Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 1CP

a.

To determine

Prepare journal entry to record the given transactions.

a.

Expert Solution
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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:

Ø  Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Ø  Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

Prepare journal entry to record the given transactions.

Event NumberAccount Titles and ExplanationDebit (Amount in $)Credit (Amount in $)
1.Salaries Payable2,100 
      Cash 2,100
 (To record the salaries paid from the Year 7)  
    
2.Equipment (1)9,000 
 Van (2)27,000 
      Cash 36,000
 (To record the purchase made on equipment and van)  
    
3.5/1Prepaid rent9,000 
       Cash 9,000
 (To record the payment of office rent in advance)  
    
4.Supplies300 
       Accounts payable 300
 (To record the purchase of supplies on account )  
    
5.Merchandise inventory33,600 
      Cash 33,600
 (To record the purchase of alarms system for cash)  
    
6Allowance for doubtful accounts2,350 
      Accounts receivable 2,350
 (To record the allowance fir doubtful accounts)  
    
7 a.Accounts receivable66,700 
      Alarms sales revenue 66,700
 (To record the sales made  on account)  
    
7.bCost of goods sold (3)32,290 
      Merchandise inventory 32,290
 (To record the cost goods sold )  
    
8.Accounts receivable-credit card34,560 
 Accounts receivable50,000 
 Credit card expense1,440 
      Monitoring service revenue 86,000
 (To record the monitoring services provided on account)  
    
9.Maintenance expense45 
 Office supplies expense28 
 Miscellaneous Expense11 
 Cash short\over (4)4 
      Cash 88
 (To record the replenished petty cash fund)  
    
10.Cash34,560 
      Accounts receivable-credit card 34,560
 (To record the amount collected on due)  
    
11.Salaries expense52,000 
      Cash 52,000
 (To record the payment of salaries)  
    
12.Cash115,000 
      Accounts receivable 115,000
 (To record the amount collected on accounts receivable)  
    
13.Advertising expense12,500 
      Cash 12,500
 (To record the cash paid on advertising expense)  
    
14.Utilities expense6,800 
      Cash 6,800
 (To record the cash paid on utilities expense)  
    
15.Cash12,000 
      Land 4,000
      Gain on sale of land 8,000
 (To record the sale made on land)  
    
16.Accounts payable300 
      Cash 300
 (To record the payment of accounts payable)  
    
17.Dividend10,000 
      Cash 10,000
 (To record the dividend paid  to the shareholders)  
    
18.Supplies Expense (5)370 
      Supplies 370
 (To record the supplies that was on hand at the end of the year.)  
    
19.Rent Expense (6)9,600 
      Prepaid rent 9,600
 (To recognize the rent that was expired)  
    
20.Uncollectible Accounts Expense (7)3,501 
      Allowance for doubtful accounts 3,501
 (To recognize uncollectible accounts expense for the year)  
    
21.Depreciation Expense (10)14,900 
      Accumulated depreciation 14,900
 (To recognize the depreciation expense  on the equipment and the van)  
    
22.Salaries Expense1,500 
      Salaries payable 1,500
 (To record  the accrued salaries at December 31, Year 8)  

(Table 1)

Note:

Since the equipment is appraised by $10,000 and the van is appraised by $30,000. The book value of equipment and van is identified by using the proportion of 1:3(14).

Working Note:

Calculate of equipment cost:

Equipment cost = Cash purchase × 14=$36,000×14=$9,000 (1)

Calculate of van cost:

Van cost = Cash purchase × 34=$36,000×34=$27,000 (2)

Calculate the cost of goods sold:

Cost of goods sold
Unit
(A)

Cost per unit ($)

(B)

Total
(A×B)
182855,130
9728027,160
Total32,290

Table (2) (3)

Calculate the value of cash short over:

Cash short = Petty cash fund (Cash + Cash receipts + Office supplies expense + miscellaneous expense)=$100($12+$45+$28+$11)=$100$96=$4 (4)

Calculate the value of supplies expense

Supplies expense = (Opening balance of supplies + Purchase of suppliesClosing balance of supplies)=$250+$300$180=$370 (5)

