50CP - Horngren'S Financial And Managerial Accounting

Question

This problem continues the Canyon Canoe Company situation and focuses on non-merchandising transactions, adjusting and closing entries, and preparing financial statements. Canyon Canoe Company does not typically prepare adjusting and closing entries each month, but the company is surprised at how popular the shirts are and wishes to know the net income for January and would also like to understand how to prepare the closing entries for a merchandising company. During January 2019, Canyon Canoe Company completed the following non-merchandising transactions:

Jan. 2	Collected \(4,500 on account.
15	Paid the utilities and telephone bills from December.
15	Paid the wages accrued in December.
18	Rented canoes and received cash, \)1,825
20	Received bills for utilities (\(360) and telephone (\)275) which will be paid later
23	Paid various accounts payable, \(1,800.
30	Paid employee, \)750

 

Requirements 

1. Journalize and post the January transactions. Omit explanations. Use the ledger from the previous problem for posting. 
2. Journalize and post the adjusting entries for the month of January. Omit explanations. Denote each adjustment as Adj. Compute each account balance, and denote the balance as Balance. In addition to the adjusting entries from the data from previous chapters, Canyon Canoe Company provides this data: 
   1. A physical count of the inventory at the end of the month revealed the cost was \(470. 
   2. The company estimated sales returns will be \)30 with a cost of \(15. 
   3. Office supplies used, \)55. 
   4. The Unearned Revenue has now been earned. 
   5. Interest expense accrued on the notes payable, $50. 
3. Prepare the month ended January 31, 2019, single step income statement of Canyon Canoe Company. 
4. Journalize and post the closing entries. Omit explanations. Denote each closing amount as Clo. and each balance as Balance. After posting all closing entries, prove the equality of debits and credits in the ledger by preparing a post-closing trial balance. 
5. Compute the gross profit percentage for January for Canyon Canoe Company.

Step-by-Step Solution

Answer

1. The total balance of the debit and credit side of the journal is $11,380
2. The total balance of the debit and credit side of the journal is $507
3. Net income = $2,650
4. Trial balance total = $153,235
5. Gross profit percentage = 70.46%

Step 1: Meaning of Journal Entries

A journal entry is a record of financial transactions kept in the books of accounts of an organization. 

Step 2: (1) Preparing journal entries and ledger

Date	Particulars	Debit ($)	Credit ($)
Jan. 2	Cash	4,500
	Accounts receivable		4,500
Jan. 15	Utilities payable	295
	cash		295
	Telephone payable	325
	Cash		325
	Wages payable	1,250
	Cash		1,250
Jan. 18	Cash	1,825
	Canoe rental revenue		1,825
Jan. 20	Utility expense	360
	Telephone expense	275
	Utilities payable		360
	Telephone payable		275
Jan. 23	Accounts payable	1,800
	Cash		1,800
Jan. 30	Wages expense	750
	Cash		750

Preparing Ledgers

Dr.	Cash	Cr.
Balance	$12,125
Jan. 2	60	40	Jan.1
8	16	245	7
12	388	336	20
23	588	48	27
31	2,695	1,568	29
Total	$15,872	$2,237	Total
Balance	$13,635	1,870	Jan. 15
Jan. 2	4,500	1,800	Jan. 23
Jan. 18	1,825	750	Jan. 30
Total	$19,960	$4,420	Total
Balance	$15,540

 

Dr.	Account Receivable	Cr.
Balance	7,600
Jan. 10	388	388	Jan. 12
21	588	588	23
30	2,695	2,695	31
Total	$11,271	$3,671	Total
Balance	$7,600
		4,500	Jan. 2
Total	$7,600	4,500	Total
Balance	$3,100

 

Dr.	Account Payable	Cr.
		3,050	Balance
Jan. 7	250	250	Jan.3
18	50	400	14
20	350	1,600	25
29	1,600
Total	$2,250	$5,300	Total
		$3,050	Balance
Jan. 23	1,800
Total	1,800	3,050	Total
		1,250

 

Dr.	Utilities Payable	Cr.
		295	Balance
Jan. 15	$295	360	Jan. 20
Total	$295	655	Total
		$360	Balance

