Concept explainers
(a)
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
The following are the rules of debit and credit:
- 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and
stockholders’ equity accounts are debited. - 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.
To Record: The journal entries in books of Company DD using perpetual inventory system during December.
(a)
Explanation of Solution
Prepare the journal entries for Company DD during December:
Date | Account Title and Description | Post Ref. |
Debit ($) |
Credit ($) |
December06 | Salaries and wages payable | 1,000 | ||
Salaries and wages expense | 600 | |||
Cash | 1,600 | |||
(To record accrued and current salaries and wages expenses) | ||||
December08 | Cash | 6,300 | ||
Accounts receivable | 6,300 | |||
(To record payment received from customers) | ||||
December10 | Cash | 6,300 | ||
Sales revenue | 6,300 | |||
(To record cash sales) | ||||
Cost of goods sold | 4,100 | |||
Inventory | 4,100 | |||
(To record cost of goods sold) | ||||
December13 | Inventory | 9,000 | ||
Accounts payable | 9,000 | |||
(To record purchase on account) | ||||
December15 | Supplies | 2,000 | ||
Cash | 2,000 | |||
(To record purchase of supplies) | ||||
December18 | Accounts receivable | 12,000 | ||
Sales revenue | 12,000 | |||
(To record sales on account) | ||||
Cost of goods sold | 8,000 | |||
Inventory | 8,000 | |||
(To record cost of goods sold) | ||||
December20 | Salaries and wages expense | 1,800 | ||
Cash | 1,800 | |||
(To record salaries and wages expense) | ||||
December23 | Accounts payable | 9,000 | ||
Inventory | 180 (1) | |||
Cash | 8,820 (2) | |||
(To record settlement of accounts payable net of discounts) | ||||
December27 | Cash | 11,640 (4) | ||
Sales discounts | 360 (3) | |||
Accounts receivable | 12,000 | |||
(To record settlement of accounts receivable net of discounts) |
Table (1)
Working Notes:
Calculate the amount of purchase discount.
Accounts payable = $9,000
Discount percentage = 2%
Calculate the amount of cash paid.
Accounts payable = $9,000
Purchase discount = $180 (1)
Calculate the amount of sales discount.
Accounts receivable = $12,000
Discount percentage = 3%
Calculate the amount of cash received.
Net accounts receivable = $12,000
Sales discount = $360 (3)
(c)
To Record: The adjusting entries of Company DD on December 31, 2017.
(c)
Explanation of Solution
Journalize the adjusting entries.
1.
The following is the adjusting entry for the accrued salaries during the year:
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
December 31 | Salaries and Wages Expense | 800 | ||
Salaries and Wages Payable | 800 | |||
(To adjust for accrued salaries and wages expense) |
Table (2)
Description:
- Salaries and wages expense is an expense and it is increased by $800. Therefore, debit salaries and wages expense account with $800.
- Salaries and wages payable is a liability and it is increased by $800. Therefore, credit salaries and wages payable account with $800.
2.
The following is the adjusting entry for the
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
December 31 | Depreciation Expense | 200 | ||
| 200 | |||
(To record the amount of depreciation for the year) |
Table (3)
Description:
- Depreciation expense is an expense and it is increased by $200. Therefore, debit depreciation expense account with $200.
- Accumulated Depreciation-Equipment is a contra asset account and reduces the value of an asset (Equipment). Therefore credit accumulated depreciation-equipment account with $200.
3.
The following is the adjusting entry for the supplies during the year:
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
December 31 | Supplies Expense | 1,700 (5) | ||
Supplies Payable | 1,700 | |||
(To adjust for supplies expense) |
Table (4)
Description:
- Supplies expense is an expense and it is increased by $1,700. Therefore, debit supplies expense account with $1,700.
- Supplies payable is a liability and it is increased by $1,700. Therefore, credit supplies payable account with $1,700.
Working Note:
Calculate the amount of supplies expense.
Beginning balance = $1,200
Purchase = $2,000 (Refer Table 1)
Ending balance = $1,500
4.
The following is the adjusting entry for the accrued income tax for the year:
Date | Accounts title and Description | Post Ref. | Debit ($) | Credit ($) |
December 31 | Income Tax Expense | 200 | ||
Income Tax Payable | 200 | |||
(To record the amount of accrued income tax for the year) |
Table (5)
Description:
- Income tax expense is an expense and it is increased by $200. Therefore, debit income tax expense account with $200.
- Income tax payable is a liability and it is increased by $200. Therefore, credit income tax payable account with $200.
