Q4-33PSA - Horngren'S Financial And Managerial Accounting

Question

On December 1, Bob Waldo began an auto repair shop, Waldo’s Quality Automotive. The following transactions occurred during December: Dec. 1 Waldo contributed \(70,000 cash to the business in exchange for shares of common stock. 1 Purchased \)12,000 of equipment paying cash. 1 Paid \(1,750 for a five-month insurance policy starting on December 1. 9 Paid \)20,000 cash to purchase land to be used in operations. 10 Purchased office supplies on account, \(2,800. 19 Borrowed \)15,000 from the bank for business use. Waldo signed a note payable to the bank in the name of the corporation. The note is due in five years. 22 Paid \(1,300 for advertising expenses. 26 Paid \)900 on account. 28 The business received a bill for utilities to be paid in January, \(280. 31 Revenues earned during the month included \)16,000 cash and \(3,600 on account. 31 Paid employees’ salaries \)3,800 and building rent \(1,200. Record as a compound entry. 31 The business received \)1,440 for auto screening services to be performed next month. 31 Paid cash dividends of \(5,500 to stockholders. The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Prepaid Insurance; Land; Equipment; Accumulated Depreciation—Equipment; Accounts Payable; Utilities Payable; Interest Payable; Unearned Revenue; Notes Payable; Common Stock; Retained Earnings; Dividends; Income Summary; Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; Advertising Expense; Supplies Expense; Insurance Expense; Interest Expense; and Depreciation Expense—Equipment. Adjustment data: a. Office Supplies used during the month, \)1,800. b. Depreciation for the month, \(200. c. One month insurance has expired. d. Accrued Interest Expense, \)75. Requirements 1. Prepare the journal entries, and post to the T-accounts. 2. Prepare an unadjusted trial balance. 3. Complete the worksheet for the month ended December 31, 2018 (optional). 4. Prepare the adjusting entries, and post to the T-accounts. 5. Prepare an adjusted trial balance.6. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in report form. 7. Prepare the closing entries, and post to the T-accounts. 8. Prepare a post-closing trial balance.

Step-by-Step Solution

Answer

Answer  

(1) Journal entries and T accounts are mentioned in Step 1. 

(2) Under unadjusted trial balance, total debits and credits equals $108,220.

(3) Worksheet is mentioned in Step 3. 

(4) Adjusting entries and T accounts are mentioned in Step 4.

(5) Under adjusted trial balance, total debits and credits equals $108,495.

(6) Net income is $10,595, ending balance of retained earnings equals $5,095  and total assets and total liabilities & stockholders’ equity equals $93,790.

(7) Cosing entries are recorded and posted in Step 7.

(8) Under post-closing trial balance, total debits and credits equals $93,990.

Step-by-Step-Solution Step 1: Journal entries and T accounts

(1) Journal entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 1	Cash	$70,000
	Common Stock		$70,000
	To record cash contribution
Dec. 1	Equipment	$12,000
	Cash		$12,000
	To record the equipment purchased
Dec. 1	Prepaid Rent	$1,750
	Cash		$1,750
	To record the rent paid in advance
Dec. 9	Land	$20,000
	Cash		$20,000
	To record the equipment purchased
Dec. 10	Office Supplies	$2,800
	Accounts Payable		$2,800
	To record office supplies purchased on account
Dec. 19	Cash	$15,000
	Notes Payable		$15,000
	To record the amount borrowed by issuing notes
Dec. 22	Advertising Expense	$1,300
	Cash		$1,300
	To record the payment of Advertising Expense
Dec. 26	Accounts Payable	$900
	Cash		$900
	To record cash paid on account
Dec. 28	Utilities Expense	$280
	Utilities Payable		$280
	To record utilities exense
Dec. 31	Cash	$16,000
	Accounts Receivable	$3,600
	Service Revenue		$19,600
Dec. 31	Salaries Expense	$3,800
	Rent Expense	$1,200
	Cash		$5,000
	To record payment of salaries and rent expense
Dec. 31	Cash	$1,440
	Unearned Revenue		$1,440
	Collected cash for future services.
Dec.31	Dividends	$5,500
	Cash		$5,500
	To record payment of dividends

 

T accounts are as follows: 

Cash
Dec.1	$70,000	$12,000	Dec.1
Dec.19	$15,000	$1,750	Dec.1
Dec.31	$16,000	$20,000	Dec.9
Dec.31	$1,440	$1,300	Dec.22
		$900	Dec.26
		$3,800	Dec.31
		$1,200	Dec.31
		$5,500	Dec.31
Bal.	$55,990

 

Accounts Receivable
Dec.31	$3,600
Bal.	$3,600

 

Prepaid Insurance
Dec.1	$1,750
Bal.	$1,750

 

Equipment
Dec. 1	$12,000
Bal.	$12,000

 

Land
Dec. 9	$20,000
Bal.	$20,000

 

Office Supplies
Dec.10	$2,800
Bal.	$2,800

 

Accounts Payable
Dec.26	$900	$2,800	Dec.10
		$1,900	Bal.

