Chapter 3, Problem 3.21E

Requirement – 1

To determine

To record: The journal entries for given transactions of Company D.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

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.

Journal entries for given transactions are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Prepaid rent	6,000
January 2	Cash		6,000
	(To record advance rent received for one year)
2018	Supplies	3,500
January 9	Accounts payable		3,500
	(To record purchase of additional supplied)
2018	Accounts receivable	25,500
January 13	Service revenue		25,500
	(To record service provided on account)
2018	Cash	3,700
January 17	Deferred revenue		3,700
	(To record cash received from customer for future service)
2018	Salaries expense	11,500
January 20	Cash		11,500
	(To record incurred of salaries expense)
2018	Cash	24,100
January 22	Accounts receivable		24,100
	(To record cash received from customer)
2018	Accounts payable	4,000
January 29	Cash		4,000
	(To record cash paid to suppliers)

Table (1)

Requirement – 2 (a)

To determine

To record: The adjusting entry for prepaid rent.

Answer to Problem 3.21E

Adjusting entry for prepaid rent is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2018	Rent expense		500
	Prepaid rent			500
	(To record the rent expense incurred at the end of the accounting year)

Table (2)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Rent expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Prepaid rent is an asset account. There is a decrease in assets, therefore it is credited.

Requirement – 2 (b)

To determine

To record: The adjusting entry for supplies expense.

Answer to Problem 3.21E

Adjusting entry for supplies expense is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2018	Supplies expense (1)		3,800
	Supplies			3,800
	(To record the supplies expense incurred at the end of the accounting year)

Table (3)

Explanation of Solution

Explanation:

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Supplies expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Supplies are an asset account. There is a decrease in assets, therefore it is credited.

Working note:

Calculate the value of supplies expense at end of the October month

$\begin{array}{c}\text{Supplies}\text{expense}\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{The amount of beginning}\\ \text{ balance of supplies}\end{array}\right)\text{ +}\\ \left(\begin{array}{l}\text{The}\text{amount}\text{of supplies }\\ \text{purchased}\end{array}\right)\end{array}\right)-\left(\begin{array}{l}\text{The}\text{amount}\text{of}\text{supplies}\text{on}\\ \text{hand at}\text{the}\text{end}\text{of}\text{the month}\end{array}\right)\\ =\left(\$3,100+\$3,500\right)-\$2,800\\ =\$3,800\end{array}$ (1)

Requirement – 2 (c)

To determine

To record: The adjusting entry for service revenue recognized at the end of the accounting year.

Answer to Problem 3.21E

Adjusting entry for service revenue is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2018	Deferred revenue		3,200
	Service revenue			3,200
	(To record the service revenue recognized at the end of the accounting year)

Table (4)

Explanation of Solution

Explanation:

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Deferred revenue is a liability account. There is a decrease in liability, therefore it is debited.
• Service revenue is revenue, and it increased the value of stockholder’s equity. Therefore, it is credited

Requirement – 2 (d)

To determine

To record: The adjusting entry for salaries expense.

Answer to Problem 3.21E

Adjusting entry for salaries expense is as follows:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2018	Salaries expense		5,800
	Salaries payable			5,800
	(To record the salaries expense incurred at the end of the accounting year)

Table (5)

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Following is the rules of debit and credit of above transaction:

• Salaries expense is an expense, and it decreased the value of stockholder’s equity. Therefore, it is debited.
• Salaries payable is a liability account. There is a decrease in liability, therefore it is credited.

Requirement – 3

To determine

To prepare: The adjusted trial balance of Company D.

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.

