Chapter 3, Problem 1CP

a.

To determine

Record the above transactions in general journal form.

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.

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.

Record the events in general journal format.

Event	Account title and Explanation	Post ref.	Debit  (in $)	Credit (in $)
1.	Salaries payable		1,200
	Cash			1,200
	(To record the salaries paid)
2.	Notes payable		2,000
	Cash			2,000
	(To record the payment made to Small business government agency)
3.	Cash		11,000
	Accounts receivable		21,000
	Security Service revenue			32,000
	(To record the security service revenue earned by cash and on account)
4.	Prepaid rent		3,000
	Cash			3,000
	(To record the payment of rent)
5.	Supplies		700
	Accounts payable			700
	(To record the supplies purchased on account)
6.	Salaries Expense		9,000
	Cash			9,000
	(To record salaries expense)
7.	Other Operating Expenses		4,200
	Accounts payable			4,200
	(To record operating expenses on account)
8.	Cash		1,200
	Unearned revenue			1,200
	(To record the unearned service revenue)
9.	Cash		19,000
	Accounts receivable			19,000
	(To record the cash collected from accounts receivable)
10.	Accounts payable		5,950
	Cash			5,950
	(To record the payment made to creditors on account)
11.	Advertising Expense		1,800
	Cash			1,800
	(To record the advertising expense)
12.	Dividends		4,650
	Cash			4,650
	(To record the dividends paid)
13.	No entry is required for the market value of the land.
14.	Supplies Expense (1)		645
	Supplies			645
	(To record the supplies)
15.	Rent Expense (2)		2,800
	Prepaid Rent			2,800
	(To adjust the prepaid rent)
16.	Unearned revenue (3)		500
	Service revenue			500
	(To record the service revenue earned)
17.	Salaries Expense		1,000
	Salaries payable			1,000
	(To record salaries expense)

Table (1)

Working note:

Calculate the Supplies used during the year.

$\begin{array}{c}\text{Supplies used during the year}=\left(\begin{array}{l}\text{Supplies at the beginning of the year+Supplies }\\ \text{purchased}-\text{Supplies at the end of the year}\end{array}\right)\\ =\$65+\$700-\$120\\ =\$645\end{array}$ (1)

Calculate the amount of prepaid rent expired during the year.

$\begin{array}{c}\text{Prepaid rent expired during the year =}\left\{\begin{array}{c}\text{Prepaid rent paid in Year 2}\times \\ \frac{\text{Number of months rent expired}}{\text{Total number of months rent prepaid}}\end{array}\right\}+\\ \left\{\begin{array}{c}\text{Prepaid rent paid in Year 3}\times \\ \frac{\text{Number of months rent expired}}{\text{Total number of months rent prepaid}}\end{array}\right\}\\ \text{= }\left\{\text{\$2,400}\times \frac{4\text{months }\left(\text{January to April}\right)}{12\text{months}}\right\}+\\ \left\{\text{\$3,000}\times \frac{8\text{months }\left(\text{May to December}\right)}{12\text{months}}\right\}\\ =\$800+\$2,000\\ =\$2,800\end{array}$ (2)

Calculate the amount of unearned revenue earned during the year.

$\begin{array}{c}\text{Unearned revenue earned in Year 3 =}\left(\begin{array}{l}\text{Uneraned revenue}\\ \text{collected in Year 2 and }\\ \text{earned in Year 3}\end{array}\right)+\left(\begin{array}{c}\text{Unearned revenue }\\ \text{earned and }\\ \text{collected in Year 3}\times \\ \frac{\begin{array}{l}\text{Number of months }\\ \text{revenue earned}\end{array}}{\begin{array}{l}\text{Total number of months }\\ \text{revenue unearned}\end{array}}\end{array}\right)\\ \text{= }\left(\text{\$200}\right)\text{+}\left(\text{\$1,200}\times \frac{3\text{months}}{12\text{months}}\right)\\ =\$200+\$300\\ =\$500\end{array}$ (3)

b.

To determine

Post the transactions to T-accounts and determine the account balances.

Explanation of Solution

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

Post the events to T-accounts as follows:

Cash
Balance	8,900	1.	1,200
3.	11,000	2.	2,000
8.	1,200	4.	3,000
9.	19,000	6.	9,000
		10.	5,950
		11.	1,800
		12.	4,650
Balance            12,500

Accounts Receivable
Balance	1,500	9.	19,000
3.	21,000
Balance                3,500

Supplies
Balance	65	14.	645
5.	700
Balance                   120

Prepaid Rent
Balance	800	15.	2,800
4.	3,000
Balance                1,000

Land
Balance	4,000

Accounts Payable
10.	5,950	Balance	1,050
		5.	700
		7.	4,200
		Balance                  0

Unearned Revenue
16.	500	Balance	200
		8.	1,200
		Balance              900

Salaries Payable
1.	1,200	Balance	1,200
		17.	1,000
		Balance           1,000

Notes Payable
2.	2,000	Balance	2,000
		Balance                  0

Common Stock
		Balance	8,000

Retained Earnings
		Balance	2,815

Dividends
12.	4,650
Balance                4,650

Security Service Revenue
		3.	32,000
		16.	500
		Balance         32,500

Advertising Expense
11.	1,800
Balance                1,800

Other Operating Expense
7.	4,200
Balance                4,200

Rent Expense
15.	2,800
Balance                2,800

Salaries Expense
6.	9,000
17.	1,000
Balance              10,000

Supplies Expense
14.	645
Balance                   645

c.

