CHAPTER 4

COMPLETION OF THE ACCOUNTING CYCLE

CHAPTER STUDY OBJECTIVES

1. Prepare closing entries and a post-closing trial balance. At the end of an accounting period, the temporary account balances (revenue, expense, Income Summary, and Owner’s Drawings) are transferred to the Owner’s Capital account by journalizing and posting closing entries. Separate entries are made to close revenues and expenses to Income Summary; then Income Summary to Owner’s Capital; and, finally, Owner’s Drawings to Owner’s Capital. The temporary accounts begin the new period with a zero balance and the Owner’s Capital account is updated to show its end-of-period balance. A post-closing trial balance has the balances in permanent accounts (i.e., balance sheet accounts) that are carried forward to the next accounting period. The purpose of this trial balance, as with other trial balances, is to prove the equality of these account balances.

2. Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. The steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance. A work sheet may be used to help prepare adjusting entries and financial statements. Reversing entries are an optional step that may be used at the beginning of the next accounting period.

Correcting entries are recorded whenever an error (an incorrect journal entry) is found. A correcting entry can be determined by comparing the incorrect entry with the journal entry that should have been recorded (the correct entry). The comparison will show which accounts need to be corrected and by how much. The correcting entry will correct the accounts. An equally acceptable alternative is to reverse the incorrect entry and then record the correct entry.

3. Prepare a classified balance sheet. In a classified balance sheet, assets are classified as current assets; long-term investments; property, plant, and equipment; intangible assets; and goodwill. Liabilities are classified as either current or non-current. Current assets are assets that are expected to be realized within one year of the balance sheet date. Current liabilities are liabilities that are expected to be paid from current assets within one year of the balance sheet date. The classified balance sheet also includes an equity section, which varies with the form of business organization.

4. Illustrate measures used to evaluate liquidity. One of the measures used to evaluate a company’s short-term liquidity is its working capital, which is the excess of current assets over current liabilities. This can also be expressed as the current ratio (current assets ÷ current liabilities). The acid-test ratio is a measure of the company’s immediate short-term liquidity and is calculated by dividing the sum of cash, short-term investments, and receivables by current liabilities.

5. Prepare a work sheet (Appendix 4A). A work sheet is an optional multi-column form, used to assist in preparing adjusting entries and financial statements. The steps in preparing a work sheet are (1) prepare a trial balance on the work sheet; (2) enter the adjustments in the adjustment columns; (3) enter adjusted balances in the adjusted trial balance columns; (4) enter adjusted trial balance amounts in correct financial statement columns; and (5) total the statement columns, calculate profit (or loss), and complete the work sheet.

6. Prepare reversing entries (Appendix 4B). Reversing entries are optional entries used to simplify bookkeeping. They are made at the beginning of the new accounting period and are the direct opposite of the adjusting entry made in the preceding period. Only accrual adjusting entries are reversed. If reversing entries are used, then subsequent cash transactions can be recorded without referring to the adjusting entries prepared at the end of the previous period.

Exercises

Exercise 1

The following selected accounts appear in the adjusted trial balance for Bender Company:

1. Accumulated Depreciation 5. Supplies

2. Depreciation Expense 6. Accounts Payable

3. J. Bender, Capital 7. Service Revenue

4. J. Bender, Drawings

Instructions

Identify the accounts that would be included in the post-closing trial balance.

Exercise 2

The closing process requires only temporary accounts to be adjusted. Listed below are both temporary and permanent accounts.

1. Owner’s drawings

2. Rent expense

3. Accounts payable

4. Cash

5. Owner’s capital

6. Prepaid expense

7. Depreciation expense

8. Land

9. Unearned revenue

10. Service revenue

11. Note payable

12. Income summary

13. Salaries expense

14. Interest payable

15. Accounts receivable

Instructions

State which accounts are permanent (P) or temporary (T).

Exercise 3

All revenue accounts (totalling $600,000), expense accounts (totalling $650,000), and the Income Summary account have been closed for the year ended December 31, 2021 for Walford Productions, an unincorporated business. After closing those accounts, P. Walford, Capital has a balance of $115,000, and P. Walford, Drawings has a balance of $48,000.

Instructions

a) Journalize the entries required to complete the closing of the accounts.

b) Prepare a statement of owner's equity for the year ended December 31, 2021.

Exercise 4

The adjusted account balances of MacDonald Company, at December 31, 2021, are as follows:

Cash $12,700 Accounts payable $12,000

Accounts receivable 22,000 Notes payable 7,000

Prepaid insurance 10,000 Accumulated depreciation—

Equipment 40,000 equipment 14,000

Depreciation expense 7,000 Service revenue 27,000

B. Stine, drawings 1,500 B.MacDonald , capital 22,000

Advertising expense 400 Unearned service revenue 16,000

Rent expense 1,800

Salary expense 2,000

Insurance expense 600

$98,000 $98,000

Instructions

a) Prepare closing entries for December 31, 2021.

b) Determine the balance in B. MacDonald's capital account after the entries have been posted.

