Concept explainers
(b)
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
The following are the rules of debit and credit:
- 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and
stockholders’ equity accounts are debited. - 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.
To Record: The journal entries in books of Incorporation I using perpetual inventory system during November.
(b)
Explanation of Solution
Prepare the journal entries for Incorporation I during November:
Date | Account Title and Description | Post Ref | Debit ($) | Credit ($) |
November 08 | Salaries and wages payable | 1,700 | ||
Salaries and wages expense | 1,850 | |||
Cash | 3,550 | |||
(To record accrued and current salaries and wages expenses) | ||||
November 10 | Cash | 1,900 | ||
| 1,900 | |||
(To record payment received from customers) | ||||
November 11 | Inventory | 8,000 | ||
Accounts payable | 8,000 | |||
(To record purchase on account) | ||||
November 12 | Accounts receivable | 5,500 | ||
Sales revenue | 5,500 | |||
(To record sales on account) | ||||
Cost of goods sold | 4,000 | |||
Inventory | 4,000 | |||
(To record cost of goods sold) | ||||
November 15 | Accounts payable | 300 | ||
Inventory | 300 | |||
(To record purchase returned) | ||||
November 19 | Cash | 5,390 (2) | ||
Sales discounts | 110 (1) | |||
Accounts receivable | 5,500 | |||
(To record settlement of accounts receivable net of discounts) | ||||
November 20 | Accounts payable | 7,700 (3) | ||
Inventory | 154 (4) | |||
Cash | 7,546 (5) | |||
(To record settlement of accounts payable net of discounts) | ||||
November 22 | Cash | 2,300 | ||
Service revenue | 2,300 | |||
(To record cash service revenue) | ||||
November 25 | Equipment | 5,000 | ||
Accounts payable | 5,000 | |||
(To record purchase of equipment on account) | ||||
November 27 | Supplies | 1,700 | ||
Accounts payable | 1,700 | |||
(To record purchase of supplies on account) | ||||
November 28 | Accounts payable | 3,000 | ||
Cash | 3,000 | |||
(To record payment to creditors for accounts payable due) | ||||
November 29 | Rent expense | 375 | ||
Cash | 375 | |||
(To record rent expense) | ||||
Date | Account Title and Description | Post Ref | Debit ($) | Credit ($) |
November 29 | Salaries and wages expense | 1,300 | ||
Cash | 1,300 | |||
(To record salaries and wages expense) | ||||
November 29 | Accounts receivable | 700 | ||
Service revenue | 700 | |||
(To record service revenue on account) | ||||
November 29 | Cash | 675 | ||
Unearned service revenue | 675 | |||
(To record the collection of cash for unearned service revenue) |
Table (1)
Working Notes:
Calculate the amount of sales discount.
Accounts receivable = $5,500
Discount percentage = 2%
Calculate the amount of cash received.
Net accounts receivable = $5,500
Sales discount = $110 (1)
Calculate the amount of net accounts payable.
Inventory = $8,000
Purchase returns = $300
Calculate the amount of purchase discount.
Net accounts payable = $7,700 (3)
Discount percentage = 2%
Calculate the amount of cash paid.
Net accounts payable = $7,700 (3)
Purchase discount = $154 (4)
(d)
To Record: The adjusting entries of Incorporation I on November 30, 2017.
(d)
Explanation of Solution
Journalize the adjusting entries.
1.
The following is the adjusting entry for the supplies during the year:
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
November 30 | Supplies Expense | 960 (6) | ||
Supplies Payable | 960 | |||
(To adjust for supplies expense) |
Table (2)
Description:
- Supplies expense is an expense and it is increased by $960. Therefore, debit supplies expense account with $960.
- Supplies payable is a liability and it is increased by $960. Therefore, credit supplies payable account with $960.
Working Note:
Calculate the amount of supplies expense.
Beginning balance = $860
Purchase = $1,700 (Refer Table 1)
Ending balance = $1,600
2.
The following is the adjusting entry for the accrued salaries during the year:
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
November 30 | Salaries and Wages Expense | 500 | ||
Salaries and Wages Payable | 500 | |||
(To adjust for accrued salaries and wages expense) |
Table (3)
Description:
- Salaries and wages expense is an expense and it is increased by $500. Therefore, debit salaries and wages expense account with $500.
- Salaries and wages payable is a liability and it is increased by $500. Therefore, credit salaries and wages payable account with $500.
3.
The following is the adjusting entry for the
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
November 30 | Depreciation Expense | 250 | ||
| 250 | |||
(To record the amount of depreciation for the year) |
Table (4)
Description:
- Depreciation expense is an expense and it is increased by $250. Therefore, debit depreciation expense account with $250.
- Accumulated Depreciation-Equipment is a contra asset account and would have a credit balance. Therefore credit accumulated depreciation-equipment account with $250.