(b) and (c)
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
To Post: The above journal entries and adjusting entries to T-accounts of Company DD.
(b) and (c)
Explanation of Solution
The following are the T-accounts.
Cash Account:
Cash Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
December 01 | Beginning balance | 7,200 | December 06 | Salaries and wages | 1,600 |
December 08 | Accounts receivable | 1,900 | December 15 | Supplies | 2,000 |
December 10 | Sales revenue | 6,300 | December 20 | Salaries and wages | 1,800 |
December 27 | Accounts receivable | 11,640 | December 23 | Accounts payable | 8,820 |
December 31 | Ending Balance | 12,820 | |||
Total | 27,040 | Total | 27,040 |
Table (6)
Accounts Receivable Account:
Accounts Receivable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 01 | Beginning Balance | 4,600 | December 08 | Cash | 1,900 |
December 18 | Sales Revenue | 12,000 | December 27 | Sales discounts | 360 |
December 27 | Cash | 11,640 | |||
December 31 | Ending Balance | 2,700 | |||
Total | 16,600 | Total | 16,600 |
Table (7)
Inventory Account:
Inventory Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
December 1 | Beginning balance | 12,000 | December 10 | Cost of goods sold | 4,100 |
December 13 | Accounts payable | 9,000 | December 18 | Cost of goods sold | 8,000 |
December 23 | Accounts payable | 180 | |||
December 31 | Ending Balance | 8,720 | |||
Total | 21,000 | Total | 21,000 |
Table (8)
Supplies Account:
Supplies Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 01 | Beginning balance | 1,200 | December 31 | Adjustment | 1,700 |
December 15 | Cash | 2,000 | December 31 | Ending Balance | 1,500 |
Total | 3,200 | Total | 3,200 |
Table (9)
Equipment Account:
Equipment Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 01 | Beginning balance | 22,000 | December 31 | Ending Balance | 22,000 |
Total | 22,000 | Total | 22,000 |
Table (10)
Accumulated Depreciation - Equipment Account:
Accumulated Depreciation - Equipment Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 31 | Ending Balance | 2,400 | December 01 | Beginning balance | 2,200 |
December 31 | Adjustment | 200 | |||
Total | 2,400 | Total | 2,400 |
Table (11)
Accounts Payable Account:
Accounts Payable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 23 | Cash and inventory | 9,000 | December 01 | Beginning balance | 4,500 |
December 31 | Ending Balance | 4,500 | December 13 | Inventory | 9,000 |
Total | 13,500 | Total | 13,500 |
Table (12)
Salaries and Wages Payable Account:
Salaries and Wages Payable Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 06 | Cash | 1,000 | December 01 | Beginning balance | 1,000 |
December 31 | Ending Balance | 800 | December 31 | Adjustment | 800 |
Total | 1,800 | Total | 1,800 |
Table (13)
Common Stock Account:
Common Stock Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars | Credit ($) |
December 31 | Ending Balance | 15,000 | December 01 | Beginning balance | 15,000 |
Total | 15,000 | Total | 15,000 |
Table (14)
Retained Earnings Account:
Retained Earnings Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
December 31 | Ending Balance | 24,300 | December 01 | Beginning balance | 24,300 |
Total | 24,300 | Total | 24,300 |
Table (15)
Sales Revenue Account:
Sales Revenue Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 31 | Ending Balance | 18,300 | December 10 | Accounts receivable | 6,300 |
December 18 | Accounts receivable | 12,000 | |||
Total | 18,300 | Total | 18,300 |
Table (16)
Sales Discount Account:
Sales Discount Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 27 | Accounts receivable | 360 | December 31 | Ending Balance | 360 |
Total | 360 | Total | 360 |
Table (17)
Cost of Goods Sold Account:
Cost of Goods Sold Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 10 | Inventory | 4,100 | December 31 | Ending Balance | 12,100 |
December 18 | Inventory | 8,000 | |||
Total | 12,100 | Total | 12,100 |
Table (18)
Depreciation Expense Account:
Depreciation Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 31 | Adjustment | 200 | December 31 | Ending Balance | 200 |
Total | 200 | Total | 200 |
Table (19)
Salaries and Wages Expense Account:
Salaries and Wages Expense Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
December 06 | Cash | 600 | December 31 | Ending Balance | 3,200 |
December 20 | Cash | 1,800 | |||
December 31 | Adjustment | 800 | |||
Total | 3,200 | Total | 3,200 |
Table (20)
Supplies Expense Account:
Supplies Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December 31 | Adjustment | 1,700 | December 31 | Ending Balance | 1,700 |
Total | 1,700 | Total | 1,700 |
Table (21)
Income Tax Expense Account:
Income Tax Expense Account | |||||
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
December31 | Adjustment | 200 | December31 | Ending Balance | 200 |
Total | 200 | Total | 200 |
Table (22)
Income Tax Payable Account:
Income Tax Payable Account | |||||
Date | Particulars | Debit ($) | Date | Particulars | Credit ($) |
December 31 | Ending Balance | 200 | December 31 | Adjustment | 200 |
Total | 200 | Total | 200 |
Table (23)
(d)
To determine: Prepare trial balance for Company DD as on December 31, 2017.