Exercise 5

At March 31, 2021, account balances after adjustments for Maddux Cinema are as follows:

Account Balances

Accounts (After Adjustment)

Cash $ 6,000

Concession supplies 4,000

Theatre equipment 50,000

Accumulated depreciation—theatre equipment 12,000

Accounts payable 5,000

N. Maddux, capital 20,000

N. Maddux, drawings 12,000

Admission ticket revenues 60,000

Popcorn revenues 37,000

Candy revenues 19,000

Advertising expense 12,000

Concession supplies expense 19,000

Depreciation expense 4,000

Film rental expense 16,000

Rent expense 12,000

Salaries expense 13,000

Utilities expense 5,000

Instructions

a) Prepare the closing journal entries for Maddux Cinema.

b) Prepare a post-closing trial balance.

Exercise 6

The adjusted account balances of Hobby Centre at July 31 are as follows:

Accounts Account Balances Accounts Account Balances

Cash $ 11,000 Service revenue $105,000

Accounts receivable 25,000 Interest revenue 8,000

Supplies 4,000 Depreciation expense 27,000

Prepaid insurance 8,000 Insurance expense 6,000

Buildings 300,000 Salary expense 30,000

Accumulated depreciation— Supplies expense 9,000

Buildings 120,000 Utilities expense 12,000

Accounts payable 19,000

D. Fortier , capital 195,000

D. Fortier , drawings 15,000

Instructions

Prepare the end of the period closing entries for Hobby Centre.

Exercise 7

The income statement of Marc’s Gamestation Repair is as follows:

MARC’S GAMESTATION REPAIR

Income Statement

Month Ended April 30, 2021

Revenue

Gamestation repair revenue $17,000

Expenses

Salaries expense $3,400

Depreciation expense 350

Utilities expense 1,400

Rent expense 600

Supplies expense 1,050

Total expenses 6,800

Profit $10,200

On April 1, the balance in Marc Luck, Capital was $11,200. During April, Marc withdrew $8,200 cash for personal use.

Instructions

a) Prepare closing entries at April 30.

b) Prepare a statement of owner's equity for the month of April.

Exercise 8

The adjusted trial balance for Jurassic Services Company at December 31, 2021 is as follows:

Jurassic Services Company

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $21,400

Accounts receivable 1,500

Prepaid insurance 2,000

Prepaid rent 5,000

Supplies 3,330

Equipment 17,500

Accumulated depreciation-equipment $5,200

Furniture 25,000

Accumulated depreciation-furniture 4,250

Accounts payable 8,400

Salary payable 12,200

Unearned revenue 6,700

J. Jurassic, drawings 15,000

J. Jurassic, capital 58,567

Service revenue 33,500

Salary expense 24,387

Depreciation expense 4,500

Rent expense 5,500

Insurance expense 2,200

Supplies expense 700

Advertising expense 800 ________

$128,817 $128,817

Instructions

1. Prepare the year-end closing entries for Jurassic Services Company at December 31, 2021.
2. Prepare a post-closing trial balance.

Exercise 9

The trial balances of Grant Company follow with the accounts arranged in alphabetic order:

Trial Balances

Unadjusted Adjusted Post-Closing

Accounts Payable $10,000 $10,000 $10,000

Accounts Receivable 2,200 3,200 3,200

Accumulated Depreciation—equipment 13,000 17,000 17,000

Advertising Expense 0 11,300 0

Cash 60,000 60,000 60,000

Depreciation Expense 0 4,000 0

Equipment 75,000 75,000 75,000

F. Grant, Capital 82,200 82,200 102,400

F. Grant, Drawings 16,000 16,000 0

Prepaid Advertising 12,800 1,500 1,500

Prepaid Rent 15,000 11,000 11,000

Rent Expense 0 4,000 0

Service Revenue 96,000 105,000 0

Supplies 3,200 700 700

Supplies Expense 2,000 4,500 0

Unearned Revenue 23,000 15,000 15,000

Wages Expense 38,000 45,000 0

Wages Payable 0 7,000 7,000

Instructions

Analyze the data and prepare a) the adjusting entries and b) the closing entries made by Grant Company.

Exercise 10

Below is an adjusted trial balance.

ROSS ROCKBOLTS

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $13,500

Accounts Receivable 4,550

Supplies 175

Prepaid Insurance 1,100

Equipment 8,350

Accumulated Depreciation—equipment $1,670

Note Payable 12,500

Accounts Payable 750

Unearned Revenue 1,250

S. Ross, capital 8,175

S. Ross, drawings 5,000

Service Revenue 47,500

Depreciation Expense 1,670

Insurance Expense 12,500

Rent Expense 25,000 ______

$71,845 $71,845

Instructions

Prepare a post-closing trial balance.

