Concept explainers
Comprehensive On November 30, 2016, Davis Company had the following account balances:
During the month of December, Davis entered into the following transactions:
Required:
- 1. Prepare general
journal entries to record the preceding transactions. - 2. Post to general ledger T-accounts.
- 3. Prepare a year-end
trial balance on a worksheet and complete the worksheet using the following information: (a) accrued salaries at year-end total $1,200; (b) for simplicity, the building and equipment are beingdepreciated using the straight-line method over an estimated life of 20 years with no residual value; (c) supplies on hand at the end of the year total $630; (d)bad debts expense for the year totals $830; and (e) the income tax rate is 30%; income taxes are payable in the first quarter of 2017. - 4. Prepare the company’s financial statements for 2016.
- 5. Prepare the 2016 (a) adjusting and (b) closing entries in the general journal.
1.
Prepare the journal entries to record the given transactions.
Explanation of Solution
Accounting rules for journal entries:
- To record the increase of balance in account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record the decrease of balance in account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Prepare the journal entries to record the given transactions:
Date | Account Title and Explanation | Debit($) | Credit($) |
December 4 | Cash | 3,000 | |
Sales Revenue | 3,000 | ||
(To record the cash sales) | |||
December 4 | Cost of Goods Sold | 1,800 | |
Inventory | 1,800 | ||
(To record the cost of ale) | |||
December 7 | Inventory | 2,400 | |
Accounts Payable | 2,400 | ||
(To record the purchase of inventory on account) | |||
December 14 | Cash | 900 | |
Accounts Receivable | 900 | ||
(To record amount of accounts receivable collected) | |||
December 18 | Cash | 7,800 | |
Gain on sale of land | 2,800 | ||
Land | 5,000 | ||
(To record the gain on sale of land) | |||
December 20 | Accounts Receivable | 4,000 | |
Sales Revenue | 4,000 | ||
(To record the credit sales) | |||
December 20 | Cost of goods sold | 2,400 | |
Inventory | 2,400 | ||
(To record the cost of goods sold) | |||
December 21 | Accounts Payable | 360 | |
Inventory | 360 | ||
(To record the returned defective merchandise for credit) | |||
December 27 | Inventory | 1,250 | |
Cash | 1,250 | ||
(To record purchased inventory for cash) | |||
December 28 | Accounts payable | 1,100 | |
Cash | 1,100 | ||
(To record accounts payable amount paid) | |||
December 31 | Land | 6,000 | |
Cash | 1,000 | ||
Notes Payable | 5,000 | ||
(To record the purchase of land by paying cash and issuing 12% of note) |
Table (1)
2.
Post the part 1 entries to general ledger T-Accounts.
Explanation of Solution
T-account: T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
Post the part 1 entries to general ledger T-Accounts:
3.
Prepare the worksheet with the given information.
Explanation of Solution
Prepare the worksheet with the given information:
Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form, having multiple columns and it is used in the adjustment process.
Table (2)
4.
Prepare the financial statements of Company D.
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.
Prepare income statement:
Company D | ||
Income statement | ||
For the Year Ended December 31, 2016 | ||
Particulars | Amount($) | Amount($) |
Sales revenue | 76,700 | |
Less: Cost of goods sold | (41,060) | |
Gross profit | 35,640 | |
Less: Operating expenses: | ||
Salaries expense | 13,700 | |
Advertising expense | 8,100 | |
Depreciation expense | 2,100 | |
Supplies expense | 770 | |
Bad debt expense | 830 | |
Other expenses | 4,500 | |
Total operating expense | (30,000) | |
Income from operations | 5,640 | |
Other items: | ||
Gain on sale of land | 2,800 | |
Income before income taxes | 8,440 | |
Less: Income tax expense | (2,532) | |
Net income | $5,908 | |
Earnings per share | $2.95 |
Table (3)
Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.
Prepare statement of retained earnings:
D Company | ||
Statement of Retained Earnings | ||
For the Year Ended December 31, 2016 | ||
Particulars | Amount ($) | Amount ($) |
Retained earnings, January 1, 2016 | 42,400 | |
Add: Net income | 5,908 | |
Subtotal | 48,308 | |
Less: Dividends | (2,000) | |
Retained earnings at December 31, 2016 | $46,308 |
Table (4)
Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the balance sheet:
Company D | ||
Balance Sheet | ||
At December 31, 2016 | ||
Assets | ||
Current assets: | Amount ($) | Amount ($) |
Cash | 11,440 | |
Accounts receivable | 13,000 | |
Less: Allowance for doubt accounts | (930) | 12,070 |
Inventory | 16,840 | |
Supplies | 630 | |
Total current assets | 40,980 | |
Property, plant and equipment: | ||
Land | 10,000 | |
Building and equipment | 42,000 | |
Less: Accumulated depreciation | (6,300) | 35,700 |
Net property, plant and equipment | 45,700 | |
Total assets | $86,680 | |
Liabilities | ||
Current liabilities: | ||
Accounts payable | 11,640 | |
Salaries payable | 1,200 | |
Income taxes payable | 2,532 | |
Total liabilities | ||
Long-term liabilities: | 15,372 | |
Notes payable due 31/12/18 | 5,000 | |
Shareholders’ Equity | ||
Contributed Capital: | ||
Common stock | 20,000 | |
Retained earnings | 46,308 | |
Total shareholders’ equity | 66,308 | |
Total liabilities and shareholders’ equity | $86,680 |
Table (5)
5 (a)
Prepare adjusting entries for the year 2016.
Explanation of Solution
Adjusting entries: Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Prepare adjusting entries for the year 2016:
Date | Accounts title and explanation | Debit ($) | Credit ($) |
2016 | Salaries Expense | 1,200 | |
December 31 | Salaries Payable | 1,200 | |
(To record the amount of accrued salaries for the period) | |||
2016 | Depreciation Expense | 2,100 | |
December 31 | Accumulated Depreciation - Building and Equipment | 2,100 | |
(To record the amount of depreciation expense for the period) | |||
2016 | Supplies Expense | 770 | |
December 31 | Supplies | 770 | |
(To record the amount of supplies used during the period) | |||
2016 | Bad debt expense | 830 | |
December 31 | Allowance for Doubtful Accounts | 830 | |
(To record the bad debt expense for the period) | |||
2016 | Income Tax Expense | 2,532 | |
December 31 | Income Tax Payable | 2,532 | |
(To record the income tax liability on earnings |
Table (6)
5 (b)
Prepare the closing entries for December 31, 2016.
Explanation of Solution
Closing entries: Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.
Prepare the closing entries for December 31, 2016.
Date | Accounts title and explanation | Debit | Credit |
($) | ($) | ||
December 31, 2016 | Sales Revenue | 76,700 | |
Gain on Sale of Land | 2,800 | ||
Income Summary | 79,500 | ||
(To close the revenue accounts) | |||
December 31, 2016 | Income Summary | 73,592 | |
Cost of Goods Sold | 41,060 | ||
Salaries Expense | 13,700 | ||
Advertising Expense | 8,100 | ||
Depreciation Expense | 2,100 | ||
Supplies Expense | 770 | ||
Bad Debt Expense | 830 | ||
Other Expense | 4,500 | ||
Income Tax Expense | 2,532 | ||
(To close the expense accounts) | |||
December 31, 2016 | Income Summary | 5,908 | |
Retained Earnings | 5,908 | ||
(To close the income summary account) | |||
December 31, 2016 | Retained Earnings | 2,000 | |
Dividends | 2,000 | ||
(To close the dividends account) |
Table (7)
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