Calculate  rent expense:

Fundamental Financial Accounting Concepts, Chapter 8, Problem 1CP , additional homework tip  1

Table (3) (6)

Calculate uncollectible accounts expense:

Fundamental Financial Accounting Concepts, Chapter 8, Problem 1CP , additional homework tip  2

Table (4) (7)

Calculate the depreciation expense for equipment using straight line method:

Depreciation expense of equipment=Bookvalue-Salvage valueEstimated useful life=$9,000$2,0005=$1,400 (8)

Calculation depreciation expense of van using double declining method:

Depreciation expense of van=Vancost ×Number of lifeEstimated useful life× 2=$27,000×14×2=$27,000×0.25×2=$13,500 (9)

Calculation of total depreciation expense:

Totaldepreciationexpense=(Depreciation expense of equipment (8)) + Depreciation expense of van (9)=$1,400+$13,500=$14,900 (10)

b.

To determine

Post the transaction to T- accounts.

b.

Expert Solution
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Explanation of Solution

T-account:

T-account refers to an individual account, where the increase or decrease in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

  1. (a) The title of the account
  2. (b) The left or debit side
  3. (c) The right or credit side
Cash
Bal.93,7081.2,100
10.34,5602.36,000
12.115,5003.9,000
15.12,0005.33,600
  9.88
  11.52,000
  13.12,500
  14.6,800
  16.300
  17.10,000
Bal.93,380  
Petty Cash
Bal.100  
    
Accounts Receivable
Bal.22,540  
7a.66,7006.2,350
8.50,00012.115,500
Bal.21,390  
Accounts Rec. Credit Cards
8.34,56010.34,560
Bal.0  
Allow. for Doubt. Accounts
6.2,350Bal.1,334
  20.3,501
  Bal.2,485
Supplies
Bal.250  
4.30018.370
Bal.180  
Accounts Payable
16.3004.300
  Bal.-0-
Salaries Payable
  Bal.2,100
1.2,10022.1,500
  Bal.1,500
Common Stock
  Bal.50,000
Retained Earnings
  Bal.75,894
Dividends
17.10,000  
Bal.10,000  
    
Alarm Sales Revenue
  7a.66,700
  Bal.66,700
Monitoring Service Rev.
  8.86,000
  Bal.86,000
Cost of Goods Sold
7b.32,290  
Bal.32,290  
Advertising Expense
13.12,500  
Bal.12,500  
Credit Card Expense
8.1,440  
Bal.1,440  
Depreciation Expense
21.14,900  
Bal.14,900  
Maintenance Expense
9.45  
Bal.45  
Prepaid Rent
Bal.3,600  
3.9,00019.9,600
Bal.3,000  
Merchandise Inventory
Bal.5,1307b.32,290
5.33,600  
Bal.6,440  
Equipment
2.9,000  
Bal.9,000  
Van
2.27,000  
Bal.27,000  
Accumulated Depreciation
  21.14,900
  Bal.14,900
Land
Bal.4,00015.4,000
Bal.-0-  
Miscellaneous Expense
9.11  
Bal.11  
Office Supplies Expense
9.28  
Bal.28  
Rent Expense
19.9,600  
Bal.9,600  
Salaries Expense
11.52,000  
22.1,500  
Bal.53,500  
Supplies Expense
18.370  
Bal.370  
Uncollectible Accts. Exp.
20.3,501  
Bal.3,501  
Utilities Expense
14.6,800  
Bal.6,800  
Cash Short/Over
9.4  
Bal.4  
Gain on Sale of Land
  15.8,000
  Bal.8,000

c.

To determine

Prepare trial balance.

c.

Expert Solution
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Explanation of Solution

Trial balance:

Trial balance is the summary of accounts, and their debit and credit balances at a given point of time. It is usually prepared at end of the accounting period. Debit balances are listed in left column and credit balances are listed in right column. The totals of debit and credit column should be equal. Trial balance is useful in the preparation of the financial statements.

Prepare trial balance.