Exercise 11

The adjusted account balances of Johanna Ltd. at December 31, 2021 are as follows:

Accounts receivable $17,600 Bank overdraft $ 2,300

Notes receivable 6,000 Accounts payable 11,000

Prepaid insurance 6,000 Notes payable 56,800

Equipment 74,000 Accumulated depreciation—

Depreciation expense 22,900 equipment 9,200

J. Johanna, drawings 16,000 Service revenue 62,500

Maintenance expense 2,200 Rent revenue 10,000

Legal expense 3,300 J. Johanna, capital 18,000

Salary expense 20,000

Insurance expense 1,800 ___

$169,800 $169,800

Instructions

a) Prepare closing entries for December 31, 2021.

b) Prepare a post-closing trial balance at December 31, 2021.

Exercise 12

The adjusted account balances of Yogi Company at December 31, 2021 are as follows:

Accounts receivable $16,000 Bank overdraft $ 14,000

Notes receivable 13,000 Accounts payable 6,000

Prepaid insurance 6,000 Notes payable 10,000

Machinery 50,000 Accumulated depreciation—

Depreciation expense 7,000 machinery 16,000

G. Yogi , drawings 4,500 Service revenue 29,000

Promotion expense 600 Interest revenue 2,000

Rent expense 3,000 G. Yogi , capital 18,000

Salary expense 10,200 Unearned revenue 16,000

Insurance expense 700

$111,000 $111,000

Instructions

a) Prepare closing entries for December 31, 2021.

b) Determine the balance in G. Yogi's capital account after the entries have been posted.

c) Prepare a post-closing trial balance at December 31, 2021.

Exercise 13

Listed below are some of the steps required to complete the accounting cycle:

1. Analyze business transactions.

2. ___________________________

3. Post to general ledger accounts.

4. Prepare a trial balance.

5. ___________________________

6. ___________________________

7. ___________________________

8. Journalize and post closing entries.

9. ___________________________

Instructions

Fill in the blank with the appropriate step in the accounting cycle.

Exercise 14

Listed below are the steps in the accounting cycle:

1. Analyze business transactions.

2. Journalize the transactions.

3. Post to general ledger accounts.

4. Prepare a trial balance.

5. Journalize and post adjusting entries.

6. Prepare an adjusted trial balance.

7. Prepare financial statements.

8. Journalize and post closing entries.

9. Prepare a post-closing trial balance.

Instructions

Beside each step determine if the step can be performed daily (D), periodically (P) such as monthly, quarterly, or annually, or only performed annually (A).

Exercise 15

As Jason Makela was doing his year-end accounting, he noticed that the bookkeeper had made errors in recording several transactions. The erroneous transactions are as follows:

1. A cheque for $900 was issued for supplies previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $900.

2. A cheque for $680 was received as payment on account. The bookkeeper debited Accounts Payable for $860 and credited Accounts Receivable for $860.

3. When making the entry to record the year's depreciation expense, the bookkeeper debited Accumulated Depreciation for $3,500 and credited Cash for $3,500.

4. When accruing the interest on a note payable, the bookkeeper debited Cash for $200 and credited Interest Payable for $200.

Instructions

Prepare the appropriate correcting entries. (Do not reverse the original entries.)

Exercise 16

The following errors were made in April 2021 by the accountant for Amanda’s Cleaning Services:

1. Equipment purchased for $4,600 was entered as a debit to Cash and a credit to Accumulated Depreciation—Equipment.
2. A payment was made to the telephone company for $195. It was a payment for the March telephone bill that had been recorded as Telephone Expense in March. The accountant recorded the April payment as a debit to Telephone Expense and a credit to Cash.
3. A customer paid a deposit for work that is to be completed in May 2021 in the amount of $500. The accountant recorded the deposit as a debit to Cash and a credit to Service Revenue.
4. Bank service charges were recorded as Debit Cash and Credit Bank Charges Expense for $52.

Instructions

Prepare the correcting entries for these errors at April 30, 2021.

Exercise 17

An examination of the accounts of Southpool Company for the month of June revealed the following errors after the transactions were journalized and posted:

1. A cheque for $750 from Lee Thompson , a customer on account, was debited to Cash $750 and credited to Service Revenue $750.

2. A payment for Advertising Expense costing $520 was debited to Utilities Expense $250 and credited to Cash $250.

3. A bill for $640 for office supplies purchased on account was debited to Office Equipment $460 and credited to Accounts Payable $460.

4. A payment on account from a customer was credited to Cash $450 and debited to Accounts Receivable $450.

5. A new computer purchased for $5,500 was recorded as a debit to Cash of $5,500 and a credit to Repairs and Maintenance Expense of $5,500.

Instructions

Prepare correcting entries for each of the above, assuming the erroneous entries are not reversed. Explain how the transaction as originally recorded affected profit for the month of June.

