Financial Accounting
Financial Accounting
18th Edition
ISBN: 9781260706307
Author: Jan Williams
Publisher: Mcgraw-hill Higher Education (us)
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Chapter 5, Problem 1CP

a. 1 and 4

To determine

Prepare journal entries for the month of December and

Prepare adjusting entry for the month of December.

a. 1 and 4

Expert Solution
Check Mark

Explanation of Solution

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 equities.
  • Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

Debit: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit.

Credit: It refers to selling goods and services to the customers on account.

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.

Prepare journal entries for the December transactions as follows:

DateAccounts title and ExplanationPost Ref.

Debit

($)

Credit

($)

Year 1
December1Cash240,000
Capital stock240,000
(To record the cash invested in the business)
December1Rental Equipment288,000
Cash168,000
Notes Payable120,000
(To record the Purchase of equipment from Rent-it and the Note payable is due for one year)
December1Prepaid Rent14,400
Cash14,400
(To record the payment of three months' rent in advance)
December4Office Supplies1,200
Accounts Payable1,200
(To record the purchase of supplies on account.)
December8Cash9,600
Unearned Rental Fees9,600
(To record the cash received in advance for equipment rental by the Construction Company)
December12Salaries Expense6,240
Cash6,240
(To record the Payment of salaries for first two weeks in December)
December15Cash14,400
Accounts Receivable7,200
Rental Fees Earned21,600
(To record the rental fees earned in first 15 days of December)
December17Maintenance Expense720
Accounts Payable720
(To record the purchase of repair parts on account from Incorporation)
December23Cash2,400
Accounts Receivable2,400
(To record the collection of an accounts receivable)
December26(No entry is required to record rental of backhoe.)
December26Salaries Expense6,240
Cash6,240
(To record the Payment of biweekly payroll)
December27Accounts Payable720
Cash720
(To record the payment of account payable)
2,400
December28Dividends2,400
Dividends Payable
(To record the Declared dividend of 12% per share payable on January 15, Year 2)
December29(No entry is required to record lawsuit.)
December29Unexpired Insurance11,520
Cash11,520
(To record the Purchase of 12-month liability policy)
December31Utilities Expense840
Accounts Payable840
(To record the utilities incurred  for December)
December31Cash18,720
Accounts Receivable5,280
Rental Fees Earned24,000
(To record the rental fees earned in the second half of December)

Table (1)

Prepare adjusting entry for the month of December as follows:

General Journal (Adjusting)
December, 31 Year 1
DateAccounts title and ExplanationPost Ref.

Debit

($)

Credit

($)

Year 1, December31.Rent Expense (1)4,800
Prepaid Rent4,800
(To record the rent expense for December)
 December31.Interest Expense (2)600
Interest Payable600
(To record the interest expense accrued in December)
 December31.Depreciation Expense (3)3,000
 Accumulated Depreciation of Rental Equipment3,000
(To record the depreciation expense incurred for December)
 December31.Office Supplies Expense (4)480
Office Supplies480
(To record the offices supplies used for December)
 December31.Unearned Rental fees4,440
Rental fees earned4,440
(To record the conversion of unearned revenue into earned revenue in December)
 December31.Accounts Receivable 1,800
Rental fees earned 1,800
(To record the revenue accrued at the end of December)
 December31.Salaries Expense1,680
Salaries Payable1,680
(To record the accrued but unpaid salaries in December)
 December31.Income Taxes Expense (5)10,896
Income Taxes Payable10,896
(To record the income taxes expense accrued in December)

Table (2)

Working notes:

Compute the amount of rent Expense:

Rent Expense=Prepaidrent3 months=$1,44003 months=$4,800 (1)

Compute the amount of interest Expense:

Interest Expense=Amount borrowed12 months×Interest rate=$120,00012 months×6100=$600 (2)

Compute the amount of depreciation Expense:

Office Depreciation Expense=Equipment96 months=$288,00096 months=$3,000 (3)

Compute the amount of Office Supplies Expense:

Office Supplies Expense=[Office supplies in trial balanceOffice supplies on hand at December31]=$1,200$720=$480 (4)

Compute the amount of income taxes Expense:

Income taxes Expense=Income taxIncome tax expense=$51,840$40,944=$10,896 (5)

a. 2 and 5

To determine

Post the December transactions to the suitable ledger accounts.