 

Notes Payable
		$15,000	Dec.19
		$15,000	Bal.

 

Common Stock
		$70,000	Dec.1
		$70,000	Bal.

 

Advertising Expense
Dec.22	$1,300
Bal.	$1,300

 

Utilities Expense
Dec.28	$280
Bal.	$280

 

Utilities Payable
		$280	Dec.28
		$280	Bal.

 

Service Revenue
		$19,600	Dec.31

 

Salaries Expense
Dec.31	$3,800
Bal.	$3,800

 

Rent Expense
Dec.31	$1,200
Bal.	$1,200

 

Unearned Revenue
		$1,440	Dec.31
		$1,440	Bal.

 

Dividends
Dec.31	$5,500
Bal.	$5,500

Step 2: Una djusted Trial Balance

(2) Unadjusted trial balance is shown as follows

Waldo’s Quality Automotive

Unadjusted Trial Balance

December 31, 2018

Account Names Debit Credit Cash $55,990   Accounts Receivable 3,600   Prepaid Insurance 1,750   Office Supplies  2,800   Equipment 12,000   Land 20,000   Accounts Payable   $1,900 Unearned Revenue   1,440 Utilities Payable   280 Notes Payable   15,000 Common Stock   70,000 Dividends 5,500   Service Revenue   19,600 Salaries Expense 3,800   Rent Expense 1,200   Advertising Expense 1,300   Utilities Expense 280   Total $108,220 $108,220

Step 3: Worksheet

(3) Worksheet is shown as follows:

Waldo’s Quality Automotive
Worksheet
December 31, 2018
	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance	Income Statement	Balance Sheet
Account Names	Debit	Credit		Debit	Credit		Debit	Credit	Debit	Credit	Debit	Credit
Cash	$55,990						$55,990				$55,990
Accounts Receivable	3,600						3,600				3,600
Prepaid Insurance	1,750				$350	(c)	1,400				1,400
Office Supplies	2,800				$1,800	(a)	1,000				1,000
Equipment	12,000						12,000				12,000
Accumulated Depreciation-Equipment					200	(b)		$200				$200
Land	20,000						20,000				20,000
Accounts Payable		$1,900						1,900				1,900
Unearned Revenue		1,440						1,440				1,440
Utilities Payable		280						280				280
Interest Payable					75	(d)		75				75
Notes Payable		15,000						15,000				15,000
Common Stock		70,000						70,000				70,000
Dividends	5,500						5,500				5,500
Service Revenue		19,600						19,600		19,600
Salaries Expense	3,800						3,800		3,800
Rent Expense	1,200						1,200		1,200
Advertising Expense	1,300						1,300		1,300
Utilities Expense	280						280		280
Insurance Expense			(c)	350			350		350
Depreciation Expense-Equipment			(b)	200			200		200
Supplies Expense			(a)	$1,800			1,800		1,800
Interest Expense			(d)	75			75		75
Total	$108,220	$108,220		$2,425	$2,425		$108,495	$108,495	$9,005	$19,600	$99,490	$88,595
								Net Income	$10,595			10,595
Total									$19,600	$19,600	$99,490	$99,490

Step 4: Adjusting Entries Recording and Posting

(4) Adjusting entries are as follows:

	Date	Accounts and Explanation	Debit	Credit
(a)	Dec. 31	Supplies Expense	$1,800
		Office Supplies		$1,800
		To record supplies expense
(b)	Dec. 31	Depreciation Expense-Equipment	$200
		Accumulated Depreciation—Equipment		$200
		To record depreciation on equipment
(c)	Dec. 31	Insurance Expense	$350
		Prepaid Insurance		$350
		To record supplies expense ($1750/5)
(d)	Dec. 31	Interest Expense	$75
		Interest Payable		$75
		To record accrued interest expense

 

Supplies Expense
Adj.	$1,800
Bal.	$1,800

 

Office Supplies
Dec.10	$2,800	$1,800	Adj.
Bal.	$1,000

 

Depreciation Expense-Equipment
Adj.	$200
Bal.	$200

 

Accumulated Depreciation- Equipment
		$200	Adj.
		$200	Bal.

 

 

Prepaid Insurance
Dec.1	$1,750	$350	Adj.
Bal.	$1,400

 

Insurance Expense
Dec. 31	$350
Bal.	$350

 

Interest Expense
Adj.	$75
Bal.	$75

 

Interest payable
		$75	Adj.
		$75	Bal.