Exercise 18

The new accountant for Wilson’s Giftware was in a hurry to record the transactions for the month of March, and made the following errors:

1. February utilities of $560 had been recorded as an Account Payable in February. When the account was paid in March, the accountant recorded the payment as a debit to Utilities Expense and a credit to Cash.
2. March 15^th salaries totalling $4,750 were recorded as a debit to Supplies instead of to Salaries Expense.
3. A customer payment in the amount of $1,200 was credited to Accounts Receivable. However, the sale had never been invoiced or recorded and was a cash sale.
4. Samra Wilson withdrew $800 for personal use. The accountant recorded the entry as a debit to Cash and a credit to S. Wilson, Drawings.

Instructions

a) For each of the four errors, indicate the effect of the error on the balance sheet and income statement, indicating whether the assets, liabilities, owner’s equity, revenue, expenses, and profit are overstated (O), understated (U), or not affected (NA). Use the table below for your answer.

b) For each of the four errors, prepare the correcting entries required at March 31.

Exercise 19

When preparing the December 31 year-end financial statements for Bruce Productions , the following errors were discovered:

1. On January 1, equipment was purchased for $10,000 and was expected to have a useful life of 4 years. The accountant recorded depreciation expense (in the correct accounts) as $250.
2. A bank loan of $9,000 was taken on December 1, and the funds were deposited directly to Bruce Production’s ’s bank account. The accountant recorded the deposit as a debit to Cash and a credit to Revenue. The loan is at 6% and no interest has yet been paid or recorded.
3. A customer payment in the amount of $450 was credited to Accounts Receivable and debited to Cash in the amount of $540.
4. Salaries expenses of $2,200 were recorded as a credit to Cash and a debit to Telephone Expense.
5. A payment of $3,500 made to a supplier on account was debited to Supplies instead of to Accounts Payable. This error was discovered before Supplies expense was adjusted to the year-end actual balance.

Instructions

a) For each of the errors, indicate the effect of the error on the balance sheet and income statement, indicating whether the assets, liabilities, owner’s equity, revenue, expenses, and profit are overstated (O), understated (U), or not affected (NA). Use the table below for your answer.

b) For each of the errors, prepare the correcting entries required at December 31.

Exercise 20

Andrea Zowkewych, CPA, was asked by Jeff Scott to review the accounting records and prepare the financial statements for his antique shop for the month ended January 31. Andrea reviewed the records and found three errors:

1. Cash paid on accounts payable for $830 was recorded as a debit to Accounts Payable $380 and a credit to Cash $380.

2. The purchase of supplies on account for $500 was debited to Equipment $500 and credited to Accounts Payable $500.

3. Jeff withdrew cash for $2,500 and the bookkeeper debited Accounts Receivable for $250 and credited Cash $250.

Instructions

Prepare an analysis of each error showing the

a) incorrect entry.

b) correct entry.

c) correcting entry.

Exercise 21

The following errors were discovered in May 2021 by the controller for Caribbean Networks:

1. Caribbean collected $6,000 of the account due from a client. This transaction was recorded as a debit to Cash and a credit to Communication Revenue.

2. On May 6, routine maintenance expenses costing $600 to service the office computer equipment was recorded as a debit to Computer Equipment and a credit to Cash.

3. On May 19, cash of $12,000 was received in advance by a client. Cash was debited and Communications Revenue was credited for $12,000.

4. Caribbean purchased equipment costing $550 on account. This transaction was recorded as a debit to Supplies and a credit to Accounts Payable for $5,500.

5. The Communication Revenue account was credited for $900 of interest earned on an investment.

Instructions

Journalize the correcting entries required on May 31, 2021.

Exercise 22

The accountant of Narly Outdoor Store, a sole proprietorship owned and managed by Ron Narly, discovered the following errors in December 2021:

1. Narly signed a note with the bank to advance funds of $8,000 for the purchase of a new store display sign. This transaction was recorded as a debit to Advertising Expense and a credit to Accounts Payable.

2. Ron withdrew cash of $2,200 from the business bank account for personal use and this amount was recorded as Salaries Expense.

3. On December 6, Narly made a sale of $1,200 that consisted of cash of $200 and the balance on account. This transaction was recorded as a debit to Cash for $1,000, debit to Accounts Receivable for $200, and a credit to Sales Revenue for $1,200.

4. Narly purchased equipment costing $4,600 on account. This transaction was recorded as a debit to Accounts Receivable and a credit to Equipment for $4,600.

Instructions

Journalize the correcting entries required on December 31, 2021.

Exercise 23

The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets.

1. Current assets
2. Investments
3. Property, plant, and equipment
4. Intangible assets
5. Current liabilities
6. Non-current liabilities
7. Owner’s equity
8. Not on the balance sheet

_____ 1. Accumulated Depreciation _____ 6. Inventory

_____ 2. S. Peters, Capital _____ 7. Patents

_____ 3. Interest Expense _____ 8. Prepaid Interest

_____ 4. Salary Payable _____ 9. Mortgage Payable

_____ 5. Owner’s Capital _____ 10. Land Held for Investment

Instructions

In the blank next to each account, write the letter indicating to which category it belongs.

