record the cash received from customer)   
     
2021Cash 17,900 
October 17Service revenue (Clinic)  17,900
 (To record the cash received from customer)   
     
2021Miscellaneous expense 1,200 
December 8Cash  1,200
 (To record the payment of miscellaneous expense)   
     
2021Supplies (Racing) 2,800 
December 12Accounts payable  2,800
 (To record purchase of supplies on account)   
     
2021Cash 20,000 
December 15Service revenue (Racing)  20,000
 (To record cash received from service revenue)   
     
2021Salaries expense 2,000 
December 16Cash  2,000
 (To record the supplies expense incurred)   
     
2021Dividend 4,000 
December 31Cash  4,000
 (To record the payment of cash dividends)   

Table (1)

Requirement – 2

To determine

Prepare the adjusting journal entries on December 31.

Requirement – 2

Expert Solution
Check Mark

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

The adjusting journal entries for given transactions of Company G are as follows:

DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
2021Depreciation expense 8,000 
December 31Accumulated depreciation  8,000
 (To record depreciation expense incurred at the end of the accounting year)   
     
2021Insurance expense 2,400 
December 31Prepaid insurance  2,400
 (To record the insurance expense incurred at the end of the accounting period)   
     
2021Rent expense 800 
December 31Prepaid rent  800
 (To record the rent expense incurred at the end of the accounting year)   
     
2021Supplies expense (Office) ($1,8000$300) 1,500 
December 31Supplies  1,500
 (To record supplies expense incurred at the end of the accounting year)   
     
2021Interest expense ($30,000×0.06×512) 750 
December 31Interest payable  750
 (To record interest expense incurred at the end of the accounting year)   
     
2021Supplies expense (Racing) ($2,800$200) 2,600 
December 31Supplies  2,600
 (To record supplies expense incurred at the end of the accounting year)   
     
2021Income tax expense 14,000 
December 31Income tax payable  14,000
 (To record the income tax expense incurred at the end of the accounting year)   

Table (2)

Requirement – 3

To determine

Prepare the T-accounts and post the transactions in the T-accounts of Company G.

Requirement – 3

Expert Solution
Check Mark

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

  1. (a) The title of the account
  2. (b) The left or debit side
  3. (c) The right or credit side

T-accounts for above transactions are as follows:

Financial Accounting, Chapter 3, Problem 1AP , additional homework tip  1

Financial Accounting, Chapter 3, Problem 1AP , additional homework tip  2

Financial Accounting, Chapter 3, Problem 1AP , additional homework tip  3

Requirement – 4

To determine

Prepare an adjusted trial balance of Company G.

Requirement – 4

Expert Solution
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Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Adjusted trial balance of Company G is as follows:

Company G
Adjusted Trial Balance
December 31, 2021
AccountsDebit ($)Credit ($)
Cash64,200 
Prepaid Insurance2,400 
Prepaid Rent1,600 
Supplies (Office)300 
Supplies (Racing)200 
Equipment (Bikes)12,000 
Equipment (Kayaks)28,000 
Accumulated Depreciation $8,000
Accounts Payable 2,800
Income Tax Payable 14,000
Interest Payable 750
Notes Payable 30,000
Common Stock 20,000
Dividends4,000 
Service Revenue (Clinic) 52,900
Service Revenue (Racing) 20,000
Advertising Expense1,000 
Depreciation Expense8,000 
Income Tax Expense14,000 
Insurance Expense2,400 
Interest Expense750 
Legal Fees Expense1,500 
Miscellaneous Expense1,200 
Rent Expense800 
Salaries Expense2,000 
Supplies Expense (Office)1,500 
Supplies Expense (Racing)2,600 
Totals148,450148,450

Table (3)

Requirement –5

To determine

Prepare an income statement, stockholders’ equity and classified balance sheet of Company G.

Requirement –5

Expert Solution
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Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for Company G:

Company G
Income Statement
For the year ended December 31, 2021
 ($)($)
Revenues:  
Service revenue (clinic)52,900 
Service revenue (racing)20,000 
Total revenues 72,900
Expenses:  
Advertising expense1,000 
Depreciation expense8,000 
Income tax expense14,000 
Insurance expense2,400 
Interest expense750 
Legal fees expense1,500 
Miscellaneous expense1,200 
Rent expense800 
Salaries expense2,000 
Supplies expense (office)1,500 
Supplies expense (racing)2,600 
Total expenses 35,750
Net income 37,150

Table (4)

Therefore, the net income of Company G is $37,150.

Statement of stockholders’ equity:

This statement reports the beginning stockholder’s equity and all the changes, which led to ending stockholder’s’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholder’s equity to arrive at the result of closing balance of stockholders’ equity.

Prepare the statement of stockholders’ equity:

Company G
Statement of Stockholders’ Equity
For the period ended December 31, 2021
ParticularsCommon
stock
($)
Retained
earnings
($)
Total stockholders' equity ($)
Balance at July 1$0$0$0
Issuance of common stock20,000 20,000
Add: Net income for 2021 37,15037,150
Less: Dividends (4,000)(4,000)
Balance at December 31$20,000$33,150$53,150

Table (5)

Therefore, the total stockholder’s equity of Company G for the year ended December 31, 2021 is $53,150.

Classified balance sheet:

The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections, and sub-sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare the classified balance sheet:

Financial Accounting, Chapter 3, Problem 1AP , additional homework tip  4

Table (6)

Therefore, the total assets of Company G are $100,700, and the total liabilities and stockholders’ equity are $100,700.

Requirement – 6

To determine

Record the closing entries of Company G.

Requirement – 6

Expert Solution
Check Mark

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.

Closing entries of Company G is as follows:

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2021Service revenue (Clinic)52,900
December 31Service revenue (Racing)20,000
Retained earnings72,900
(To close all revenue account)
2021Retained earnings37,750
December 31Advertising expense1,000
Depreciation expense8,000
Income tax expense14,000
Insurance expense2,400
Interest expense750
Legal fees expense1,500
Miscellaneous expense1,200
Rent expense800
Salaries expense2,000
Supplies expense (office)1,500
Supplies expense (Racing)2,600
(To close all the expenses account)
2021Retained earnings4,000
December 31Dividends4,000
(To close the dividends account)

Table (6)

Requirement – 7

To determine

Prepare the T-account and post the closing entries to the T-accounts.

Requirement – 7

Expert Solution
Check Mark

Explanation of Solution

Financial Accounting, Chapter 3, Problem 1AP , additional homework tip  5

Requirement – 8

To determine

Prepare a post-closing trial balance of Company G.

Requirement – 8

Expert Solution
Check Mark

Explanation of Solution

Post-closing trial balance:

The post-closing trial balance is a summary of all ledger accounts, and it shows the debit and the credit balances after the closing entries are journalized and posted. The post-closing trial balance contains only permanent (balance sheet) accounts, and the debit and the credit balances of permanent accounts should agree.

Prepare a post-closing trial balance:

Company G
Post-closing Trial Balance
For the year ended December 31, 2021
AccountsDebit ($)Credit ($)
Cash$64,200 
Prepaid Insurance2,400 
Prepaid Rent1,600 
Supplies (Office)300 
Supplies (Racing)200 
Equipment (Bikes)12,000 
Equipment (Kayaks)28,000 
Accumulated Depreciation $8,000
Accounts Payable 2,800
Income Tax Payable 14,000
Interest Payable 750
Notes Payable 30,000
Common Stock 20,000
Retained Earnings 33,150
Total$108,700$108,700

Table (7)

Therefore, the total of debit, and credit columns of post-closing trial balance is $108,700.

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Chapter 3 Solutions

Financial Accounting

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