 

Step 5: Adjusting Trial Balance

(5) Adjusted trial balance is shown as follows:

Waldo’s Quality Automotive
Adjusted Trial Balance
December 31, 2018
Account Names	Debit	Credit
Cash	$55,990
Accounts Receivable	3,600
Prepaid Insurance	1,400
Office Supplies	1,000
Equipment	12,000
Accumulated Depreciation-Equipment		$200
Land	20,000
Accounts Payable		$1,900
Unearned Revenue		1,440
Utilities Payable		280
Interest Payable		75
Notes Payable		15,000
Common Stock		70,000
Dividends	5,500
Service Revenue		19,600
Salaries Expense	3,800
Rent Expense	1,200
Advertising Expense	1,300
Utilities Expense	280
Insurance Expense	350
Depreciation Expense-Equipment	200
Supplies Expense	1,800
Interest Expense	75
Total	$108,495	$108,495

Step 6: I ncome statement, Statement of retained earnings, and the classified balance sheet

(6) Income statement is shown as follows: 

Waldo’s Quality Automotive
Income Statement
Year Ended  December 31, 2018
Revenues
Service Revenue		$19,600
Expenses
Salaries Expense	$3,800
Rent Expense	1,200
Advertising Expense	1,300
Utilities Expense	280
Insurance Expense	350
Depreciation Expense-Equipment	200
Supplies Expense	1,800
Interest Expense	75
Total Expenses		9,005
Net Income		$10,595

Statement of retained earnings is shown as follows: 

Waldo’s Quality Automotive
Statement of Retained Earnings
Year Ended  December 31, 2018
Retained Earnings, Beginning Balance	$0
Net Income for the year	10,595
	10,595
Dividends	(5,500)
Retained Earnings,  Ending Balance	$5,095

 Balance Sheet is shown as follows:

Waldo’s Quality Automotive
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash		$55,990
Accounts Receivable		3,600
Prepaid Insurance		1,400
Office Supplies		1,000
Total Current Assets			$61,990
Property, Plant, and Equipment:
Land		$20,000
Equipment	$12,000
Less: Accumulated Depreciation- Equipment	(200)	11,800
Total Property, Plant, and Equipment:			31,800
Total Assets			$93,790
Liabilities
Current Liabilities:
Accounts Payable		$1,900
Unearned Revenue		1,440
Utilities Payable		280
Interest Payable		75
Total Current Liabilities:			$3,695
Long term Liabilities
Notes Payable			15,000
Total Liabilities			$18,695
Stockholders’ Equity
Common Stock			70,000
Retained Earnings			5,095
Total Stockholders’ Equity			75,095
Total Liabilities and Stockholders’ Equity			$93,790

Step 7: Closing entries and posting

(7) Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$19,600
	Income Summary		$19,600
	To close revenue.
Dec. 31	Income Summary	$9,005
	Salaries Expense		$3,800
	Rent Expense		$1,200
	Advertising Expense		$1,300
	Utilities Expense		$280
	Insurance Expense		$350
	Depreciation Expense-Equipment		$200
	Supplies Expense		$1,800
	Interest Expense		$75
	To close expenses.
Dec. 31	Income Summary	$10,595
	Retained Earnings		$10,595
	To close Income Summary
Dec. 31	Retained Earnings	$5,500
	Dividends		$5,500
	To close Dividends

 

Retained Earnings
Clos.4	$5,500	$0	Adj. Bal.
		$10,595	Clos.3
		$5,095	Bal.

 

Income Summary
Clos.2	$9,005	$19,600	Clos.1
		$10,595	Bal.
Clos.3	$10,595
		$0	Bal.

 

Dividends
Un. Adj. Bal.	$5,500	$5,500	Clos. 4
Bal.	$0

 

Service Revenue
Clos.1	$19,600	$19,600	Dec.31
		$0	Bal.

 

Salaries Expense
Dec.31	$3,800	$3,800	Clos. 2
Bal.	$0

 

Rent Expense
Dec.31	$1,200	$1,200	Clos. 2
Bal.	$0

 

Advertising Expense
Dec. 31	$1,300	$1,300	Clos.2
Bal.	$0

 

Utilities Expense
Dec. 31	$280	$280	Clos.2
Bal.	$0

 

Depreciation Expense-Equipment
Dec. 31	$200	$200	Clos.2
Bal.	$0

 

Supplies Expense
Dec.31	$1,800	$1,800	Clos.2
Bal.	$0

 

Interest Expense
Dec.31	$75	$75	Clos.2
Bal.	$0

 

Insurance Expense
Dec.31	$350	$350	Clos.2
Bal.	$0

Step 8: Post-closing Trial Balance

(8) Post-closing trial balance is shown as follows:

Waldo’s Quality Automotive
Post Closing Trial Balance
December 31, 2018
Account Names	Debit	Credit
Cash	$55,990
Accounts Receivable	3,600
Prepaid Insurance	1,400
Office Supplies	1,000
Equipment	12,000
Accumulated Depreciation-Equipment		$200
Land	20,000
Accounts Payable		$1,900
Unearned Revenue		1,440
Utilities Payable		280
Interest Payable		75
Notes Payable		15,000
Common Stock		70,000
Retained Earnings		5,095
Total	$93,990	$93,990