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Q1SP

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Financial & Managerial Accounting
Found in: Page 219
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

SP 4 Santana Rey created Business Solutions on October 1, 2017. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2017. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts.

No

Account title

Dr.

Cr.

101

Cash

$48,372

106.1

Alex’s Engineering Co

0

106.2

Wildcat Services

0

106.3

Easy leasing

0

106.4

IFM Co

3,000

106.5

Liu Corp

0

106.6

Gomez Co

2,668

106.7

Delta Co

0

106.8

Kc Inc

0

106.9

Dream Inc

0

119

Merchandise inventory

0

126

Computer supplies

580

128

Prepaid insurance

1,665

131

Prepaid rent

825

163

Office equipment

8,000

164

Accumulated depreciation – office equipment

$400

167

Computer equipment

20,000

168

Accumulated depreciation – computer equipment

1,250

201

Accounts payable

1,100

210

Wages payable

500

236

Unearned computer service revenue

1,500

307

Common stock

73,000

318

Retained earnings

7,360

319

Dividend

0

403

Computer service revenue

0

413

Sales

0

414

Sales return and allowances

0

415

Sales discount

0

502

Cost of goods sold

0

612

Depreciation expenses – office equipment

0

613

Depreciation expenses – computer equipment

0

623

Wages expenses

0

637

Insurance expenses

0

640

Rent expenses

0

652

Computer supplies expenses

0

655

Advertising expenses

0

676

Mileage expenses

0

677

Miscellaneous expenses

0

684

Repair expenses - computer

0

In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1∕10, n∕30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company’s new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2018. Its transactions for January through March follow:

Jan. 4 The company paid cash to Lyn Addie for five days’ work at the rate of $125 per day. Four of the five days relate to wages payable that were accrued in the prior year.

5 Santana Rey invested an additional $25,000 cash in the company in exchange for more common stock.

7 The company purchased $5,800 of merchandise from Kansas Corp. with terms of 1∕10, n∕30, FOB shipping point, invoice dated January 7.

9 The company received $2,668 cash from Gomez Co. as full payment on its account.

11 The company completed a five-day project for Alex’s Engineering Co. and billed it $5,500, which is the total price of $7,000 less the advance payment of $1,500.

13 The company sold merchandise with a retail value of $5,200 and a cost of $3,560 to Liu Corp., invoice dated January 13.

15 The company paid $600 cash for freight charges on the merchandise purchased on January 7.

16 The company received $4,000 cash from Delta Co. for computer services provided.

17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount.

20 Liu Corp. returned $500 of defective merchandise from its invoice dated January 13. The returned merchandise, which had a $320 cost, is discarded. (The policy of Business Solutions is to leave the cost of defective products in Cost of Goods Sold.)

22 The company received the balance due from Liu Corp., net of both the discount and the credit for the returned merchandise.

24 The company returned defective merchandise to Kansas Corp. and accepted a credit against future purchases. The defective merchandise invoice cost, net of the discount, was $496.

26 The company purchased $9,000 of merchandise from Kansas Corp. with terms of 1∕10, n∕30, FOB destination, invoice dated January 26.

26 The company sold merchandise with a $4,640 cost for $5,800 on credit to KC, Inc., invoice dated January 26.

31 The company paid cash to Lyn Addie for 10 days’ work at $125 per day

Feb. 1 The company paid $2,475 cash to Hillside Mall for another three months’ rent in advance.

3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the $496 amount in the credit memorandum.

5 The company paid $600 cash to the local newspaper for an advertising insert in today’s paper.

11 The company received the balance due from Alex’s Engineering Co. for fees billed on January 11.

15 The company paid $4,800 cash in dividends.

23 The company sold merchandise with a $2,660 cost for $3,220 on credit to Delta Co., invoice dated February 23.

26 The company paid cash to Lyn Addie for eight days’ work at $125 per day.

27 The company reimbursed Santana Rey for business automobile mileage (600 miles at $0.32 per mile).

Mar. 8 The company purchased $2,730 of computer supplies from Harris Office Products on credit, invoice dated March 8.