Exercise 24

A list of financial statement items for Duck Company at November 30, 2021 includes the following:

Accounts receivable $14,500 Prepaid insurance $3,400

Cash 18,400 Supplies 1,800

Short-term investments 6,200

Instructions

Prepare the current assets section of the balance sheet listing the items in the sequence traditionally followed by Canadian companies.

Exercise 25

The adjusted trial balance for Mosley’s Mosaic Tiles at December 31, 2021 is as follows:

Mosley Mosaic Tiles

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $31,400

Accounts receivable 26,500

Prepaid insurance 2,000

Prepaid rent 5,000

Supplies 3,330

Equipment 17,500

Accumulated depreciation-equipment $5,200

Furniture 25,000

Accumulated depreciation-furniture 4,250

Accounts payable 8,400

Salary payable 12,200

Unearned revenue 6,700

Mortgage payable (due in 2040) 35,000

M. Mosaic, drawings 15,000

M. Mosaic, capital 58,567

Service revenue 33,500

Salary expense 24,387

Depreciation expense 4,500

Rent expense 5,500

Insurance expense 2,200

Supplies expense 700

Advertising expense 800 ________

$163,817 $163,817

Instructions

Use the above adjusted trial balance to prepare a classified balance sheet as at December 31, 2021.

Exercise 26

The following information is available for Juxton Company for the year ended December 31, 2021:

Accounts payable $ 2,700

Building not currently used 9,500

Accumulated depreciation-equipment 4,000

K. Juxton, capital 20,800

Intangible assets 2,500

Notes payable (due in 5 years) 7,500

Accounts receivable 1,500

Cash 2,600

Short-term investments 1,000

Equipment 17,500

Long-term investments 400

Instructions

Use the above information to prepare a classified balance sheet as at December 31, 2021.

Exercise 27

The following are the adjusted account balances of Sally’s Salon and Spa as at June 30, 2021, the business year end. The accounts are listed in alphabetical order, and all are in their normal balance.

Accounts payable $ 2,340 Note receivable $ 5,000

Accounts receivable 500 Prepaid insurance 620

Accumulated depreciation - computers 2,000 Rent expense 24,000

Accumulated depreciation - shop equipment 6,320 S. Juul-Hansen, capital 11,760

Cash 3,250 S. Juul-Hansen, drawings 12,000

Computers 6,000 Service revenue 125,600

Depreciation expense 4,160 Shop equipment 15,800

Insurance expense 2,000 Supplies 1,190

Interest expense 100 Supplies expense 4,560

Note payable 14,000 Wages expense 82,840

Additional information:

The note payable is due January 31, 2022.

During the year, Sally Juul-Hansen invested $10,000.

Instructions

Prepare the income statement, statement of owner’s equity, and classified balance sheet for Sally’s June 30, 2021 year end in good format.

Exercise 28

The adjusted trial balance of Special Event Security Services (SESS), an unincorporated business owned and operated by Jim Popovich, is provided below:

SPECIAL EVENT SECURITY SERVICES

Adjusted Trial Balance

September 30, 2021

Debit Credit

Cash $ 10,000

Accounts receivable 8,500

Prepaid insurance 1,100

Land 50,000

Building 260,000

Accumulated depreciation—building $ 31,200

Equipment 18,000

Accumulated depreciation—equipment 7,200

Accounts payable 15,500

Accrued interest 500

Unearned revenue 25,000

Note payable 100,000

J. Popovich, capital 48,150

J. Popovich, drawings 36,000

Service revenue 420,000

Depreciation expense 2,350

Insurance expense 6,600

Interest expense 5,000

Rent expense 60,000

Wages expense 190,000 _______

$ 647,550 $ 647,550

Additional information:

The note payable is due in annual instalments of $10,000 principal plus interest. The next payment is due August 31, 2022.

Jim Popovich invested $20,000 on June 1, 221.

Instructions

Prepare, in good format, the income statement, statement of owner’s equity, and classified balance sheet for SESS for the year ended September 30, 2021.

Exercise 29

The adjusted trial balance for Poor Company at December 31, 2021 is as follows:

POOR COMPANY

Adjusted Trial Balance

December 31, 2021

Debit Credit

Accounts Receivable $ 21,000

Supplies 4,600

Prepaid Rent 2,200

Equipment 110,000

Accumulated Depreciation—Equipment $ 17,000

Bank Overdraft 6,000

Accounts Payable 9,800

Salaries Payable 6,400

Unearned Revenue 6,000

T. Poor, Capital 99,000

T. Poor, Drawings 19,500

Service Revenue 102,800

Promotion Expense 17,000

Depreciation Expense 10,000

Insurance Expense 5,000

Rent Expense 15,000

Salaries Expense 36,700

Maintenance Expense 6,000 _______

$247,000 $247,000

Instructions

a) Calculate the balance of T. Poor, Capital that would appear on a balance sheet at December 31, 2021.

b) Prepare a classified balance sheet for Poor Company at December 31, 2021.

c) Calculate working capital and the current and acid-test ratios for Poor Company.

