Q3TI-1 - Horngren'S Financial And Managerial Accounting

Question

Benson Auto Repair had the following account balances after adjustments. Assume all accounts had normal balances.

Cash \( 4,000 Common Stock \) 20,000

Accounts Receivable 3,200 Retained Earnings, January 1 15,700

Prepaid Rent 1,900 Dividends 2,100

Office Supplies 3,000 Service Revenue 1,600

Equipment 34,800 Depreciation Expense—Equipment 300

Accumulated Depreciation—Equipment 1,600 Salaries Expense 800

Accounts Payable 5,400 Rent Expense 500

Notes Payable (long-term) 7,000 Utilities Expense 600

Supplies Expense 100

14. Prepare the closing entries for Benson at December 31.

15. What is the balance of Retained Earnings after closing entries have been recorded? (Use a T-account to determine the balance.)

Step-by-Step Solution

Answer

Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$1600
	Income Summary		$1,600
	To close revenue.
Dec. 31	Income Summary	$2,300
	Rent Expense		$500
	Salaries Expense		$800
	Supplies Expense		$100
	Utilities Expense		$600
	Depreciation Expense—Equipment		$300
	To close expenses.
Dec. 31	Retained Earnings	$700
	Income Summary		$700
	To close Income Summary.
Dec. 31	Retained Earnings	$2,100
	Dividends		$2,100
	To close Dividends.

Step 1: Explanation on Retained Earnings

Retained earnings are the sum total of previous profits of the previous years, which are used to pay the dividends.

Step 2: Calculation of Net Loss

$\begin{array}{c}\mathbf{NetLoss}\mathbf{=}\mathbf{Revenues}\mathbf{-}\mathbf{Expenses}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{600}-\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{300}\\ \mathbf{=}\mathbf{\$}\mathbf{700}\end{array}$