9 The company received the balance due from Delta Co. for merchandise sold on February 23.

11 The company paid $960 cash for minor repairs to the company’s computer.

16 The company received $5,260 cash from Dream, Inc., for computing services provided.

19 The company paid the full amount due to Harris Office Products, consisting of amounts created on December 15 (of $1,100) and March 8.

24 The company billed Easy Leasing for $9,047 of computing services provided.

25 The company sold merchandise with a $2,002 cost for $2,800 on credit to Wildcat Services, invoice dated March 25.

30 The company sold merchandise with a $1,048 cost for $2,220 on credit to IFM Company, invoice dated March 30.

31 The company reimbursed Santana Rey for business automobile mileage (400 miles at $0.32 per mile).

The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation:

a. The March 31 amount of computer supplies still available totals $2,005.

b. Three more months have expired since the company purchased its annual insurance policy at a $2,220 cost for 12 months of coverage.

c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.

d. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is $825.

e. Depreciation on the computer equipment for January 1 through March 31 is $1,250.

f. Depreciation on the office equipment for January 1 through March 31 is $400.

g. The March 31 amount of merchandise inventory still available totals $704.

Required

1. Prepare journal entries to record each of the January through March transactions.

2. Post the journal entries in part 1 to the accounts in the company’s general ledger. (Note: Begin with the ledger’s post-closing adjusted balances as of December 31, 2017.)

3. Prepare a partial work sheet consisting of the first six columns (similar to the one shown in Exhibit 4B.1) that includes the unadjusted trial balance, the March 31 adjustments (a) through (g), and the adjusted trial balance. Do not prepare closing entries and do not journalize the adjustments or post them to the ledger.

4. Prepare an income statement (from the adjusted trial balance in part 3) for the three months ended March 31, 2018. Use a single-step format. List all expenses without differentiating between selling expenses and general and administrative expenses.

5. Prepare a statement of retained earnings (from the adjusted trial balance in part 3) for the three months ended March 31, 2018.

6. Prepare a classified balance sheet (from the adjusted trial balance) as of March 31, 2018.

  1. Wages payable and wages expenses are debited by $500 and $125, and cash is credited by $625
  2. The closing balance of the cash account is $68,057
  3. The total adjusted trial balance is $154,082
  4. Net income is $18,833
  5. The closing balance of retained earnings is $21,393
  6. The balance sheet total is $120,268
See the step by step solution

Step by Step Solution

Step 1: Definition of Wages Payable

Wages payable can be defined as the line item in the current liabilities including the wages expenses that are incurred but are not paid to the employees. These are reported only under accrual accounting.

Step 2: Journal entries

Date

Accounts and Explanation

Debit ($)

January

4

Wages payable

500

Wages expenses

125

Cash

5

Cash

25,000

Common stock

7

Merchandise inventory

5,800

Account payable

9

Cash

2,668

Gomez Co

11

Alex engineering co

5,500

Unearned computer service revenue

1,500

Service revenue

13

Liu corporation

5,200

Sales revenue

Cost of goods sold

3,560

Merchandise inventory

15

Merchandise inventory

600

Cash

16

Cash

4,000

Computer service revenue

17

Account payable

5,800

Merchandise inventory

Cash

20

Sales return and allowances

500

Liu corporation

22

Cash

4,653

Sales discount

47

Liu corporation

24

Account payable

496

Merchandise inventory

26

Merchandise inventory

9,000

Account payable

26

KC Inc.