Exercise 30

The adjusted trial balance for DVD Concepts at December 31, 2021 is as follows:

DVD CONCEPTS

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $ 8,000

Accounts Receivable 16,000

Supplies 6,000

Prepaid Insurance 8,000

Computer Equipment 210,000

Accumulated Depreciation—Computer Equipment $ 25,000

Accounts Payable 20,000

Note Payable 71,000

Salaries Payable 3,000

J. Yan, Capital 109,000

J. Yan, Drawings 12,000

DVD Rental Revenue 133,000

Advertising Expense 26,000

Depreciation Expense 12,000

Insurance Expense 4,000

Rent Expense 15,000

Salaries Expense 38,000

Supplies Expense 6,000 _______

$361,000 $361,000

Instructions

a) Calculate the balance of J. Yan, Capital that would appear on a balance sheet at December 31, 2021.

b) Prepare a classified balance sheet for DVD Concepts at December 31, 2021 assuming the note payable is payable on November 30, 2023.

c) Calculate working capital and the current and acid-test ratios for DVD Concepts.

Exercise 31

The adjusted trial balance for Novakowski Company as at December 31, 2021 is as follows:

NOVAKOWSKI COMPANY

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $20,000

Accounts receivable 4,000

Prepaid insurance 7,000

Supplies 4,500

Equipment 48,000

Accumulated depreciation—equipment $ 4,800

Patents 7,500

Accumulated amortization—patent 1,500

Accounts payable 21,500

Bonds payable, due in 2023 18,000

M. Novakowski, capital 46,000

M. Novakowski, drawings 4,200

Service revenue 23,400

Salaries expense 5,200

Depreciation and amortization expense 6,300

Insurance expense 5,000

Interest expense 3,500 ______

$115,200 $115,200

Instructions

a) Prepare a classified balance sheet for Novakowski Company.

b) Calculate working capital and the current and acid-test ratios for Novakowski Company.

Exercise 32

The following items are taken from the adjusted trial balance of Sutch Video Productions at December 31, 2021:

Accounts Payable $ 15,000

Accounts Receivable 11,000

Accumulated Depreciation—Video Equipment 28,000

Advertising Expense 21,000

Cash 24,000

Depreciation Expense 12,000

J. Sutch, capital 102,000

J. Sutch, drawings 15,000

Insurance Expense 3,000

Note Payable (due 2023) 70,000

Prepaid Insurance 6,000

Rent Expense 17,000

Salaries Expense 34,000

Salaries Payable 3,000

Service Revenue 145,000

Supplies 4,000

Supplies Expense 6,000

Video Equipment 210,000

Instructions

a) Calculate the profit.

b) Calculate the balance of owner’s equity that would appear on a balance sheet at December 31, 2021.

c) Prepare a classified balance sheet for Sutch Video Productions at December 31, 2021.

d) Calculate the working capital and the current ratio. Which of the two measures is preferable for comparing Sutch’s liquidity with competitors’?

e) Calculate the acid-test ratio for the company. What could the company do to improve this ratio?

Exercise 33

The following items are taken from the financial statements of Maxon Services for 2021:

Accounts payable $18,500

Accounts receivable 4,000

Accumulated depreciation—equipment 4,800

Accumulated amortization—patents 10,000

Bonds payable, due 2027 18,000

Cash 24,000

M. Maxon, capital 41,000

Advertising expense 3,000

Depreciation and amortization expense 4,800

M. Maxon, drawings 5,300

Equipment 48,000

Interest expense 2,500

Patents 17,500

Salaries expense 15,200

Service revenue 36,500

Supplies 4,500

Instructions

a) Prepare an income statement and a classified balance sheet for Maxon Services.

b) Calculate the following ratios and values:

1. Current ratio

2. Working capital

3. Acid-test ratio

Exercise 34

The adjusted account balances of Saint Company at December 31, 2021 are as follows:

Accounts receivable $16,000 Bank overdraft $ 14,000

Notes receivable 13,000 Accounts payable 6,000

Prepaid insurance 6,000 Notes payable 10,000

Machinery 50,000 Accumulated depreciation—

Depreciation expense 7,000 machinery 16,000

G. Saint, drawings 4,500 Service revenue 29,000

Promotion expense 600 Interest revenue 2,000

Rent expense 3,000 G. Saint, capital 18,000

Salary expense 10,200 Unearned revenue 16,000

Insurance expense 700

$111,000 $111,000

Instructions

a) Calculate the balance of G. Saint, Capital that would appear on a balance sheet at December 31, 2021.

b) Prepare a classified balance sheet for Saint Company at December 31, 2021. Assume that the note receivable is expected to be collected in 120 days and the note payable is due October 1, 2023.

c) Calculate the working capital and the current and acid-test ratios for Saint Company. Also, briefly interpret each ratio result.