Post the adjusting entries to the suitable ledger accounts.

a. 2 and 5

Expert Solution
Check Mark

Explanation of Solution

Posting transactions:

The process of transferring the journalized transactions into the accounts of the ledger is known as posting the transactions.

Cash
DateDebitCreditBalance
December     1240,000240,000
   1168,00072,000
   114,40057,600
   89,60067,200
 126,24060,960
 1514,40075,360
 232,40077,760
 266,24071,520
 2772070,800
 2911,52059,280
 3118,72078,000
Accounts Receivable
DateDebitCreditBalance
December 157,2007,200
 232,4004,800
 315,28010,080
 311,80011,880
Prepaid Rent
DateDebitCreditBalance
December   114,40014,400
 314,8009,600
Unexpired Insurance
DateDebitCreditBalance
December 2911,52011,520
Office Supplies
DateDebitCreditBalance
December   41,2001,200
 31480720
Rental Equipment
DateDebitCreditBalance
December 1288,000288,000
Accumulated Depreciation: Rental Equipment
DateDebitCreditBalance
December 313,0003,000
Notes Payable
DateDebitCreditBalance
December 1120,000120,000
Accounts Payable
DateDebitCreditBalance
December 41,2001,200
177201,920
277201,200
318402,040
Interest Payable
DateDebitCreditBalance
December 31600600
Salaries Payable
DateDebitCreditBalance
December 311,6801,680
Dividends Payable
DateDebitCreditBalance
December282,4002,400
Unearned Rental Fees
DateDebitCreditBalance
December89,6009,600
   314,4405,160
Income Taxes Payable
DateDebitCreditBalance
December3110,89610,896
Income Taxes Payable
DateDebitCreditBalance
December1240,000240,000
Retained Earnings
DateDebitCreditBalance
December31Income, Year 116,34416,344
31Dividends2,40013,944

Table (3)

a. 3 and 6

To determine

Prepare the unadjusted trial balance columns of a 10-column worksheet for the year ended December 31 and Complete the 10-column worksheet for the year ended December 31.

a. 3 and 6

Expert Solution
Check Mark

Explanation of Solution

Worksheet:

A worksheet is the summarized form of accounting information which is made in order to ensure that the accounts are made properly.

Financial Accounting, Chapter 5, Problem 1CP

Figure (1)

b.

To determine

Prepare an income statement and statement of retained earnings and a balance sheet for the year ended December 31.

b.

Expert Solution
Check Mark

Answer to Problem 1CP

  • Prepare the income statement of Company S as on December 31, Year 1 as follows:
Company S
Income Statement
For the Year Ended December 31, Year 1
Particulars$$
Revenues:
Rental fees earned$51,840
Less: Expenses:
 Salaries expense$14,160
 Maintenance expense 720
 Utilities expense 840
 Rent expense 4,800
 Office supplies expense 480
 Depreciation expense 3,000
 Interest expense 60024,600
Income before income taxes expense$27,240
Less: Income taxes expense10,896
Net income$16,344

Table (4)

  • Prepare the statement of retained earnings of Company S as on December 31, Year 1 as follows:
Company S
Statement of retained earnings
For the Year Ended December 31, Year 1
Particulars$
Retained earnings as on January 1, Year 10
Add: Net Income16,344
Less: Dividend2,400
Retained earnings as on December 31, Year 113,944

Table (5)

  • Prepare the Balance Sheet of Company S as on December 31, Year 1 as follows:
Company S
Balance Sheet
December 31, Year 1
Assets$$
Cash $78,000
Accounts Receivable 11,880
Prepaid rent 9,600
Unexpired insurance 11,520
Office supplies 720
Rental equipment288,000
Less: Accumulated depreciation3,000285,000
Total Assets$396,720
Liabilities
Notes payable 120,000
Accounts payable 2,040
Interest payable 600
Salaries payable 1,680
Dividends payable 2,400
Unearned rental fees 5,160
Income taxes payable10,896
Total Liabilities$142,776
Stockholders' Equity
Capital stock$240,000
Retained earnings13,944$253,944
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity$396,720

Table (6)

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Statement of retained earnings:

This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends are deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

c.

