Q4-39PSB - Horngren'S Financial And Managerial Accounting

Question

On December 1, Curt Wilson began an auto repair shop, Wilson’s Quality Automotive. The following transactions occurred during December: Dec. 1 Wilson contributed \(63,000 cash to the business in exchange for shares of common stock. 1 Purchased \)14,400 of equipment paying cash. 1 Paid \(3,600 for a twelve-month insurance policy starting on December 1. 9 Paid \)15,000 cash to purchase land to be used in operations. 10 Purchased office supplies on account, \(2,200. 19 Borrowed \)24,000 from the bank for business use. Wilson signed a notes payable to the bank in the name of the corporation. The note is due in five years. 22 Paid \(2,000 for advertising expenses. 26 Paid \)1,000 on account. 28 The business received a bill for utilities to be paid in January, \(260. 31 Revenues earned during the month included \)18,500 cash and \(3,800 on account. 31 Paid employees’ salaries \)3,900 and building rent \(800. Record as a compound entry. 31 The business received \)1,380 for auto screening services to be performed next month. 31 Paid cash dividends of \(5,000 to stockholders. The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Prepaid Insurance; Land; Equipment; Accumulated Depreciation—Equipment; Accounts Payable; Utilities Payable; Interest Payable; Unearned Revenue; Notes Payable; Common Stock; Retained Earnings; Dividends; Income Summary; Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; Advertising Expense; Supplies Expense; Insurance Expense; Interest Expense; and Depreciation Expense—Equipment. Adjustment data: a. Office Supplies used during the month, \)600. b. Depreciation for the month, \(240. c. One month insurance has expired. d. Accrued Interest Expense, \)120. 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 $112,140.

(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 $112,500.

(6) Net income is $14,080, ending balance of retained earnings equals $9,080  and total assets and total liabilities & stockholders’ equity equals $99,040.

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

(8) Under post-closing trial balance, total debits and credits equals $99,280

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	$63,000
	Common Stock		$63,000
	To record cash contribution
Dec. 1	Equipment	$14,400
	Cash		$14,400
	To record the equipment purchased
Dec. 1	Prepaid Rent	$3,600
	Cash		$3,600
	To record the rent paid in advance
Dec. 9	Land	$15,000
	Cash		$15,000
	To record the equipment purchased
Dec. 10	Office Supplies	$2,200
	Accounts Payable		$2,200
	To record office supplies purchased on account
Dec. 19	Cash	$24,000
	Notes Payable		$24,000
	To record the amount borrowed by issuing notes
Dec. 22	Advertising Expense	$2,000
	Cash		$2,000
	To record the payment of Advertising Expense
Dec. 26	Accounts Payable	$1,000
	Cash		$1,000
	To record cash paid on account
Dec. 28	Utilities Expense	$260
	Utilities Payable		$260
	To record utilities exense
Dec. 31	Cash	$18,500
	Accounts Receivable	$3,800
	Service Revenue		$22,300
Dec. 31	Salaries Expense	$3,900
	Rent Expense	$800
	Cash		$4,700
	To record payment of salaries and rent expense
Dec. 31	Cash	$1,380
	Unearned Revenue		$1,380
	Collected cash for future services.
Dec.31	Dividends	$5,000
	Cash		$5,000
	To record payment of dividends

 

T accounts are as follows: 

Cash
Dec.1	$63,000	$14,400	Dec.1
Dec.19	$24,000	$3,600	Dec.1
Dec.31	$18,500	$15,000	Dec.9
Dec.31	$1,380	$2,000	Dec.22
		$1,000	Dec.26
		$3,900	Dec.31
		$800	Dec.31
		$5,000	Dec.31
Bal.	$61,180

 

Accounts Receivable
Dec.31	$3,800
Bal.	$3,800

 

Prepaid Insurance
Dec.1	$3,600
Bal.	$3,600

 

Equipment
Dec. 1	$14,400
Bal.	$14,400

 

Land
Dec. 9	$15,000
Bal.	$15,000

 

Office Supplies
Dec.10	$2,200
Bal.	$2,200

 

Accounts Payable
Dec.26	$1,000	$2,200	Dec.10
		$1,200	Bal.