Exercise 35

The following data are taken from the financial statements of Keanan Company as at the end of the year 2021. The data are in alphabetical order.

Accounts Payable $28,000 Profit 48,000

Accounts Receivable 66,000 Supplies 8,600

Cash 54,000 Total assets 250,000

Other current liabilities 17,000 Total liabilities 200,000

Prepaid Insurance 2,000 Wages payable 5,000

Instructions

a) Calculate Keanan Company’s working capital, current ratio, and acid-test ratio.

b) Explain what additional information you would require in order to use the three measures to evaluate Keanan’s liquidity.

Exercise 36

Kean’s Biotechnologies is located in Kelowna, British Columbia. It is a leader in the development of computer adapted bio-technical scanning and the pre-eminent company operating in this industry. The following data (in millions) were taken from Kean’s most recent financial statements.

December 31 2021 2020 2019

Current assets $87,406 $66,847 $62,441

Current liabilities 26,242 18,986 16,841

Instructions

a) Calculate the working capital and current ratio for each year.

b) Discuss Kean’s liquidity in 2021 compared to the previous two years.

c) Compare the purpose of the current ratio to the acid-test ratio and explain what additional information would be needed to calculate the acid-test ratio for Kean’s Biotechnologies.

Exercise 37

The following data is taken from the financial statements of Dellmont Company:

Accounts payable $28,000 Profit $ 50,000

Accounts receivable 65,000 Service revenue 500,000

Cash 56,000 Salaries payable 7,000

Other current liabilities 20,000 Owners equity 169,000

Prepaid insurance 2,500 Total assets 325,000

Additional information:

Information taken from the financial statements of Dellmont’s major competitor:

Current assets $ 250,000

Current liabilities 131,000

Service revenue 980,000

Information taken from industry publications:

Average current ratio is 2.5:1

Average acid-test ratio is 1.9:1

Instructions

Calculate Dellmont’s working capital and current and acid-test ratios, and comment on the company’s liquidity.

Exercise 38

The work sheet for Anger Company appears below.

Adjustment data:

a) A physical count revealed that $3,300 of supplies remained on hand at year end.

b) $1,100 of insurance previously recorded as prepaid has lapsed during the year.

c) Depreciation charged on equipment totalled $600.

d) Salaries expense incurred at December 31 but not yet paid amounted to $1,200.

e) Unearned revenue of $1,350 was considered earned during the year.

Instructions

Using the above information, complete the following work sheet for Anger Company for the year ended December 31, 2021.

Exercise 39

The work sheet for Plateo Rental Company appears below (in thousands).

Adjustment data:

a) Prepaid rent expired during August, $2.

b) Depreciation expense on office equipment for the month of August, $8.

c) Supplies on hand on August 31 amounted to $6.

d) Salaries expense incurred at August 31 but not yet paid amounted to $12.

Instructions

Using the adjustment data, complete the work sheet. Add any accounts that are necessary.

Exercise 40

The account balances appearing on the trial balance were taken from the general ledger of Giovanni's Copy Shop at June 30. Additional information for the month of June that has not yet been recorded in the accounts is as follows:

a) A physical count of supplies indicates $600 on hand at June 30.

b) The amount of insurance that expired in the month of June was $400.

c) Depreciation on equipment for June was $800.

d) Rent owed on the copy shop for the month of June was $1,000 but will not be paid until July.

Instructions

Using the above information, complete the following work sheet for Giovanni's Copy Shop for the month of June.

Exercise 41

The unadjusted trial balance of Jackson’s Web Services at December 31, 2021 follows.

Additional data regarding the accounts:

1. Actual supplies on hand are $750.

2. Depreciation expense for 2021 has not yet been recorded, but has been calculated as $1,600.

3. Amounts recorded as Unearned Revenue are for services that were provided in December. No additional work needs to be done for these customers.

4. Salaries expense of $1,000 for the last week of December has not been paid yet, and should be recorded as an Account Payable.

Instructions

a) Complete the work sheet for December 2021.

b) Calculate profit for the year.

c) Calculate the balance in E. Jackson, Capital at December 31, 2021 after closing entries are made.