To determine

Prepare the disclosures that are required to accompany the December 31 financial statements.

c.

Expert Solution
Check Mark

Answer to Problem 1CP

Note 1: Depreciation Policy

The Depreciation expense in the financial statements is calculated by using the straight-line method of depreciation. The estimated useful life of the rental equipment is 8 years.

Note 2: Maturity dates of liabilities

The notes payable of the company matures on November 30, Year 2 and it is the single obligation of the company.  The maturity value of this note including interest, will amount to $127,200.

Note 3: Pending litigation

For $30,000 personal injury lawsuit the Company has been named as a co-defendant. The extent of legal and financial responsibility cannot be determined at this time.

Explanation of Solution

Straight-line depreciation method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset, is referred to as straight-line method.

d.

To determine

Prepare the closing entries and post to ledger accounts.

d.

Expert Solution
Check Mark

Answer to Problem 1CP

Prepare the year-end closing entries of Company S as follows:

DateAccounts title and ExplanationPost Ref.

Debit

($)

Credit

($)

Year 1,  December 31Rent fees earned51,840
 Income Summary51,840
(To record the closure of revenues account )
December 31Income Summary35,496
Salaries Expense14,160
Maintenance Expense 720
Utilities Expense 840
Rent Expense 4,800
Office Supplies Expense 480
Depreciation Expense 3,000
Interest Expense 600
Income Taxes Expense 10,896
(To record the closure of expense account to income summary)
December 31Income Summary16,344
 Retained earnings16,344
(To record the closure of net income from income summary to retained earnings)
December31Retained earnings2,400
 Dividends2,400
(To record the closure of dividend to retained earnings)

Table (7)

Post the closing entries to ledger accounts:

Retained Earnings
DateExplanationDebitCreditBalance
December31Income, Year 116,34416,344
31Dividends2,40013,944
Dividends
DateExplanationDebitCreditBalance
December282,4002,400
31To close2,4000
Income Summary
DateExplanationDebitCreditBalance
December31To close revenue accounts51,84051,840
31To close expense accounts35,49616,344
31To close16,3440
Rental Fees Earned
DateExplanationDebitCreditBalance
December1521,60021,600
3124,00045,600
314,44050,040
311,80051,840
31To close51,8400
Salaries Expense
DateExplanationDebitCreditBalance
December 126,2406,240
 266,24012,480
 311,68014,160
 31To close14,1600
Maintenance Expense
DateExplanationDebitCreditBalance
December17720720
30To close7200
Utilities Expense
DateExplanationDebitCreditBalance
December31840840
31To close8400
Rent Expense
DateExplanationDebitCreditBalance
December314,8004,800
31To close4,8000
Office Supplies Expense
DateExplanationDebitCreditBalance
December31480480
31To close4800
Depreciation Expense
DateExplanationDebitCreditBalance
December313,0003,000
31To close3,0000
Interest Expense
DateExplanationDebitCreditBalance
December31600600
31To close6000
Income taxes Expense
DateExplanationDebitCreditBalance
December3110,89610,896
31To close10,8960

Table (8)

Explanation of Solution

  • Revenue Earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
  • Office supply Expense, Depreciation Expense, Rent expenses, Salaries Expense, Insurance Expense, Interest Expense, Income and Taxes Expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.
  • Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Since Income Summary account has a credit balance, it is transferred to Retained Earnings account by debiting it. Therefore, debit Income Summary account with $16,344.
  • Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $16,344.
  • Closing entries are also passed in order to close the excess of expenses over the revenues, and the dividend account.

e.

To determine

Prepare an after-closing trial balance of Company S.

e.

Expert Solution
Check Mark

Answer to Problem 1CP

Prepare an after-closing trial balance of Company S as follows:

Company S
After-Closing Trial Balance
December 31, Year 1
Particulars$$
 Cash $78,000
 Accounts receivable 11,880
 Prepaid rent 9,600
 Unexpired insurance 11,520
 Office supplies 720
 Rental equipment 288,000
 Accumulated depreciation: rental equipment $3,000
 Notes payable120,000
 Accounts payable 2,040
 Interest payable 600
 Salaries payable 1,680
 Dividends payable 2,400
 Unearned rental fees 5,160
 Income taxes payable 10,896
 Capital stock240,000
 Retained earnings 13,944
Totals399,720399,720

Table (9)

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.

f.