 

Dr.	Wages Payable	Cr.
		$1,250	Balance
Jan. 15	$1,250
Total	$1,250	$1,250	Total
		$0	Balance

 

 

Dr.	Utilities expense	Cr.
Jan. 20	$360

 

Dr.	Telephone  Payable	Cr.
		$325	Balance
Jan. 15	$325	275	Jan. 20
Total	$325	655	Total
		$275	Balance

 

Dr.	Canoe rental revenue	Cr.
		$1,825	Jan. 20

 

Dr.	Telephone expense	Cr.
Jan. 20	$275

 

Dr.	Wages expense	Cr.
Jan. 30	$750

Step 3: (2) Preparing Journal entries

Date	Particulars	Debit ($)	Credit ($)
a	Cost of goods sold	7
	Merchandise inventory		7
b	Sales revenue	30
	Refund payable		30
	Estimated returns inventory	15
	Cost of goods sold		15
c	Supplies expense	55
	Office supplies		55
d	Unearned revenue	350
	Canoe rental revenue		350
e	Interest expense	50
	Interest payable		50

 

Preparing Ledgers

Dr.	Cost of goods sold	Cr.
Jan. 2	$24
Jan. 10	200
Jan. 21	220
Jan 30	1,300
Balance	$1,744
Adj.	7	$15	Adj.
Total	$1,751	$15
Balance	$1,736

 

Dr.	Merchandise inventory	Cr.
Jan. 1	$40	$24	Jan.2
Jan. 3	25+0	5	Jan. 7
Jan. 14	400	16	Jan. 8
Jan. 25	1,600	200	Jan. 10
Jan. 27	48	50	Jan. 18
		14	Jan. 20
		220	Jan. 21
		32	Jan. 29
		1,300	Jan. 30
Total	$2,338	$1,861	Total
Balance	$477
		7	Adj.
	$477	$7
Balance	$470

 

Dr.	Sales revenue	Cr.
		$60	Jan. 2
		388	Jan. 10
		588	Jan. 21
		2,395	Jan. 30
		$3,731	Balance
Adj.	$30	$3,731
		$3,701	Balance

 

Dr.	Refund Payable	Cr.
		$30	Adj.

 

Dr.	Estimated returns Payable	Cr.
Adj.	$15

 

Dr.	Supplies expense	Cr.
Adj.	$55

 

Dr.	Office supplies	Cr.
Jan. 1	$165	$55	Adj.
Balance	$0

 

Dr.	Canoe rental revenue	Cr.
		$1,825	Jan. 18
		350	Adj.
		$2,175	Balance

 

Dr.	Interest expense	Cr.
Adj.	$50

 

Dr.	Interest  Payable	Cr.
		$50	Jan. 1
		$50	Adj.
		$100	Balance

Step 4: (3) Preparing Income Statement

Compute the total revenues by adding the sales revenue and canoes rental revenues.

$\begin{array}{rcl}\mathrm{Total} \mathrm{Revenue}& =& \mathrm{Sales} \mathrm{Revenue}+\mathrm{Canoe} \mathrm{Rental} \mathrm{Revenue}\\ & =& \$3,701+\$2,175\\ & =& \$5.876\end{array}$ 

Total expense is the sum of the cost of goods sold, wages expense, utility expense, telephone expense, supplies expense, and interest expense.

$\begin{array}{rcl}\mathrm{Total} \mathrm{Expense}& =& \mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}+\mathrm{Wages} \mathrm{expense}+\mathrm{Wages} \mathrm{expense}+\mathrm{Utilities} \mathrm{expense}+\mathrm{Telephone} \mathrm{expense}+\mathrm{Supplies} \mathrm{expense}+\mathrm{Interest}\\ & =& \$1,736+\$750+\$360+\$275+\$55+\$50\\ & =& \$3,226\end{array}$

Compute the gross profit by deducting the total expenses incurred from the total revenues earned by the company.

