Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
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Chapter 3, Problem 20E

1.

To determine

Record the journal entries for the given transaction occurred during the year.

1.

Expert Solution
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Explanation of Solution

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

DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
2021Cash20,000
February 15Common stock20,000
(To record the common stock issued)
2021Cash35,000
May, 20Account receivable30,000
Service revenue65,000
(To record the service revenue provided to customer on account and in cash)
2021Salaries expense23,000
August 31Cash23,000
(To record the cash received from issuance of common stock)
2021Prepaid rent12,000
October 1Cash12,000
(To record payment of one-year advance rent)
2021Supplies22,000
November 17Accounts payable22,000
(To record the purchase of supplies on account)
2021Dividends2,000
December 30Cash2,000
(To record the payment of dividend to stockholder)

Table (1)

2.

To determine

Record the adjusting entry for prepaid insurance.

2.

Expert Solution
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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.

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.

Adjusting entries of Company R are as follows:

DateAccount Title and ExplanationPost Ref.Debit($)Credit($)
2021Salaries expense4,000
December 31Salaries payable4,000
(To record salaries expense incurred at the end of accounting year)
2021Rent expense (1)3,000
December 31Prepaid rent3,000
(To record the rent expense incurred at the end of the accounting period)
2021Supplies expense (2)25,000
December 31Supplies25,000
(To record supplies expense incurred at the end of the accounting year)
2021Deferred revenue5,000
December 31Service revenue5,000
(To record service revenue recognized at the end of the accounting year)

Table (2)

Working Note:

Calculate the rent expense:

Rent expense = Cost of  rental  space × Time period=$12,000×(October to December)12=$12,000×312=$3,000 (1)

Calculate the supplies expense:

Supplies expense = (Supplies expense during January1, 2021+Purchase of supplies expense on account)Remaining suppplies expense =$8,000+$22,000$5,000=$25,000 (2)

3.

To determine

Prepare an adjusted trial balance of Company R.

3.

Expert Solution
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Explanation of Solution


Adjusted trial balance:

Adjusted trial balance is that statement which contains complete list of accounts with their adjusted balances, after all relevant adjustments have been made. This statement is prepared at the end of every financial period.

Adjusted trial balance of Company R is as follows:

Company R
Adjusted Trial Balance
December 31, 2021
AccountsDebit ($)Credit ($)
Cash$30,000
Accounts Receivable30,000
Supplies5,000
Prepaid Rent9,000
Land60,000
Accounts Payable$22,000
Salaries Payable4,000
Common Stock70,000
Retained Earnings25,000
Dividends2,000
Service Revenue70,000
Salaries Expense27,000
Rent Expense3,000
Supplies Expense25,000
Total$191,000$191,000

Table (3)

Conclusion

Therefore, the total of debit, and credit columns of adjusted trial balance is $191,000.

4.

To determine

Prepare the income statement, stockholder’s equity and classified balance sheet of Company R.

4.

Expert Solution
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Explanation of Solution

Income statement:

Income statement of Company R is as follows:

Company R
Income Statement
For the year ended December 31, 2021
 Particulars($)($)
Revenues:
Service revenue70,000 
Total revenues70,000
Expenses:
Rent expense3,000
Salaries expense27,000
Supplies expense25,000
Total expenses55,000
Net income15,000

Table (4)

Therefore, the net income of Company R is $15,000.

Statement of stockholder’s equity:

The statement of stockholder’s equity of Company R for the year ended December 31, 2021 is as follows:

Company R
Statement of Stockholders’ Equity
For the period ended December 31, 2021
 Common
stock
($)
 Retained
earnings ($)
 Total stockholders' equity ($)
Balance at January 150,00$25,000$75,000
Issuance of common stock20,00020,000
Add: Net income for 202115,00015,000
Less: Dividends(2,000)(2,000)
Balance at December 31$70,000$38,000$108,000

Table (5)

Therefore, the total stockholder’s equity of Company R for the year ended December 31, 2021 is $108,000.

Classified balance sheet:

Classified balance sheet of Company R is as follows:

Financial Accounting, Chapter 3, Problem 20E

Figure (1)

Therefore, the total assets of Company R are equal to the total liabilities and stockholders’ equity by $134,000.

5.

To determine

Prepare the closing entries of Company R.

5.

Expert Solution
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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 R is as follows:

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2021Service revenue 70,000 
December 31Retained earnings  70,000
 (To close all revenue account)   
 
2021Retained earnings 55,000 
December 31Salaries expense  27,000
 Rent expense  3,000
 Supplies expense  25,000
 (To close all the expenses account)   
 
2021Retained earnings 2,000 
December 31Dividends  2,000
 (To close the dividends account)   

Table (6)

Closing entry for revenue account:

In this closing entry, the service revenue account is closed by transferring the amount of service revenue to the retained earnings in order to bring the revenue accounts balance to zero.

Closing entry for expenses account:

In this closing entry, salaries expense, rent expense, and supplies expense are closed by transferring the amount of all expenses to the retained earnings in order to bring all the expense accounts balance to zero.

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Chapter 3 Solutions

Financial Accounting

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