4.
The following is the adjusting entry for the unearned service revenue during the month:
Date | Accounts title and Description | Post Ref. |
Debit ($) | Credit ($) |
November 30 | Unearned service revenue | 4,025 (7) | ||
Service revenue | 4,025 | |||
(To record the unearned service revenue) |
Table (5)
Description:
- Unearned service revenue is a liability and it is decreased by $4,025. Therefore, debit unearned service revenue with $4,025.
- Service revenue is revenue and it increases the value of equity by $4,025. Therefore, credit service revenue with $4,025.
Working Note:
Calculate the amount received in advance of service revenue earned.
Beginning unearned service revenue = $4,000
Unearned service revenue during the month = $675 (Refer Table 1)
Ending unearned service revenue = $650
(a), (c), and (d)
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
To Post: The above journal entries and adjusting entries to T-accounts of Incorporation I.
(a), (c), and (d)
Explanation of Solution
The following are the T-accounts.
Cash Account:
Cash Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
November 01 | Beginning balance | 9,000 | November 08 | Salaries and wages | 3,550 |
November 10 | Accounts receivable | 1,900 | November 20 | Accounts payable | 7,546 |
November 19 | Accounts receivable | 5,390 | November 28 | Accounts payable | 3,000 |
November 22 | Sales revenue | 2,300 | November 29 | Rent | 375 |
November 29 | Unearned service revenue | 675 | November 29 | Salaries and wages | 1,300 |
November 30 | Ending Balance | 3,494 | |||
Total | 19,265 | Total | 19,265 |
Table (6)
Accounts Receivable Account:
Accounts Receivable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 01 | Beginning balance | 2,240 | November 10 | Cash | 1,900 |
November 12 | Sales revenue | 5,500 | November 19 | Sales discounts | 110 |
November 29 | Service revenue | 700 | November 19 | Cash | 5,390 |
November 30 | Ending Balance | 1,040 | |||
Total | 8,440 | Total | 8,440 |
Table (7)
Inventory Account:
Inventory Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 01 | Beginning balance | 0 | November 12 | Cost of goods sold | 4,000 |
November 11 | Accounts payable | 8,000 | November 15 | Accounts payable | 300 |
November 20 | Accounts payable | 154 | |||
November 30 | Ending Balance | 3,546 | |||
Total | 8,000 | Total | 8,000 |
Table (8)
Supplies Account:
Supplies Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 01 | Beginning balance | 860 | November 30 | Adjustment | 960 |
November 27 | Accounts payable | 1,700 | November 30 | Ending Balance | 1,600 |
Total | 2,560 | Total | 2,560 |
Table (9)
Equipment Account:
Equipment Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 01 | Beginning balance | 25,000 | November 30 | Ending Balance | 30,000 |
November 25 | Accounts payable | 5,000 | |||
Total | 30,000 | Total | 30,000 |
Table (10)
Accumulated Depreciation - Equipment Account:
Accumulated Depreciation - Equipment Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
November 30 | Ending Balance | 1,250 | November 01 | Beginning balance | 1,000 |
November 30 | Adjustment | 250 | |||
Total | 1,250 | Total | 1,250 |
Table (11)
Accounts Payable Account:
Accounts Payable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 15 | Inventory | 300 | November 01 | Beginning balance | 3,400 |
November 20 | Cash and Inventory | 7,700 | November 11 | Inventory | 8,000 |
November 28 | Cash | 3,000 | November 25 | Equipment | 5,000 |
November 30 | Ending Balance | 7,100 | November 27 | Supplies | 1,700 |
Total | 18,100 | Total | 18,100 |
Table (12)
Unearned Service Revenue Account:
Unearned Service Revenue Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 29 | Adjustment | 4,025 | November 01 | Beginning balance | 4,000 |
November 30 | Ending Balance | 650 | November 30 | Cash | 675 |
Total | 4,675 | Total | 4,675 |
Table (13)
Salaries and Wages Payable Account:
Salaries and Wages Payable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 08 | Cash | 1,700 | November 01 | Beginning balance | 1,700 |
November 30 | Ending Balance | 500 | November 30 | Adjustment | 500 |
Total | 2,200 | Total | 2,200 |
Table (14)
Common Stock Account:
Common Stock Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 30 | Ending Balance | 20,000 | November 01 | Beginning balance | 20,000 |
Total | 20,000 | Total | 20,000 |
Table (15)
Retained Earnings Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
November 30 | Ending Balance | 7,000 | November 01 | Beginning balance | 7,000 |
Total | 7,000 | Total | 7,000 |
Table (16)
Sales Revenue Account:
Sales Revenue Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 30 | Ending Balance | 5,500 | November 12 | Accounts receivable | 5,500 |