5,800

Sales revenue

Cost of goods sold

4,640

Merchandise inventory

31

Wages expenses

1,250

Cash

February

1

Prepaid rent

2,475

Cash

3

Account payable

8,504

Merchandise inventory

Cash

5

Advertising expenses

600

Cash

11

Cash

5,500

Alex engineering

15

Dividend expenses

4,800

Cash

23

Delta Co

3,220

Sales revenue

Cost of goods sold

2,660

Merchandise inventory

26

Wages expenses

1,000

Cash

27

Mileage expenses

192

Cash

March

8

Computer supplies

2,730

Account payable

9

Cash

3,220

Delta Co

11

Repair expenses – computer

960

Cash

16

Cash

5,260

Computer service revenue

19

Account payable

3,830

Cash

24

Easy leasing

9,047

Computer service revenue

25

Wildcat services

2,800

Sales revenue

Cost of goods sold

2,002

Merchandise inventory

30

IFM company

2,220

Sales revenue

Cost of goods sold

1,048

Merchandise inventory

31

Mileage expenses

128

Cash

Step 3: Posting into ledger

Cash Account

Date

Particulars

Amount $

Date

Particulars

Amount $

Opening balance

48,372

4 Jan

Wages expenses

125

5 Jan

Common stock

25,000

4 Jan

Wages payable

500

9 Jan

Gomez co

2,668

15 Jan

Merchandise inventory

600

16 Jan

Computer service revenue

4,000

17 Jan

Account payable

5,742

22 Jan

Liu Corp

4,653

31 Jan

Wages expenses

1,250

11 Feb

Alex engineering

5,500

1 Feb

Prepaid rent

2,475

9 March

Delta Co

3,220

3 Feb

Account payable

8,414

16 March

Computer service revenue

5,260

5 Feb

Advertising expenses

600

15 Feb

Dividend expenses

4,800

26 Feb

Wages expenses

1,000

27 Feb

Mileage expenses

192

11 Mar

Repair expenses

960

19 March

Account payable

3,830

31 Mar

Mileage expenses

128

$98,673

$30,616

Balance c/d

$68,057

Alex engineering Co

Date

Particulars

Amount $

Date

Particulars

Amount $

11 Jan

Service revenue

5,500

11 Feb

Cash

5,500

5,500

5,500

Wildcat services

Date

Particulars

Amount $

Date

Particulars

Amount $

25 March

Sales revenue

2,800

2,800

0

Balance c/d

2,800

Easy leasing

Date

Particulars

Amount $

Date

Particulars

Amount $

24 March

Computer service revenue

9,047

9,047

0

Balance c/d

9,047

IFM Co

Date

Particulars

Amount $

Date

Particulars

Amount $

Beginning balance

3,000

30 Mar

Sales revenue

2,220

5,220

0

Balance c/d

5,220

Liu Corp

Date

Particulars

Amount $

Date

Particulars

Amount $

13 Jan

Sales revenue

5,200

20 Jan

Sales return and allowances

500

22 Jan

Cash

4,653

22 Jan

Merchandise inventory

47

5,200

5,200

Gomez Co

Date

Particulars

Amount $

Date

Particulars

Amount $

Beginning balance

2,668

9 Jan

Cash

2,668

2,668

2,668

Delta Co

Date

Particulars

Amount $

Date

Particulars

Amount $

23 Feb

Sales revenue

3,220

9 March

Cash

3,220

3,220

3,220

KC Inc

Date

Particulars

Amount $

Date

Particulars

Amount $

26 Jan

Sales revenue

5,800

5,800

0

Balance c/d

5,800

Dream Inc

Date

Particulars

Amount $

Date

Particulars

Amount $

0

0

Merchandise inventory

Date

Particulars

Amount $

Date

Particulars

Amount $

7 Jan

Account payable

5,800

13 Jan

Cost of goods sold

3,560

15 Jan

Cash

600

17 Jan

Account payable

58

26 Jan

Account payable

9,000

24 Jan

Account payable

496

26 Jan

Cost of goods sold

4,640

3 Feb

Account payable

90

23 Feb

Cost of goods sold

2,660

25 Mar

Cost of goods sold

2,002

30 Mar

Cost of goods sold

1,048

15,400

14,554

846

Computer Supplies

Date

Particulars

Amount $

Date

Particulars

Amount $

Beginning balance

580

8 March

Account payable

2,730

3,310

0

3,310

Prepaid insurance

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

1,665

Prepaid rent

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

825

1 Feb

Cash

2,475

3,300

0

Balance c/d

3,300

Accumulated depreciation – office equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

