Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 4, Problem 6AP

1.

To determine

Journal the adjusting entries for Company T.

1.

Expert Solution
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Explanation of Solution

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.

Journal the adjusting entries for Company T.

Transaction for item (b):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
December31Accounts Receivable (+A) 1,500 
   Service Revenue (+R, +SE)  1,500
  (Record accrued revenue)   

Table (1)

Transaction for item (c):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
December31Rent Expense (+E, –SE) 400 
   Prepaid Rent (–A)  400
  (Record part of prepaid rent expired)   

Table (2)

Working Notes:

Calculate rent expense.

Rent expense = (Value of prepaid rent before adjustmentValue of prepaid rent after adjustment)= $1,200$800= $400

Transaction for item (e):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
December31Depreciation Expense (+E, –SE) 17,500 
   Accumulated Depreciation (+XA, –A)  17,500
  (Record depreciation expense)   

Table (3)

Working Notes:

Calculate depreciation expense.

Depreciation expense = (Value of accumulated depreciation after adjustmentValue of accumulated depreciation before adjustment)= $70,000$52,500= $17,500

Transaction for item (f):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
December31Income Tax Expense (+E, –SE) 4,650 
   Income Tax Payable (+L)  4,650
  (Record accrued expense)   

Table (4)

Transaction for item (g):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
December31Unearned Revenue (+L) 8,000 
   Service Revenue (+R, +SE)  8,000
  (Record part of unearned revenue earned)   

Table (5)

Working Notes:

Calculate service revenue.

Service revenue = (Value of unearned revenue before adjustmentValue of unearned revenue after adjustment)= $16,000$8,000= $8,000

2.

To determine

Ascertain the value of net income, and explain the reason for the correct net income.

2.

Expert Solution
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Explanation of Solution

Ascertain the value of net income.

Particulars

Amounts Before Adjusting

Entries

Amounts After

Adjusting Entries

Revenues:  
 Service revenue$83,000$92,500
Expenses:  
 Salary expense56,00056,000
 Depreciation expense 17,500
 Rent expense 400
 Income tax expense 4,650
Total expenses56,00078,550
Net income (loss)  $27,000$13,950

Table (6)

Reason for correct net income: The correct net income is $13,950 because this the net income derived after the adjustments are recorded. This system incorporates the effect of revenue recognition and matching principles. The net income of $27,000 does not reflect this effect.

3.

To determine

Ascertain the earnings per share for Company T.

3.

Expert Solution
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Explanation of Solution

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Calculate earnings per share.

Earningspershare = Netincome Average number of shares of stock outstanding during the period =$13,9505,000shares=$2.79 per share

4.

To determine

Ascertain the total asset turnover ratio based on the corrected information and provide the inference of this ratio about Company T.

4.

Expert Solution
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Explanation of Solution

Total asset turnover ratio: This ratio analyzes number of times sales or revenue generated from the total assets.

Calculate total asset turnover ratio.

Total asset turnover = Sales Average total assets=$92,500($136,000+$158,300)÷2=$92,500$14,750=0.63

Inference: The total asset turnover ratio represents that Company T earns $0.63 for every $1 of assets invested. This ratio of Company T implies that Company T is more effective at generating revenue from the available assets.

5.

To determine

Prepare the closing entry for Company T for the current year, by using the adjusted balances.

5.

Expert Solution
Check Mark

Explanation of Solution

Prepare the closing entry for Company T for the current year, by using the adjusted balances.

DateAccount Title and ExplanationPost. Ref.Debit ($)Credit ($)
  Service Revenue (–R) 92,500 
   Salary Expense (–E)   56,000
   Depreciation Expense (–E)  17,500
   Rent Expense (–E)  400
   Income Tax Expense (–E)  4,650
   Retained earnings (+SE)  13,950
  (Record closing of revenues and expenses)   

Table (7)

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Chapter 4 Solutions

Financial Accounting

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