Total | 5,500 | Total | 5,500 |
Table (17)
Sales Discount Account:
Sales Discount Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 19 | Accounts receivable | 110 | November 30 | Ending Balance | 110 |
Total | 110 | Total | 110 |
Table (18)
Service Revenue Account:
Service Revenue Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 30 | Ending Balance | 7,025 | November 22 | Cash | 2,300 |
November 29 | Accounts receivable | 700 | |||
November 30 | Adjustment | 4,025 | |||
Total | 7,025 | Total | 7,025 |
Table (19)
Cost of Goods Sold Account:
Cost of Goods Sold Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 12 | Inventory | 4,000 | November 30 | Ending Balance | 4,000 |
Total | 4,000 | Total | 4,000 |
Table (20)
Depreciation Expense Account:
Depreciation Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 30 | Adjustment | 250 | November 30 | Ending Balance | 250 |
Total | 250 | Total | 250 |
Table (21)
Rent Expense Account:
Rent Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 29 | Cash | 375 | November 30 | Ending Balance | 375 |
Total | 375 | Total | 375 |
Table (22)
Salaries and Wages Expense Account:
Salaries and Wages Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 08 | Cash | 1,850 | November 30 | Ending Balance | 3,650 |
November 29 | Cash | 1,300 | |||
November 30 | Adjustment | 500 | |||
Total | 3,650 | Total | 3,650 |
Table (23)
Supplies Expense Account:
Supplies Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
November 31 | Adjustment | 960 | November 30 | Ending Balance | 960 |
Total | 960 | Total | 960 |
Table (24)
(e)
To determine: Prepare trial balance for Incorporation I as on November 30, 2017.
(e)
Answer to Problem 5.2CACR
The following is the adjusted trial balance of Incorporation I as on November 30, 2017.
Incorporation I | ||
Adjusted Trial Balance | ||
At November 30, 2017 | ||
Account Title | Balance ($) | |
Debit | Credit | |
Cash | 3,494 | |
Accounts Receivable | 1,040 | |
Inventory | 3,546 | |
Supplies | 1,600 | |
Equipment | 30,000 | |
Accumulated Depreciation - Equipment | 1,250 | |
Accounts Payable | 7,100 | |
Unearned Service Revenue | 650 | |
Salaries and Wages Payable | 500 | |
Common Stock | 20,000 | |
Retained Earnings | 7,000 | |
Sales Revenue | 5,500 | |
Service Revenue | 7,025 | |
Sales Discounts | 110 | |
Cost of Goods Sold | 4,000 | |
Depreciation Expense | 250 | |
Rent Expense | 375 | |
Salaries and Wages Expense | 3,650 | |
Supplies Expense | 960 | |
Total | 49,025 | 49,025 |
Table (25)
Explanation of Solution
The trial balance as shown in Table (25) is prepared after placing the journal entries and adjusting entries to the ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.
Therefore, the total debit balance and credit balance of Incorporation I is $49,025.
(f)
To Prepare: The multi-step income statement, retained earnings statement, and classified balance sheet of Incorporation I for the year ended November 30, 2017.
(f)
Explanation of Solution
Prepare the multi-step income statement of Incorporation I.
Multi step income statement: A multiple step income statement refers to the income statement that shows the operating and non-operating activities of the business under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.
Incorporation I | ||
Income Statement | ||
For the Year Ended November 30, 2017 | ||
Particulars | Amount($) | Amount($) |
Service revenue | 7,025 | |
Sales revenue | 5,500 | |
Less: Sales discounts | (110) | |
Net sales | 5,390 | |
Less: Cost of goods sold | (4,000) | 1,390 |
Gross profit | 8,415 | |
Less: Operating expenses: | ||
Rent expense | 375 | |
Salaries and wages expenses | 3,650 | |
Depreciation expenses | 250 | |
Supplies expense | 960 | |
Total operating expenses | (5,235) | |
Net income | 3,180 |
Table (26)
Prepare a retained earnings statement of Incorporation I for the year ended November 30, 2017.
Retained Earnings Statement is one of the financial statement, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and used to pay its debts and obligations. It shows the amount of earnings that is not paid as dividends to the shareholders.
Incorporation I | |
Retained Earnings Statement | |
For the Year Ended November 30, 2017 | |
Details | Amount ($) |
Beginning Balance of Retained earnings | 7,000 |
Add: Net Income for the year | 3,180 |
Total Retained Earnings | 10,180 |
Less: Dividends | 0 |
Ending balance of Retained Earnings | 10,180 |
Table (27)
Prepare the classified balance sheet of Incorporation I for the year ended November 30, 2017.
Classified Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are organized and reported as different groups, and sub-groups on the basis of the nature of the classification made of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.