400

Computer equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

20,000

Accumulated depreciation – computer equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

1,250

Account payable

Date

Particulars

Amount $

Date

Particulars

Amount $

17 Jan

Cash

5,742

Balance b/d

1,100

17 Jan

Merchandise inventory

58

7 Jan

Merchandise inventory

5,800

24 Jan

Merchandise inventory

496

26 Jan

Merchandise inventory

9,000

3 Feb

Cash

8,414

8 March

Computer supplies

2,730

3 Feb

Merchandise inventory

90

19 March

Cash

3,830

$18,630

$18,630

Balance

$0

Wages payable

Date

Particulars

Amount $

Date

Particulars

Amount $

4 Jan

Cash

500

Balance b/d

500

500

500

Unearned computer service revenue

Date

Particulars

Amount $

Date

Particulars

Amount $

Service revenue

1,500

Balance b/d

1,500

1,500

1,500

Common stock

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

73,000

5 Jan

Cash

25,000

0

98,000

Balance c/d

98,000

Retained earnings

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

7,360

Dividend

Date

Particulars

Amount $

Date

Particulars

Amount $

15 Feb

Cash

4,800

4,800

0

Balance c/d

4,800

Computer service revenue

Date

Particulars

Amount $

Date

Particulars

Amount $

11 Jan

Alex engineering

5,500

11 Jan

Unearned computer service revenue

1,500

16 Jan

Cash

4,000

16 March

Cash

5,260

24 March

Easy leasing

9,047

0

25,307

Balance c/d

25,307

Sales

Date

Particulars

Amount $

Date

Particulars

Amount $

13 Jan

Liu Corp

5,200

26 Jan

Kc Inc

5,800

23 Feb

Delta Co

3,220

25 Mar

Wildcat services

2,800

30 March

IFM company

2,220

0

19,240

Balance c/d

19,240

Sales return and allowance

Date

Particulars

Amount $

Date

Particulars

Amount $

20 Jan

LIU corp.

500

500

0

Balance c/d

500

Sales Discount

Date

Particulars

Amount $

Date

Particulars

Amount $

22 Jan

Liu corporation

47

47

47

Balance

47

Cost of goods sold

Date

Particulars

Amount $

Date

Particulars

Amount $

13 Jan

Merchandise inventory

3,560

26 Jan

Merchandise inventory

4,640

23 Feb

Merchandise inventory

2,660

25 Mar

Merchandise inventory

2,002

30 Mar

Merchandise inventory

1,048

13,910

0

Balance c/d

13,910

Depreciation expenses – office equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Depreciation expenses – computer equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Wages expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

4 Jan

Cash

125

31 Jan

Cash

1,250

26 Feb

Cash

1,000

2,375

0

Balance c/d

2,375

Insurance expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Rent expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Computer supplies expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Advertising expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

5 Feb

Cash

600

600

0

Balance c/d

600

Mileage expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

27 Feb

Cash

192

31 Mar

Cash

128

320

0

Balance c/d

320

Miscellaneous expenses

Date

Particulars

Amount $

Date

Particulars

Amount $

0

Repair expenses computer

Date

Particulars

Amount $

Date

Particulars

Amount $

11 Mar

Cash

960

960

0

Balance c/d

960

Office equipment

Date

Particulars

Amount $

Date

Particulars

Amount $

Balance b/d

8,000

8,000

0

Balance c/d

8,000

Step 4: Partial worksheet

ParticularUnadjusted trial balanceAdjustment
Dr.Cr.Dr.Cr.