To determine

Describe whether the declined cash balance appears to be headed for insolvency in the near future.

f.

Expert Solution
Check Mark

Explanation of Solution

  • The company does not appear to face any instant solvency problems. This is because during the month of December the company commenced cash with $240,000 and out of which it spent $168,000 on equipment and left only $72,000 to begin its operation. However, on the end of the month the company had $78,000 cash. Hence, the company generated $6,000 of cash flow from operations during its first month of operations.
  • The notes payable of $120,000 is due on November 30, Year 2 and it is the single obligation of the company and it does raise a potential concern about the solvency of the company. However, to satisfy this obligation, the business does not have sufficient liquid assets currently.
  • On the other hand, the working capital of the company is negative by $31,056 ($111,720$142,776) and the current ratio of the company is only 0.78:1($111,720$142,776). Thus if the company continues to generate only a least operating cash flows of $6,000 each month, then the remaining solvent should not pose a serious issue.

g.

To determine

Describe whether it would be ethical for Person D to maintain the accounting records for the company or whether it must be maintained by someone who is independent of the organization.

g.

Expert Solution
Check Mark

Explanation of Solution

Person D (the stockholder) can maintain the accounting records for the company and it is ethical. This is because, in most businesses, usually the accounting records are maintained either by owners or employees.

The concept of independence denotes auditing the financial statements, in which the auditor has to make an independent evaluation of the statements referred as fairness.” Independence does not apply to the routine maintenance of accounting records.

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Chapter 5 Solutions

Financial Accounting

Ch. 5 - Prob. 3DQCh. 5 - Prob. 4DQCh. 5 - 5. What type of accounts are referred to as...Ch. 5 - Prob. 6DQCh. 5 - Prob. 7DQCh. 5 - Which accounts appear in a company’s after-closing...Ch. 5 - Prob. 9DQCh. 5 - Prob. 10DQCh. 5 - Prob. 11DQCh. 5 - Prob. 12DQCh. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - BRIEF EXERCISE 5.1 Balancing the Accounting...Ch. 5 - BRIEF EXERCISE 5.2 Income Statement and Balance...Ch. 5 - BRIEF EXERCISE 5.3 Classifying Balance Sheet...Ch. 5 - BRIEF EXERCISE 5.4 Identifying and Closing...Ch. 5 - BRIEF EXERCISE 5.5 Closing Entries of a Profitable...Ch. 5 - Prob. 6BECh. 5 - Prob. 7BECh. 5 - Prob. 8BECh. 5 - Prob. 9BECh. 5 - Prob. 10BECh. 5 - EXERCISE 5.1 Accounting Terminology Listed as...Ch. 5 - EXERCISE 5.2 Financial Statement Preparation Green...Ch. 5 - EXERCISE 5.3 Financial Statement...Ch. 5 - EXERCISE 5.4 Preparing Closing Entries and an...Ch. 5 - EXERCISE 5.5 Preparing Closing Entries and an...Ch. 5 - Prob. 6ECh. 5 - EXERCISE 5.7 Closing Entries of a Profitable...Ch. 5 - EXERCISE 5.8 Closing Entries of an Unprofitable...Ch. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - PROBLEM 5.1A Correcting Classification...Ch. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 5APCh. 5 - Prob. 6APCh. 5 - Prob. 7APCh. 5 - Prob. 8APCh. 5 - PROBLEM 5.1B Correcting Classification...Ch. 5 - PROBLEM 5.2B Preparing Financial Statements and...Ch. 5 - Prob. 3BPCh. 5 - PROBLEM 5.4B Interim Financial Statements Howard...Ch. 5 - Prob. 5BPCh. 5 - Prob. 6BPCh. 5 - Prob. 7BPCh. 5 - Prob. 8BPCh. 5 - Prob. 1CTCCh. 5 - Prob. 3CTCCh. 5 - Prob. 4CTCCh. 5 - Prob. 1CP
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