2P - Intermediate Accounting (Kieso)

Question

Mason Advertising was founded in January 2013. Presented below are adjusted and unadjusted trial balances as of December 31, 2017.

MASON ADVERTISING TRIAL BALANCE DECEMBER 31, 2017
	Unadjusted			Adjusted
	Dr.		Cr.	Dr.	Cr.
Cash	\( 11,000			\) 11,000
Accounts Receivable	20,000			23,500
Supplies	8,400			3,000
Prepaid Insurance	3,350			2,500
Equipment	60,000			60,000
Accumulated Depreciation—Equipment			\( 28,000		\) 33,000
Accounts Payable			5,000		5,000
Interest Payable			–0–		150
Notes Payable			5,000		5,000
Unearned Service Revenue			7,000		5,600
Salaries and Wages Payable			–0–		1,300
Common Stock			10,000		10,000
Retained Earnings			3,500		3,500
Service Revenue			58,600		63,500
Salaries and Wages Expense	10,000			11,300
Insurance Expense				850
Interest Expense	350			500
Depreciation Expense				5,000
Supplies Expense				5,400
Rent Expense	4,000			4,000
	\(117,100		\)117,100	\(127,050	\)127,050

 

Instructions 

1. Journalize the annual adjusting entries that were made. (Omit explanations.) 
2. Prepare an income statement and a statement of retained earnings for the year ending December 31, 2017, and an unclassified balance sheet at December 31.
3. Answer the following questions. 
   1. If the note has been outstanding 3 months, what is the annual interest rate on that note? 
   2. If the company paid $12,500 in salaries and wages in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?

Step-by-Step Solution

Answer

1. The total debit and credit side of the journal is $17,600
2. Net income is $36,450

Statement of retained earnings shows the closing balance of retained earnings is $39,950

The balance sheet total is $67,000

1. Interest = $50 

Salaries and wages payable = $2,500

Step 1: Meaning of Income Statement

The income statement sometimes referred to as a profit and loss statement, is a document created by a company's management that lists the company's earnings, costs, and net gain or loss for a given period.

Step 2: (a) Preparing Journal entries

Date	Particulars	Debit ($)	Credit ($)
Dec. 31	Account receivable	3,500
	Service revenue		3,500
31	Unearned service revenue	1,400
	Service revenue		1,400
31	Supplies expense	5,400
	Supplies		5,400
31	Depreciation expense	5,000
	Accumulated depreciation-     equipment		5,000
31	Internet expense	150
	Interest payable		150
31	Insurance expense	850
	Prepaid expense		850
31	Salaries and Wages Expense	1,300
	Salaries and Wages payable		1,300
		$17,600	$17,600

Step 3: (b) Preparing income statement, statement of retained earnings, and unclassified balance sheet.

MASON ADVERTISING AGENCY Income Statement
Revenues
Service revenues	$63,500
Expenses
Salaries and wages expense                                $11,300
Supplies expense                                                         5,400
Depreciation expense                                                   5,000
Rent expense                                                            4,000
Insurance expense                                                       850
Interest expense                                                           500
Total Income	27,050
Net Income	$36,450

 

MASON ADVERTISING AGENCY Statement of Retained Earnings
Retained earnings, January 1	$3,500
Add: Net Income	36,450
Retained earnings, December 31	$39,950

 

MASON ADVERTISING AGENCY Balance Sheet
Assets
Cash	$11,000
Accounts receivables	23,500
Supplies	3,000
Prepaid insurance	2,500
Equipment                                                                       $60,000
Less: Accumulated depreciation-equipment                     33,000	27,000
Total assets	$67,000
Liabilities and Stockholder’s Equity
Liabilities
Notes payable                                                            $5,000
Accounts payable                                                         5,000
Unearned service revenue                                        5,600
Salaries and wages payable                                    1,300
Interest payable                                                              150
Total liabilities	$17,050
Stockholders’ Equity
Common stock                                                         $10,000
Retained earnings                                                      39,950	49,950
Total liabilities and stockholders’ equity	$67,000

Step 4: (c) Explaining the answers

1. The monthly interest payment is $50 i.e., ($150/3 months) or 1% of the outstanding balance. 12 divided by 1 equals 12 percent annual interest.
2. Calculation of salaries and wages payable on December 31, 2016

Salaries and wages expense	$11,300
Less: Salaries and wages payable Dec 31, 2017	$1,300
	$10,000
Payments made in 2017	$12,500
Salaries and wages payable Dec 31, 2016	$2,500