Cash

$68,057

Alex’s Engineering Co

0

Wildcat Services

2,800

Easy leasing

9,047

IFM Co

5,220

Liu Corp

0

Gomez Co

0

Delta Co

0

Kc Inc

5,800

Dream Inc

0

Merchandise inventory

846

142

Computer supplies

3,310

1,305

Prepaid insurance

1,665

Prepaid rent

3,300

2,475

Office equipment

8,000

Accumulated depreciation – office equipment

$400

400

Computer equipment

20,000

Accumulated depreciation – computer equipment

1,250

1,250

Accounts payable

0

Wages payable

0

875

Unearned computer service revenue

0

Common stock

98,000

Retained earnings

7,360

Dividend

4,800

Computer service revenue

25,307

Sales

19,240

Sales return and allowances

500

Cost of goods sold

13,910

142

Sales discount

47

Depreciation expenses – office equipment

0

400

Depreciation expenses – computer equipment

0

1,250

Wages expenses

2,375

875

Insurance expenses

0

Rent expenses

0

2,475

Computer supplies expenses

0

1,305

Advertising expenses

600

Mileage expenses

320

Miscellaneous expenses

0

Repair expenses - computer

960

$151,557

$151,557

$6,447

$6,447

ParticularAdjusted trial balance
Dr.Cr.

Cash

$68,057

Alex’s Engineering Co

0

Wildcat Services

2,800

Easy leasing

9,047

IFM Co

5,220

Liu Corp

0

Gomez Co

0

Delta Co

0

Kc Inc

5,800

Dream Inc

0

Merchandise inventory

704

Computer supplies

2,005

Prepaid insurance

1,665

Prepaid rent

825

Office equipment

8,000

Accumulated depreciation – office equipment

800

Computer equipment

20,000

Accumulated depreciation – computer equipment

2,500

Accounts payable

0

Wages payable

875

Unearned computer service revenue

0

Common stock

98,000

Retained earnings

7,360

Dividend

4,800

Computer service revenue

25,307

Sales

19,240

Sales return and allowances

500

Cost of goods sold

14,052

Sales discount

47

Depreciation expenses – office equipment

400

Depreciation expenses – computer equipment

1,250

Wages expenses

3,250

Insurance expenses

0

Rent expenses

2,475

Computer supplies expenses

1,305

Advertising expenses

600

Mileage expenses

320

Miscellaneous expenses

0

Repair expenses - computer

960

$154,082

$154,082

Step 5: Income statement

Particular

Amount $

Amount $

Computer service revenue

25,307

Sales

19,240

Total revenue

$44,547

Less: Sales discount

(47)

Sales return and allowances

(500)

Net revenue

$44,000

Cost of goods sold

14,052

Depreciation expenses – office equipment

400

Depreciation expenses – computer equipment

1,250

Wages expenses

3,250

Insurance expenses

555

Rent expenses

2,475

Computer supplies expenses

1,305

Advertising expenses

600

Mileage expenses

320

Miscellaneous expenses

0

Repair expenses - computer

960

(25,167)

Net income

$18,833

Step 6: Statement of retained earnings

Particular

Amount $

Opening retained earnings

$7,360

Add: net income

$18,833

Less: Dividend

($4,800)

Closing retained earnings

$21,393

Step 7: Classified balance sheet

Particular

Amount $

Amount $

Cash

$68,057

Alex’s Engineering Co

0

Wildcat Services

2,800

Easy leasing

9,047

IFM Co

5,220

Liu Corp

0

Gomez Co

0

Delta Co

0

Kc Inc

5,800

Dream Inc

0

Merchandise inventory

704

Computer supplies

2,005

Prepaid insurance

1,110

Prepaid rent

825

Total current assets

$95,568

Office equipment

$8,000

Accumulated depreciation – office equipment

800

$7,200

Computer equipment

20,000

Accumulated depreciation – computer equipment

$2,500

$17,500

Total assets

$120,268

Liabilities and shareholder’s equity

Accounts payable

$0

Wages payable

875

Unearned computer service revenue

$0

Total liabilities

$875

Shareholder’s equity

Common stock

$98,000

Retained earnings

$21,393

119,393

Total liabilities and shareholder’s equity

$120,268

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