Fundamental Financial Accounting Concepts, Chapter 8, Problem 1CP , additional homework tip  3

(Table 5)

Therefore, the total of debit, and credit columns of trial balance is $305,479.

d.

To determine

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows of Company P.

d.

Expert Solution
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Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Statement of changes in stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’ equity during the end of an accounting period by explaining about the increase or decrease in the capital reserves of shares.

Balance Sheet:

Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows of Company P as follows:

Company P
Income Statement
For the Year Ended December 31, Year 8
ParticularsAmount in $Amount in $
Revenues:  
Monitoring Service Revenue86,000 
Alarm Sales Revenue66,700 
Total Revenues 152,700
Cost of Goods Sold (32,920)
Gross Margin 120,410
   
Expenses:
Advertising Expense12,500 
Credit card Expense1,440 
Depreciation Expense14,900 
Office Supplies Expense28 
Maintenance Expense45 
Miscellaneous Expense11 
Rent Expense9,600 
Salaries Expense53,500 
Supplies Expense370 
Uncollectible Accounts Expense3,501 
Utilities Expense6,800 
Cash Short and Over4 
Total Operating Expenses 102,699
Net Operating Income 17,711
   
Non-Operating Items  
Gain on sale of land 8,000
Net Income 25,711

(Table 6)

Therefore, the net income of Company P is $25,711.

Company P
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, Year 8
ParticularsAmount in $Amount  in $
Beginning Common Stock50,000
Plus: Common Stock Issued-
Ending Common Stock50,000
Beginning Retained Earnings75,894
Plus: Net Income25,711
Less: Dividends(10,000)
Ending Retained Earnings91,605
Total Stockholders’ Equity141,605

(Table 7)

Therefore, the total stockholder’s equity is $141,605

Company P
Balance Sheet
As of December 31, Year 8
ParticularsAmount in  $Amount in $
Assets:  
Cash93,380
Petty Cash100
Accounts Receivable21,390
Allowance for doubtful accounts(2,485)18,905
Supplies180
Prepaid Rent3,000
Merchandise Inventory6,440
Equipment9,000
Van27,000
Accumulated depreciation(14,900)21,100
Total Assets143,105
 
Liabilities:
Salaries Payable1,500
Total Liabilities1,500
 
Stockholders’ Equity:
Common Stock50,000
Retained Earnings91,605
Total Stockholders’ Equity141,605
Total Liabilities and Stockholders’ Equity143,105

(Table 8)

Therefore, the total assets of Company P are $143,105, and the total liabilities and stockholders’ equity is $143,105.

Company P
Statement of Cash Flows
For the Year Ended December 31, Year 8
ParticularsAmount  in $Amount in $
Cash Flows From Operating Activities:
Cash Receipts from Customers (11)150,060 
Cash Payment for Expenses (12)(116,388) 
Net Cash Flow from operating activities 33,672
   
Cash Flows From Investing Activities:  
        Inflow from Sale of Land12,000 
        Outflow to Purchase Equip. and Van(36,000) 
Net Cash Flow from investing activities (24,000)
   
Cash Flows From Financing Activities:  
Cash Payments for Dividends(10,000) 
Net Cash Flow from financing activities (10,000)
   
Net Increase in Cash (328)
Plus: Beginning Cash Balance 93,808
Ending Cash Balance 93,880

(Table 9)

Therefore, the net increase in cash of Company P for the year ended December 31, Year 8 is, $93,880.

Working note:

Calculate the total cash from customers

Cashreceiptsfromcustomers}=(Collection of accounts receivable+ collection of credit cards)=$115,500+$34,560=$150,060 (11)

Calculate total cash payment for expense

Total cash payments for expesnes}=(Prepaid rent+Salaries+Inventory+Accounts payable+Advertising+Utilities expense+Expense from petty cash)=($9,000+$54,100+$33,600+$300+$12,500+$6,800+$88)=$116,388 (12)

e.

To determine

Prepare closing entries of Company P.

e.

Expert Solution
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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 retained earnings. Closing entries produce a zero balance in each temporary account.