$\begin{array}{rcl}\mathrm{Gross} \mathrm{Profit}& =& \mathrm{Total} \mathrm{Revenue}-\mathrm{Total} \mathrm{expense}\\ & =& \$5,876-\$3,226\\ & =& \$2,650\end{array}$ 

Income Statement

Canyon Canoe Company
Income Statement
For the Month Ended January 31, 2019
Revenues
Sales revenue	$3,701
Canoes rental revenue	2,175
Total revenues	5,876
Expense
Cost of goods sold                                                $1,736
Wages expense                                                         750
Utilities expense                                                         360
Telephone expense                                                    275
Supplies expense                                                      55
Interest expense                                                           50
Total expenses	3,226
Net income	$2,650

Step 5: (4) Preparing journal entry and ledger

Date	Particulars	Debit ($)	Credit ($)
Jan. 31	Sales revenue	3,701
	Canoe rental revenue	2,175
	Income summary		5,876
	Income summary	3,226
	Cost of goods sold		1,736
	Wages expense		750
	Utility expense		360
	Telephone expense		275
	Supplies expense		55
	Interest expense		50
	Income summary	$2,650
	Retained earnings		$2,650

 

Preparing Ledgers

Dr.	Sales revenue	Cr.
		$60	Jan. 2
		388	Jan. 10
		588	Jan. 21
		2,395	Jan. 30
		$3,731	Balance
Jan 31	$30
	$30	$3,731
		$3,701	Balance
Clo.	$3,701
	$3,701	$3,701
		$0	Balance

 

Dr.	Canoe rental revenue	Cr.
		$1,825	Jan. 18
		350	Adj.
		$2,175	Balance
Clo.	$2,175
		$0	Balance

 

Dr.	Cost of goods sold	Cr.
Jan. 2	$24
Jan. 10	200
Jan. 21	220
Jan 30	1,300
Balance	$1,744
Adj.	7	$15	Jan. 31
Total	$1,751	$15
Balance	$1,736	$1,736	Clo.
		$0	Balance

 

 

 

Dr.	Wages expense	Cr.
Jan. 30	$750	$750	Clo.
Balance	$0

 

Dr.	Utility expense	Cr.
Jan. 20	$360	$360	Clo.
Balance	$0

 

Dr.	Telephone expense	Cr.
Jan. 30	$275	$275	Clo.
Balance	$0

 

Dr.	Interest expense	Cr.
Jan. 31	$50	$50	Clo.
Balance	$0

 

Dr.	Supplies expense	Cr.
Jan. 31	$50	$50	Clo.
Balance	$0

 

Dr.	Income summary	Cr.
Clo.	$3,226	$5,876	Clo.
Clo.	2,650
	$5,876	$5,876
		$0	Balance

 

Dr.	Retained earnings	Cr.
		$4,520	Jan. 1
		$2,650	Clo.
		$7,170	Balance

 

Canyon Canoe Company Post-Closing Trial Balance January 31, 2019
	Debit ($)	Credit ($)
Cash	15,540
Accounts receivable	3,100
Merchandise inventory	470
Office supplies	110
Estimated returns inventory	15
Prepaid rent	2,000
Land	85,000
Building	35,000
Canoes	12,000
Accumulated depreciation-building		550
Accumulated depreciation-building		350
Accounts payable		1,250
Utilities payable		360
Telephone payable		275
Notes payable		7,200
Interest payable		100
Refunds payable		30
Common stock		136,000
Retained earnings		7,170
Total	$153,235	$153,235

Step 6: (5) Computing gross profit percentage

Compute the gross profit by deducting the cost of goods sold incurred by the company from the total revenues earned by the company.

 $\begin{array}{rcl}\mathrm{Gross} \mathrm{Profit}& =& \mathrm{Total} \mathrm{revenue}-\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}\\ & =& (\$3,701+\$2,175)-\$1,736\\ & =& \$4,140\end{array}$

The gross profit percentage is computed by dividing gross profit by total revenue.

 $\begin{array}{rcl}\mathrm{Gross} \mathrm{Profit} \mathrm{Percentage}& =& \frac{\mathrm{Gross} \mathrm{Profit}}{\mathrm{Total} \mathrm{Revenue}}\\ & =& \frac{\$4,140}{\$5,876}\\ & =& 70.46\%\end{array}$