The adjusted trial balance of Company D is as follows:

Company D
Adjusted Trial Balance
January 31, 2018
Accounts (Refer working note (2) )	Debit	Credit
Cash	$30,100
Accounts Receivable	6,600
Supplies	2,800
Prepaid Rent	5,500
Land	50,000
Accounts Payable		$2,700
Deferred Revenue		500
Salaries Payable		5,800
Common Stock		65,000
Retained Earnings		13,900
Service Revenue		28,700
Salaries Expense	17,300
Rent Expense	500
Supplies Expense	3,800
Totals	$116,600	$116,600

Table (6)

Working note:

Calculate the ending balance of all accounts:

Accounts		Beginning balance +Adjustment		Ending balance
Cash	=	$\left(\begin{array}{l}23,800-6,000+3,700-\\ 11,500+24,100-4,000\end{array}\right)$	=	30,100
Accounts Receivable	=	$\left(5,200+25,500-24,100\right)$	=	6,600
Supplies	=	$\left(3,100+3,500-3,800\right)$	=	2,800
Prepaid Rent	=	$\left(6,000-500\right)$	=	5,500
Land	=	$\left(50,000\right)$	=	50,000
Accounts Payable	=	$\left(3,200+3,500-4,000\right)$	=	2,700
Deferred Revenue	=	$\left(3,700-3,200\right)$	=	500
Salaries Payable	=	$\left(5,800\right)$	=	5,800
Common Stock	=	$\left(65,000\right)$	=	65,000
Retained Earnings	=	$\left(13,900\right)$	=	13,900
Service Revenue	=	$\left(25,500+3,200\right)$	=	28,700
Salaries Expense	=	$\left(11,500+5,800\right)$	=	17,300
Rent Expense	=	$\left(500\right)$	=	500
Supplies Expense	=	$\left(3,800\right)$	=	3,800

(2)

Thus, the total of debit, and credit columns of an adjusted trial balance is $116,600 and agreed.

Requirement – 4

To determine

To prepare: The income statement of Company D for the year ended January 31, 2018.

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

The income statement of Company D for the year ended January 31, 2018 is as follows:

Company D
Income statement
For the year ended January 31, 2018
	$	$
Service revenue (A)		28,700
Expenses:
Salaries expense	17,300
Rent expense	500
Supplies expense	3,800
Total expense (B)		21,600
Net income		7,100

Table (7)

Therefore, the net income of Company D is $7,100.

Requirement – 5

To determine

To prepare: The classified balance sheet of Company D at January 31, 2018.

Explanation of Solution

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

The classified balance sheet of Company D at January 31, 2018 is as follows:

Figure (1)

Therefore, the total assets of Company D are $95,000, and the total liabilities and stockholders’ equity are $95,000.

Requirement – 6

To determine

To record: The closing entries of Company D.

Answer to Problem 3.21E

The closing entries of Company D are as follows:

Date	Account Title and Explanation	Debit($)	Credit($)
2018	Service revenue	28,700
January 31	Retained earnings		28,700
	(To close revenue account)
2018	Retained earnings	21,600
January 31	Salaries expense		17,300
	Rent expense		500
	Supplies expense		3,800
	(To close all expense account)

Table (7)

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts, (all revenues account, all expenses account and dividend) to the income summary account. Closing entries produce a zero balance in each temporary account.

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.

Requirement – 7 (a)

To determine

the amount of profit reported for the month of January.

Explanation of Solution

Net income:

Net income is the excess amount of revenue which is arises after deducting all the expenses of a company.  In simply, it is the difference between total revenue and total expenses of the company.

$\boxed{\text{Net}\text{income}\text{=}\text{Total}\text{revenue}\text{–}\text{Total}\text{expenses}}$

The amount of reported profit is $7,100 (Refer Requirement – 4).

Requirement – 7 (b)

To determine

To calculate: The ratio of current assets to current liabilities at the end of January.

Explanation of Solution

Current Ratio:

A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities. A current ratio is a useful tool for analysis of financials of a company.

Current ratio of the Company D is as follows:

Here,

Current assets is $45,000

Current liabilities is $9,000

$\begin{array}{c}\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}\\ =\frac{\$45,000}{\$9,000}\\ =5.00\end{array}$

Requirement – 7 (c)

To determine

To indicate: Whether Company D appears good or bad in financial condition.

Explanation of Solution

Financial condition of Company D is good, because profit is greater than zero and current assets is greater than its current liability. So, the company can earn revenue from its customer and able to pay obligation.