 

Notes Payable
		$24,000	Dec.19
		$24,000	Bal.

 

Common Stock
		$63,000	Dec.1
		$3,000	Bal.

 

Advertising Expense
Dec.22	$2,000
Bal.	$2,000

 

Utilities Expense
Dec.28	$260
Bal.	$260

 

Utilities Payable
		$260	Dec.28
		$260	Bal.

 

Service Revenue
		$22,300	Dec.31
		$22,300	Bal.

 

Salaries Expense
Dec.31	$3,900
Bal.	$3,900

 

Rent Expense
Dec.31	$800
Bal.	$800

 

Unearned Revenue
		$1,380	Dec.31
		$1,380	Bal.

 

Dividends
Dec.31	$5,000
Bal.	$5,000

 

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	$61,180
Accounts Receivable	3,800
Prepaid Insurance	3,600
Office Supplies	2,200
Equipment	14,400
Land	15,000
Accounts Payable		$1,200
Unearned Revenue		1,380
Utilities Payable		260
Notes Payable		24,000
Common Stock		63,000
Dividends	5,000
Service Revenue		22,300
Salaries Expense	3,900
Rent Expense	800
Advertising Expense	2,000
Utilities Expense	260
Total	$112,140	$112,140

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	$61,180						$61,180				$61,180
Accounts Receivable	3,800						3,800				3,800
Prepaid Insurance	3,600				$300	(c)	3,300				3,300
Office Supplies	2,200				$600	(a)	1,600				1,600
Equipment	14,400						14,400				14,400
Accumulated Depreciation-Equipment					240	(b)		$240				$240
Land	15,000						15,000				15,000
Accounts Payable		$1,200						1,200				1,200
Unearned Revenue		1,380						1,380				1,380
Utilities Payable		260						260				260
Interest Payable					120	(d)		120				120
Notes Payable		24,000						24,000				24,000
Common Stock		63,000						63,000				63,000
Dividends	5,000						5,000				5,000
Service Revenue		22,300						22,300		22,300
Salaries Expense	3,900						3,900		3,900
Rent Expense	800						800		800
Advertising Expense	2,000						2,000		2,000
Utilities Expense	260						260		260
Insurance Expense			(c)	300			300		300
Depreciation Expense-Equipment			(b)	240			240		240
Supplies Expense			(a)	$600			600		600
Interest Expense			(d)	120			120		120
Total	$108,220	$108,220		$1,260	$1,260		$112,500	$112,500	$8,220	$22,300	$104,280	$90,200
								Net Income	$14,080			14,080
Total									$22,300	$22,300	$104,280	$104,280

 

Step 4: Adjusting Entries Recording and Posting

(4) Adjusting entries are as follows:

	Date	Accounts and Explanation	Debit	Credit
(a)	Dec. 31	Supplies Expense	$600
		Office Supplies		$600
		To record supplies expense
(b)	Dec. 31	Depreciation Expense-Equipment	$240
		Accumulated Depreciation—Equipment		$240
		To record depreciation on equipment
(c)	Dec. 31	Insurance Expense	$300
		Prepaid Insurance		$300
		To record supplies expense ($3,600/12)
(d)	Dec. 31	Interest Expense	$120
		Interest Payable		$120
		To record accrued interest expense

 

Supplies Expense
Adj.	$600
Bal.	$600

 

Office Supplies
Dec.10	$2,200	$600	Adj.
Bal.	$1,600

 

Depreciation Expense-Equipment
Adj.	$240
Bal.	$240

 

Accumulated Depreciation- Equipment
		$240	Adj.
		$240	Bal.