To determine

Prepare a trial balance.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare a trial balance for Year 1 as follows:

Incorporation P
Trial Balance
December 31, Year 3
Particulars	Debit $	Credit $
Cash	12,500
Accounts receivable	3,500
Supplies	120
Prepaid rent	1,000
Land	4,000
Unearned revenue		900
Salaries payable		1,000
Common stock		8,000
Retained earnings		2,815
Dividends	4,650
Security Service revenue		32,500
Advertising expense	1,800
Other Operating expenses	4,200
Rent expenses	2,800
Supplies expense	645
Salaries expenses	10,000
Total	$45,215	$45,215

Table (2)

d.

To determine

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows for Year 3.

Explanation of Solution

Financial Statements:

A financial statement is a complete record of the financial transactions that takes place in a company at a particular point of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.

Four general-purpose financial statements:

The four general-purpose financial statements that business enterprises use are:

1. Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

2. Statement of changes in Stockholder’s equity:

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

3. Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

4. Statement of cash flows:

Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows for Year 1 as follows:

Incorporation P Financial Statements For the Year Ended December 31, Year 3
Income Statement
Details	Amount ($)	Amount ($)
Revenues:
Service revenue		32,500
Less: Expenses
Advertising  Expense	1,800
Other Operating  Expense	4,200
Rent Expense	2,800
Supplies Expense	645
Salaries Expense	10,000
Total Expenses		(19,445)
Net Income		$13,055
Statement of changes in Stockholders’ Equity
Beginning common stock	8,000
Add: Stock issued	0
Ending common stock		8,000
Beginning retained earnings	2,815
Add: Net income	13,055
Less: Dividends	(4,650)
Ending retained earnings		11,220
Total Stockholders’ Equity		$19,220
Incorporation P
Balance Sheet
As of December 31, Year 3
Assets:
Cash	12,500
Accounts Receivable	3,500
Supplies	120
Land	4,000
Prepaid rent	1,000
Total Assets		21,120
Liabilities:
Salaries Payable	1,000
Unearned revenue	900
Total Liabilities		1,900
Stockholders’ Equity:
Common stock	8,000
Retained earnings	11,220
Total Stockholders’ Equity		19,220
Total Liabilities and Owners’ Equity		$21,120
Statement of Cash Flows
Particulars
Cash Flow From Operating Activities:
Received cash from customers	31,200
Paid cash for expenses	(20,950)
Net Cash Flow from Operating Activities		10,250
Net Cash Flow From Investing Activities		0
Net Cash Flow From Financing Activities:
Cash payments on loan	(2,000)
Cash payments for dividends	(4,650)
Net Cash Flow from Financing Activities		(6,650)
Net increase in Cash		3,600
Add: Beginning Cash Balance		8,900
Ending Cash Balance		$12,500

Table (3)

Working Notes:

Calculate the cash received from customers.

Cash sales	11,000
Cash received from unearned income	1,200
Collection of accounts receivable	19,000
Total cash from customers	$31,200

Table (4)

Calculate the cash paid for expenses.

Payment of prepaid rent	3,000
Payment of salaries	10,200
Payment of accounts payable	5,950
Payment of advertising	1,800
Total cash payment for expenses	$20,950

Table (5)

e.

To determine

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

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Prepare the closing entries and post to the T-accounts as follows:

Date	Accounts title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Security Service revenue		32,500
	Retained earnings			32,500
	(To close the balance of revenue account)
December 31	Retained earnings		19,445
	Other Operating expense			4,200
	Advertising expense			1,800
	Rent Expense			2,800
	Salaries Expense			10,000
	Supplies Expense			645
	(To close the balances of expense accounts)
December 31	Retained earnings		4,650
	Dividends			4,650
	(To close the dividend account to retained earnings account)

Table (6)

• Fees earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
• Operating Expense, Rent Expense, Salaries Expense, and Supplies expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.
• Closing entries are also passed in order to close the excess of expenses over the revenues, and the dividend account.

Post the closing entries to T-accounts as follows:

Cash
Bal.	12,500
Accounts Receivable
Bal.	3,500
Supplies
Bal.	120
Prepaid Rent
Bal.	1,000
Land
Bal.	4,000
Accounts Payable
		Bal.	0
Unearned Revenue
		Bal.	900
Salaries Payable
		Bal.	1,000
Common Stock
		Bal.	8,000
Retained Earnings
cl.	19,445	Bal.	2,815
cl.	4,650	cl.	32,500
		Bal.	11,220
Dividends
Bal.	4,650	Cl.	4,650
Bal.	0
Security Service Revenue
cl.	32,500	Bal.	32,500
		Bal.	0
Advertising Expense
Bal.	1,800	cl.	1,800
Bal.	0
Other Operating Expense
Bal.	4,200	cl.	4,200
Bal.	0
Rent Expenses
Bal.	2,800	cl.	2,800
Bal.	0
Salaries Expense
Bal.	10,000	cl.	10,000
Bal.	0
Supplies Expense
Bal.	645	cl.	645
Bal.	0

f.

To determine

Prepare a post-closing trial balance.

Explanation of Solution

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.

Prepare a trial balance for Year 1 as follows:

Incorporation P
Post – Closing Trial Balance
December 31, Year 3
Particulars	Debit ($)	Credit ($)
Cash	12,500
Accounts Receivable	3,500
Supplies	120
Prepaid Rent	1,000
Land	4,000
Unearned Revenue		900
Salaries Payable		1,000
Common Stock		8,000
Retained Earnings		11,220
Total	$21,120	$21,120

Table (7)