Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 3, Problem 1CP

a.

To determine

Record the above transactions in general journal form.

a.

Expert Solution
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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.

Supplies used during the year=(Supplies at the beginning of the year+Supplies purchasedSupplies at the end of the year)=$65+$700$120=$645 (1)

Calculate the amount of prepaid rent expired during the year.

Prepaid rent expired during the year ={Prepaid rent paid in Year 2×Number of months rent expiredTotal number of months rent prepaid}+{Prepaid rent paid in Year 3×Number of months rent expiredTotal number of months rent prepaid}{$2,400×4months (January to April)12months}+{$3,000×8months (May to December)12months}=$800+$2,000=$2,800 (2)

Calculate the amount of unearned revenue earned during the year.

Unearned revenue earned in Year 3 =(Uneraned revenuecollected in Year 2 and earned in Year 3)+(Unearned revenue earned and collected in Year 3×Number of months revenue earnedTotal number of months revenue unearned)($200)+($1,200×3months12months)=$200+$300=$500 (3)

b.

To determine

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

b.

Expert Solution
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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.

c.

Expert Solution
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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.

d.

Expert Solution
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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.

e.

Expert Solution
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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.

f.

Expert Solution
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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)

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Chapter 3 Solutions

Fundamental Financial Accounting Concepts

Ch. 3 - Prob. 11QCh. 3 - Prob. 12QCh. 3 - Prob. 13QCh. 3 - Prob. 14QCh. 3 - Prob. 15QCh. 3 - Prob. 16QCh. 3 - Prob. 17QCh. 3 - Prob. 18QCh. 3 - Prob. 19QCh. 3 - Prob. 20QCh. 3 - Prob. 21QCh. 3 - Prob. 22QCh. 3 - Prob. 1AECh. 3 - Prob. 2AECh. 3 - Prob. 3AECh. 3 - Prob. 4AECh. 3 - Prob. 5AECh. 3 - Prob. 6AECh. 3 - Prob. 7AECh. 3 - Prob. 8AECh. 3 - Prob. 9AECh. 3 - Prob. 10AECh. 3 - Prob. 11AECh. 3 - Prob. 12AECh. 3 - Prob. 13AECh. 3 - Prob. 14AECh. 3 - Prob. 15AECh. 3 - Prob. 16AECh. 3 - Prob. 17AECh. 3 - Prob. 18AECh. 3 - Prob. 19AECh. 3 - Prob. 20AECh. 3 - Prob. 21AECh. 3 - Prob. 22AECh. 3 - Prob. 23AECh. 3 - Prob. 24AECh. 3 - Prob. 25APCh. 3 - Prob. 26APCh. 3 - Prob. 27APCh. 3 - Prob. 28APCh. 3 - Prob. 29APCh. 3 - Prob. 30APCh. 3 - Prob. 31APCh. 3 - Prob. 32APCh. 3 - Prob. 33APCh. 3 - Prob. 34APCh. 3 - Prob. 35APCh. 3 - Prob. 36APCh. 3 - Prob. 1BECh. 3 - Prob. 2BECh. 3 - Prob. 3BECh. 3 - Prob. 4BECh. 3 - Prob. 5BECh. 3 - Prob. 6BECh. 3 - Prob. 7BECh. 3 - Prob. 8BECh. 3 - Prob. 9BECh. 3 - Prob. 10BECh. 3 - Prob. 11BECh. 3 - Prob. 12BECh. 3 - Prob. 13BECh. 3 - Prob. 14BECh. 3 - Prob. 15BECh. 3 - Prob. 16BECh. 3 - Prob. 17BECh. 3 - Prob. 18BECh. 3 - Prob. 19BECh. 3 - Prob. 20BECh. 3 - Prob. 21BECh. 3 - Prob. 22BECh. 3 - Prob. 23BECh. 3 - Prob. 24BECh. 3 - Prob. 25BPCh. 3 - Prob. 26BPCh. 3 - Prob. 27BPCh. 3 - Prob. 28BPCh. 3 - Prob. 29BPCh. 3 - Prob. 30BPCh. 3 - Prob. 31BPCh. 3 - Prob. 32BPCh. 3 - Prob. 33BPCh. 3 - Prob. 34BPCh. 3 - Prob. 35BPCh. 3 - Prob. 36BPCh. 3 - Prob. 1ATCCh. 3 - Prob. 3ATCCh. 3 - Prob. 4ATCCh. 3 - Prob. 5ATCCh. 3 - Prob. 6ATCCh. 3 - Prob. 7ATCCh. 3 - Prob. 9ATCCh. 3 - Prob. 10ATCCh. 3 - Prob. 1CP
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