Prepare closing entries of Company P as follows:

DateAccount Titles and ExplanationDebit in $Credit in $
Dec. 31Alarm Sales Revenue66,700 
Monitoring Service Revenue86,000 
Gain on sale of land8,000 
Retained Earnings 106,700
(To close all revenue accounts)  
Dec. 31Retained Earnings134,989 
Cost of Goods Sold 32,290
Advertising Expense 12,500
 Credit card Expense 1,440
Depreciation Expense 14,900
Maintenance Expense 45
Miscellaneous Expense 11
 Office supplies Expense 28
Rent Expense 9,600
Salaries Expense 53,500
Supplies Expense 370
 Uncollectible Accounts Expense 3,501
Utilities Expense 6,800
 Cash Short and Over 4
 (To close all expense account)  
Dec. 31Retained Earnings10,000 
 Dividends 10,000
 (To close dividends account)  

(Table 10)

Closing entry for revenue account:

In this closing entry, the service revenue and gain on sale of land accounts are closed by transferring the amount of service revenue and gain on sale of land accounts to retained earnings in order to bring the revenue account balance to zero. Hence, debit the service revenue account for $160,700 and credit the retained account for $160,700.

Closing entry for expenses account:

In this closing entry, all expense accounts are closed by transferring the amount of total expense to the retained earnings in order to bring the expense account balance to zero. Hence, debit the retained earnings for $134,989 and credit supplies account for $134,989.

Closing entry for dividends account:

In this closing entry, the dividends account is closed by transferring the amount of dividends to retained earnings in order to bring the dividends account balance to zero. Hence, debit the retained earnings for $10,000 and credit dividends account for $10,000.

f.

To determine

Post the closing entries to the T-account, and prepare a post-closing trial balance.

f.

Expert Solution
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Explanation of Solution

Post the closing entries to the T-account:

Cash
Bal.93,380  
Petty Cash
Bal.100  
Accounts Receivable
Bal.21,390  
Allow. for Doubt. Accts.
  Bal.2,485
Supplies
Bal.180  
Prepaid Rent
Bal.3,000  
Merchandise Inventory
Bal.6,440  
Equipment
Bal.9,000  
Accumulated Depr.
 Bal.14,900
Salaries Payable
  Bal.1,500
Common Stock
Bal.50,000
Retained Earnings
  Bal.75,894
cl.134,989cl160,700
cl.10,000  
  Bal.91,605
    
Dividends
Bal.10,000cl10,000
Bal.-0-  
Alarm Sales Revenue
cl.66,700Bal.66,700
  Bal.-0-
Monit. Service Revenue
cl.86,000Bal.86,000
  Bal.-0-
Cost of Goods Sold
Bal.32,290cl32,290
Bal.-0-  
Advertising Expense
Bal.12,500cl12,500
Bal.-0-  
Credit Card Expense
Bal.1,440cl.1,440
Bal.-0-  
Depreciation Expense
Bal.14,900cl.14,900
Bal.-0-  
Maintenance Expense
Bal.45cl.45
Bal.-0-  
Miscellaneous Expense
Bal.11cl.11
Bal.-0-  
Office Supplies Expense
Bal.28cl.28
Bal.-0-  
Rent Expense
Bal.9,600cl.9,600
Bal.-0-  
Salaries Expense
Bal.53,500cl.53,500
Bal.-0-  
Supplies Expense
Bal.370cl.370
Bal.-0-  
Uncoll. Accts. Expense
Bal.3,501cl.3,501
Bal.-0-  
Utilities Expense
Bal.6,800cl.6,800
Bal.-0-  
Cash Short/Over
Bal.4Bal.4
Bal.-0-  
Gain on Sale of Land
cl.8,000Bal.8,000
  Bal.-0-

Prepare a post-closing trial balance:

Company P
Post-Closing Trial Balance
December 31, Year 8
Account TitlesDebit in $Credit in $
Cash93,380 
 Petty Cash100 
 Accounts Receivable21,390 
Allowance for doubtful accounts 2,485
 Supplies180 
 Prepaid Rent3,000 
 Merchandise Inventory6,440 
 Equipment9,000 
Van27,000 
 Accumulated  depreciation 14,900
 Salaries Payable 1,500
 Common Stock 50,000
 Retained Earnings 91,605
 Totals160,490160,490

(Table 11)

Therefore, the total of debit, and credit columns of post-closed trial balance is $160,490.

