Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781260006520
Author: williams
Publisher: MCG
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Chapter C, Problem 6P

a.

To determine

Prepare the journal entries for the year 2017.

a.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

(1) Prepare journal entry to record the issuance of the common stock.

DateAccount Titles and ExplanationDebit ($)Credit ($)
January 15Cash800,000
     Capital Stock800,000
( Issued 40,000 shares of capital stock at $20 per share)

Table (1)

  • Cash is an asset and it is increased. Therefore, debit cash account by $800,000.
  • Capital stock is a component of stockholders’ equity and it is increased. Therefore, credit cash account by $800,000.

(2) Prepare journal entry to record the income tax liability at December 31.

DateAccount Titles and ExplanationDebit ($)Credit ($)
December 31Income Tax Expense (1)48,000
     Income Tax Payable48,000
 (To accrue the income tax for the year)

Table (2)

  • Income tax expense is a component of stockholders’ equity and it is decreased. Therefore, debit income tax expense account by $48,000.
  • Income tax payable is a liability and it is increased. Therefore, credit income tax payable account by $48,000.

Working note:

Calculate the amount of income tax expense:

Incometaxexpense=Profitbeforeincometax×Incometaxrate=$120,000×40%=$48,000

(1)

(3) Prepare journal entry to close the income tax expense account.

DateAccount Titles and ExplanationDebit ($)Credit ($)
December 31Income Summary48,000
     Income Taxes Expense48,000
 (To close the Income Taxes Expense account)

Table (3)

  • Income summary is a component of stockholders’ equity and it is decreased. Therefore, debit income summary account by $48,000.
  • Income tax expense is a component of stockholders’ equity and it is increased. Therefore, credit income tax expense account by $48,000.

b.

To determine

Prepare journal entries for the year 2018.

b.

Expert Solution
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Explanation of Solution

Record the journal entries:

DateAccount Titles and ExplanationDebit ($)Credit ($)
March 15Dividends20,000
     Dividends Payable (2)20,000
 (Declared a dividend of $0.50 per share, payable)
April 15Dividends Payable20,000
     Cash20,000
 (To record payment of dividend declared March 15)

Table (4)

March 15:

  • Dividends are a component of stockholders’ equity and it is decreased. Therefore, debit dividends account by $20,000.
  • Dividends payable is a liability and it is increased. Therefore, credit dividends payable account by $20,000.

April 15:

  • Dividends payable is a liability and it is decreased. Therefore, debit dividends payable $20,000.
  • Cash is an asset and it is decreased. Therefore, credit cash account by $20,000.

Working note:

Calculate the amount of dividends payable:

Dividendpayable=Numberofshares×Dividendpershare=40,000shares×$0.50=$20,000

(2)

c.

To determine

Prepare the journal entries to close the income summary and dividends accounts at December 31, 2018.

c.

Expert Solution
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Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Record the closing entries:

DateAccount Titles and ExplanationDebit ($)Credit ($)
December 31Retained Earnings18,000
     Income Summary18,000
 (To close the Income Summary account for a period with a net loss)
December 31Retained Earnings20,000
     Dividends20,000
 (To close Dividends into Retained Earnings)

Table (5)

December 31:

  • Retained earnings are a component of stockholders’ equity and it is decreased. Therefore, Debit retained earnings account by $18,000.
  • Income summary is a component of stockholders’ equity and it is increased. Therefore, credit income summary account by $18,000.

December 31:

  • Retained earnings are a component of stockholders’ equity and it is decreased. Therefore, Debit retained earnings account by $20,000.
  • Dividends are liability and it is increased. Therefore, credit dividends account by $20,000.

d.

To determine

Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.

d.

Expert Solution
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Explanation of Solution

Stockholders’ Equity Section:

Stockholders’ Equity Section refers to the section of the balance sheet that shows the available balance of each stockholder’s equity account as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.

Incorporation F
Partial Balance Sheet
For the year ended December 31, 2018
Stockholders’ equity:Amount ($)
Capital stock800,000
Retained earnings (3)34,000
 Total stockholders’ equity834,000

Table (6)

Working note:

Calculate the amount of retained earnings:

Computation of retained earnings at December 31, 2018:Amount ($)Amount ($)
 Income before income tax—2017120,000
 Less: Income tax expense (1)48,000
 Retained earnings, December 31, 201772,000
 Less: Dividends for 2018 (2)20,000
 Less: Net loss for 201818,00038,000
 Retained earnings, December 31, 201834,000

Table (7)

(3)

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