 

Prepaid Insurance
Dec.1	$3,600	$300	Adj.
Bal.	$3,300

 

Insurance Expense
Dec. 31	$300
Bal.	$300

 

Interest Expense
Adj.	$120
Bal.	$120

 

Interest payable
		$120	Adj.
		$120	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	$61,180
Accounts Receivable	3,800
Prepaid Insurance	3,300
Office Supplies	1,600
Equipment	14,400
Accumulated Depreciation-Equipment		$240
Land	15,000
Accounts Payable		1,200
Unearned Revenue		1,380
Utilities Payable		260
Interest Payable		120
Notes Payable		24,000
Common Stock		63,000
Dividends	5,000
Service Revenue		22,300
Salaries Expense	3,900
Rent Expense	800
Advertising Expense	2,000
Utilities Expense	260
Insurance Expense	300
Depreciation Expense-Equipment	240
Supplies Expense	600
Interest Expense	120
Total	$112,500	$112,500

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		$22,300
Expenses
Salaries Expense	$3,900
Rent Expense	800
Advertising Expense	2,000
Utilities Expense	260
Insurance Expense	300
Depreciation Expense-Equipment	240
Supplies Expense	600
Interest Expense	120
Total Expenses		8,220
Net Income		$14,080

 

 

 

 

 

 

 

 

 

 

 

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	14,080
	14,080
Dividends	(5,000)
Retained Earnings,  Ending Balance	$9,080

Balance Sheet is shown as follows:

Waldo’s Quality Automotive
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash		$61,180
Accounts Receivable		3,800
Prepaid Insurance		3,300
Office Supplies		1,600
Total Current Assets			$69,880
Property, Plant, and Equipment:
Land		$15,000
Equipment	$14,400
Less: Accumulated Depreciation- Equipment	(240)	14,160
Total Property, Plant, and Equipment:			29,160
Total Assets			$99,040
Liabilities
Current Liabilities:
Accounts Payable		$1,200
Unearned Revenue		1,380
Utilities Payable		260
Interest Payable		120
Total Current Liabilities:			$2,960
Long term Liabilities
Notes Payable			24,000
Total Liabilities			$26,960
Stockholders’ Equity
Common Stock			63,000
Retained Earnings			9,080
Total Stockholders’ Equity			72,080
Total Liabilities and Stockholders’ Equity			$99,040

Step 7: Closing entries and posting

(7) Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$22,300
	Income Summary		$22,300
	To close revenue.
Dec. 31	Income Summary	$8,220
	Salaries Expense		$3,900
	Rent Expense		$800
	Advertising Expense		$2,000
	Utilities Expense		$260
	Insurance Expense		$300
	Depreciation Expense-Equipment		$240
	Supplies Expense		$600
	Interest Expense		$120
	To close expenses.
Dec. 31	Income Summary	$14,080
	Retained Earnings		$14,080
	To close Income Summary
Dec. 31	Retained Earnings	$5,000
	Dividends		$5,000
	To close Dividends

 

Retained Earnings
Clos.4	$5,000	$0	Adj. Bal.
		$14,080	Clos.3
		$9,080	Bal.

 

Income Summary
Clos.2	$8,220	$22,300	Clos.1
		$14,080	Bal.
Clos.3	$14,080
		$0	Bal.

 

Dividends
Un. Adj. Bal.	$5,000	$5,000	Clos. 4
Bal.	$0

 

Service Revenue
Clos.1	$22,300	$22,300	Dec.31
		$0	Bal.

 

Salaries Expense
Dec.31	$3,900	$3,900	Clos. 2
Bal.	$0

 

Rent Expense
Dec.31	$800	$800	Clos. 2
Bal.	$0

 

Advertising Expense
Dec. 31	$2,000	$2,000	Clos.2
Bal.	$0

 

Utilities Expense
Dec. 31	$260	$260	Clos.2
Bal.	$0

 

Depreciation Expense-Equipment
Dec. 31	$240	$240	Clos.2
Bal.	$0

 

Supplies Expense
Dec.31	$600	$600	Clos.2
Bal.	$0

 

Interest Expense
Dec.31	$120	$120	Clos.2
Bal.	$0

 

Insurance Expense
Dec.31	$300	$300	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	$61,180
Accounts Receivable	3,800
Prepaid Insurance	3,300
Office Supplies	1,600
Equipment	14,400
Accumulated Depreciation-Equipment		$240
Land	15,000
Accounts Payable		1,200
Unearned Revenue		1,380
Utilities Payable		260
Interest Payable		120
Notes Payable		24,000
Common Stock		63,000
Retained Earnings		9,080
Total	$99,280	$99,280