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Chapter 8 Solutions

Fundamental Financial Accounting Concepts

Ch. 8 - Prob. 11QCh. 8 - Prob. 12QCh. 8 - Prob. 13QCh. 8 - Prob. 14QCh. 8 - Prob. 15QCh. 8 - Prob. 16QCh. 8 - Prob. 17QCh. 8 - Prob. 18QCh. 8 - Prob. 19QCh. 8 - Prob. 20QCh. 8 - Prob. 21QCh. 8 - Prob. 22QCh. 8 - Prob. 23QCh. 8 - Prob. 24QCh. 8 - Prob. 25QCh. 8 - Prob. 26QCh. 8 - Prob. 27QCh. 8 - Prob. 28QCh. 8 - Prob. 29QCh. 8 - Prob. 30QCh. 8 - Prob. 31QCh. 8 - Prob. 32QCh. 8 - Prob. 1AECh. 8 - Prob. 2AECh. 8 - Prob. 3AECh. 8 - Prob. 4AECh. 8 - Prob. 5AECh. 8 - Prob. 6AECh. 8 - Prob. 7AECh. 8 - Prob. 8AECh. 8 - Prob. 9AECh. 8 - Prob. 10AECh. 8 - Prob. 11AECh. 8 - Prob. 12AECh. 8 - Prob. 13AECh. 8 - Prob. 14AECh. 8 - Prob. 15AECh. 8 - Prob. 16AECh. 8 - Prob. 17AECh. 8 - Prob. 18AECh. 8 - Prob. 19AECh. 8 - Prob. 20AECh. 8 - Prob. 21AECh. 8 - Prob. 22AECh. 8 - Prob. 23AECh. 8 - Prob. 24AECh. 8 - Prob. 25APCh. 8 - Prob. 26APCh. 8 - Prob. 27APCh. 8 - Prob. 28APCh. 8 - Prob. 29APCh. 8 - Prob. 30APCh. 8 - Prob. 31APCh. 8 - Prob. 33APCh. 8 - Prob. 34APCh. 8 - Prob. 35APCh. 8 - Prob. 36APCh. 8 - Prob. 1BECh. 8 - Prob. 2BECh. 8 - Prob. 3BECh. 8 - Prob. 4BECh. 8 - Prob. 5BECh. 8 - Prob. 6BECh. 8 - Prob. 7BECh. 8 - Prob. 8BECh. 8 - Prob. 9BECh. 8 - Prob. 10BECh. 8 - Prob. 11BECh. 8 - Prob. 12BECh. 8 - Prob. 13BECh. 8 - Prob. 14BECh. 8 - Prob. 15BECh. 8 - Prob. 16BECh. 8 - Prob. 17BECh. 8 - Prob. 18BECh. 8 - Prob. 19BECh. 8 - Prob. 20BECh. 8 - Prob. 21BECh. 8 - Prob. 22BECh. 8 - Prob. 23BECh. 8 - Prob. 24BECh. 8 - Prob. 25BPCh. 8 - Prob. 26BPCh. 8 - Prob. 27BPCh. 8 - Prob. 28BPCh. 8 - Prob. 29BPCh. 8 - Prob. 30BPCh. 8 - Prob. 31BPCh. 8 - Prob. 33BPCh. 8 - Prob. 34BPCh. 8 - Prob. 35BPCh. 8 - Prob. 36BPCh. 8 - Prob. 1ATCCh. 8 - Prob. 3ATCCh. 8 - Prob. 4ATCCh. 8 - Prob. 5ATCCh. 8 - Prob. 6ATCCh. 8 - Prob. 7ATCCh. 8 - Prob. 8ATCCh. 8 - Prob. 9ATCCh. 8 - Prob. 10ATCCh. 8 - Prob. 1CP
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