Incorporation I | ||
Balance Sheet | ||
As of November 30, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current assets: | ||
Cash | 3,494 | |
Accounts receivable | 1,040 | |
Inventory | 3,546 | |
Supplies | 1,600 | |
Total current assets | 9,680 | |
Plant assets: | ||
Equipment | 30,000 | |
Less: Accumulated depreciation | (1,250) | 28,750 |
Total assets | 38,430 | |
Liabilities and Stockholders’ equity | ||
Current liabilities: | ||
Accounts payable | 7,100 | |
Unearned service revenue | 650 | |
Salaries and wages payable | 500 | |
Total current liabilities | 8,250 | |
Long-term liabilities | - | |
Total liabilities | 8,250 | |
Stockholders’ Equity: | ||
Common stock | 20,000 | |
Retained earnings | 10,180 | |
Total stockholders’ equity | 30,180 | |
Total liabilities and stockholders’ equity | 38,430 |
Table (28)
Therefore, the net income of Incorporation I for the year ended November 30, 2017 is $3,180.
Therefore, the retained earnings statement of Incorporation I for the year ended November 30, is $10,180.
(g)
Closing entries: These refers to the journal entries that are recorded at the end of an each accounting period. It closes all revenue accounts earned, and all expenses account incurred during the current accounting year to the income summary account.
To Record: The closing entries of Incorporation I for the month November.
To Post: The above closing entries to their respective T-accounts of Incorporation I.
(g)
Explanation of Solution
Solution:
Record the closing entry of revenue.
Date | Accounts and Description | Post Ref |
Debit ($) |
Credit ($) |
November 30 | Sales Revenue | 5,500 | ||
Service Revenue | 7,025 | |||
Income Summary | 12,525 | |||
(To close the revenues.) |
Table (29)
Description:
- Sales and service revenue is revenue and it increases the value of equity. To close the revenue account it should be debited. Therefore, debit sales revenue account by $5,500, and service revenue account by $7,025.
- Income Summary is a component of equity and it increases by $12,525. Therefore, credit income summary account by $12,525.
Record the closing entries of expenses and other debit accounts.
Date | Accounts and Description | Post Ref |
Debit ($) |
Credit ($) |
November 30 | Income Summary | 9,345 | ||
Sales Discounts | 110 | |||
Cost of Goods Sold | 4,000 | |||
Rent Expense | 375 | |||
Salaries and Wages Expense | 3,650 | |||
Depreciation Expense | 250 | |||
Supplies Expense | 960 | |||
(To close expenses and other debit accounts) |
Table (30)
Description:
- Income summary is a component of equity and it decreases by $9,345. Therefore, debit income summary account by $9,345.
- Sales discount is a contra revenue account and it increases by $110. Therefore, credit sales discount by $110.
- Cost of goods sold is an expense and it decreases by $4,000. Therefore, credit cost of goods sold account by $4,000.
- Rent expense is an expense and it decreases by $375. Therefore, credit rent expense account by $375.
- Salaries and wages expense is an expense and it decreases by $3,650. Therefore, credit salaries and wages expense account by $3,650.
- Depreciation expense is an expense and it decreases by $250. Therefore, credit depreciation expense account by $250.
- Supplies expense is an expense and it decreases by $960. Therefore, credit supplies expense account by $960.
Record the closing entry of income summary account.
Date | Accounts and Description | Post Ref |
Debit ($) |
Credit ($) |
November 30 | Income Summary (E-) | 3,180 | ||
Retained Earnings (E+) | 3,180 | |||
(To close income summary account) |
Table (31)
Description:
- Income summary is a component of equity and it decreases by $3,180. Therefore, debit income summary account by $3,180.
- Retained earnings are component of equity and it increases by $3,180. Therefore, credit retained earnings account by $3,180.
The following are the T-accounts.
Income Summary Account:
Income Summary Account | |||
Details |
Debit ($) | Details |
Credit ($) |
Sales Discounts | 110 | Sales Revenue | 5,500 |
Cost of Goods Sold | 4,000 | Service Revenue | 7,025 |
Rent Expense | 375 | ||
Salaries and Wages Expense | 3,650 | ||
Depreciation Expense | 250 | ||
Supplies Expense | 960 | ||
Retained Earnings | 3,180 | ||
Total | 12,525 | Total | 12,525 |
Table (32)
Effects:
All the respective expenses and revenues closing balances are recorded in the Income summary. The difference of revenues and expenses, that is, net income is transferred to the retained earnings.
Retained Earnings account:
Retained Earnings Account | |||
Details |
Debit ($) | Details |
Credit ($) |
Closing Balance | 3,180 | Income Summary | 3,180 |
Total | 3,180 | Total | 3,180 |
Table (33)
Effects:
The net income is transferred from income summary to retained earnings
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Chapter 5 Solutions
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