(d)
Answer to Problem 5.1CACR
The following is the adjusted trial balance of Company DD as on December 31, 2017.
Company DD | ||
Adjusted Trial Balance | ||
At December 31, 2017 | ||
Account Title | Balance ($) | |
Debit | Credit | |
Cash | 12,820 | |
Accounts Receivable | 2,700 | |
Inventory | 8,720 | |
Supplies | 1,500 | |
Equipment | 22,000 | |
Accumulated Depreciation - Equipment | 2,400 | |
Accounts Payable | 4,500 | |
Salaries and Wages Payable | 800 | |
Income Tax Payable | 200 | |
Common Stock | 15,000 | |
Retained Earnings | 24,300 | |
Sales Revenue | 18,300 | |
Sales Discounts | 360 | |
Cost of Goods Sold | 12,100 | |
Depreciation Expense | 200 | |
Salaries and Wages Expense | 3,200 | |
Supplies Expense | 1,700 | |
Income Tax Expense | 200 | |
Total | 65,500 | 65,500 |
Table (24)
Explanation of Solution
The trial balance as shown in Table (24) is prepared after placing the journal entries and adjusting entries to the ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.
Therefore, the total debit balance and credit balance of Company DD is $65,500.
(e)
To Prepare: The income statement, retained earnings statement, and classified
(e)
Answer to Problem 5.1CACR
Prepare the income statement of Company DD.
Company DD | ||
Income Statement | ||
For the Year Ended December 31, 2017 | ||
Particulars | Amount($) | Amount($) |
Sales revenue | 18,300 | |
Less: Sales Discounts | (360) | |
Net sales | 17,940 | |
Less: Cost of goods sold | (12,100) | |
Gross profit | 5,840 | |
Less: Operating expenses: | ||
Salaries and wages expenses | 3,200 | |
Depreciation expenses | 200 | |
Supplies expense | 1,700 | |
Total operating expenses | (5,100) | |
Income before income taxes | 740 | |
Less: Income tax expense | (200) | |
Net income | 540 |
Table (25)
Prepare a retained earnings statement of Company DD for the year ended December 31, 2017.
Company DD | |
Retained Earnings Statement | |
For the Year Ended December 31, 2017 | |
Details | Amount ($) |
Beginning Balance of Retained earnings | 24,300 |
Add: Net Income for the year | 540 |
Total Retained Earnings | 24,840 |
Less: Dividends | 0 |
Ending balance of Retained Earnings | 24,840 |
Table (26)
Prepare the classified balance sheet of Company DD for the year ended December 31, 2017.
Company DD | ||
Balance Sheet | ||
As of December 31, 2017 | ||
Assets | Amount ($) |
Amount ($) |
Current assets: | ||
Cash | 12,820 | |
Accounts receivable | 2,700 | |
Inventory | 8,720 | |
Supplies | 1,500 | |
Total current assets | 25,740 | |
Plant assets: | ||
Equipment | 22,000 | |
Less: Accumulated depreciation | -2,400 | 19,600 |
Total assets | 45,340 | |
Liabilities and Stockholders’ equity | ||
Current liabilities: | ||
Accounts payable | 4,500 | |
Salaries and wages payable | 800 | |
Income tax payable | 200 | |
Total current liabilities | 5,500 | |
Long-term liabilities | - | |
Total liabilities | 5,500 | |
Stockholders’ Equity: | ||
Common stock | 15,000 | |
Retained earnings | 24,840 | |
Total stockholders’ equity | 39,840 | |
Total liabilities and stockholders’ equity | 45,340 |
Table (27)
Explanation of Solution
Income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a
Retained Earnings Statement is one of the financial statement, which shows the amount of the net income retained by a company at a particular point of time for reinvestment and used to pay its debts and obligations. It shows the amount of earnings that is not paid as dividends to the shareholders.
Classified Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are organized and reported as different groups, and sub-groups on the basis of the nature of the classification made of a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.
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Chapter 5 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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