Exercise 42

The unadjusted trial balance for Lavish Company at December 31, 2021 is as follows:

LAVISH COMPANY

Adjusted Trial Balance

December 31, 2021

Debit Credit

Accounts Receivable …………………………………………………….. $ 21,000

Supplies 4,600

Prepaid Rent 2,200

Equipment 110,000

Accumulated Depreciation—Equipment $ 17,000

Bank Overdraft 6,000

Accounts Payable 9,800

Notes Payable 6,400

Unearned Revenue 6,000

K. Lavish, Capital 99,000

K. Lavish, Drawings 19,500

Service Revenue 102,800

Promotion Expense 27,000

Insurance Expense 5,000

Rent Expense 15,000

Salaries Expense 36,700

Maintenance Expense 6,000 _______

$247,000 $247,000

The following information was prepared by Lavish Company’s controller to help prepare the December 31, 2021 adjusting entries:

1. The company has earned revenue totalling $6,500 that has not been invoiced.

2. The expired portion of prepaid rent is $700.

3. The earned portion of the Unearned Revenue at December 31, 2021 is $2,200.

4. Depreciation expense for the equipment has been calculated as $11,000.

5. Employees have earned but have not been paid salaries of $5,800.

Instructions

a) Prepare the adjusting entries that Lavish Company should record at the year ended December 31, 2021.

b) Complete the work sheet in the form provided below.

c) Prepare the appropriate reversing entries relating to the adjustments made in a) above.

Exercise 43

The following are selected unadjusted account balances as at December 31, 2021, the year end of Joseph’s Law Firm:

Accounts receivable $50,600

Prepaid insurance 12,600

Salaries payable -0-

Service revenue 456,000

Insurance expense 8,200

Salaries expense 115,000

Additional information obtained from a review of the law firm’s records:

1. Work done for clients in December that will be invoiced in January is $9,800.

2. Prepaid insurance includes $12,600 paid for a one-year policy that was effective December 1, 2021.

3. Salaries are paid monthly on the 15^th of each month. The salaries earned by employees from December 16 to 31 total $5,000.

Instructions

a) Prepare the December 31, 2021 adjusting entries required for these items.

b) Prepare the reversing entries required for January 1, 2022.

Exercise 44

Expo Company prepared the following adjusting entries at year end on December 31, 2021:

1. Interest Expense 300

Interest Payable 300

2. Unearned Revenue 1,500

Service Revenue 1,500

3. Insurance Expense 1,200

Prepaid Insurance 1,200

4. Interest Receivable 150

Interest Revenue 150

5. Supplies Expense 250

Supplies 250

6. Wages Expense 3,000

Wages Payable 3,000

In an effort to minimize errors in recording transactions, Expo Company utilizes reversing entries.

Instructions

Prepare reversing entries on January 1, 2022 where appropriate.

Exercise 45

Transaction and adjustment data for Portiski Company for the year ended September 30 (newly formed September 1) is as follows:

1. September 24 (initial salary entry): $12,000 of salaries earned between September 1 and September 24 are paid.

2. September 30 (adjusting entry): Salaries earned between September 25 and September 30 are $5,000. These will be paid in the October 8 payroll.

3. October 8 (subsequent salary entry): Total salary payroll amounting to $9,000 was paid.

Instructions

Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversing entries are utilized by the company.

Assume no reversing entries Assume reversing entries

a) Initial Salary Entry

Sep 24

b) Adjusting Entry

Sep 30

c) Closing Entry

Sep 30

d) Reversing Entry

Oct 1

e) Subsequent Salary Entry

Oct 8

Exercise 46

On December 31, 2021, selected accounts of Brolin Personnel Agency, after all year-end adjusting entries, show the following data:

Commission Receivable Commission Revenue

12/31/21 8,000 12/31/21 80,000

Interest Expense Interest Payable

12/31/21 10,500 12/31/21 2,500

Utilities Expense Accounts Payable

12/31/21 4,800 12/31/21 2,400

Analysis indicates that adjusting entries were made for

1. $8,000 of commission revenue earned but not billed,

2. $2,500 of accrued interest, and

3. $2,400 of utilities expense accrued.

Instructions

a) Prepare the closing entries for revenue and expenses at December 31, 2021.

b) Prepare the reversing entries on January 1, 2022.

c) Prepare the entries to record (1) the collection of the accrued commission on January 8, (2) payment of the utility bill on January 10, and (3) payment of all the interest due ($3,100) on January 15.

d) What is the interest expense for the month of January 2022, assuming debt was retired on January 15?

Exercise 47

On August 31, 2021 selected accounts of Lorraine’s Real Estate, after all year-end adjusting entries, show the following data:

Commission Receivable Commission Revenue

08/31/21 8,000 08/31/21 80,000

Interest Receivable Interest Revenue

08/31/21 2,500 08/31/21 10,500

Telephone Expense Accounts Payable

08/31/21 8,600 08/31/21 1,600

Analysis indicates that adjusting entries were made for

1. $8,000 of commission revenue earned but not billed,

2. $2,500 of accrued interest, and

3. $1,600 of telephone expense accrued.

Instructions

a) Prepare the closing entries at August 31, 2021.

b) Prepare the reversing entries on September 1, 2021.

c) Prepare the entries to record (1) the collection of the accrued commission on September 8, (2) payment of the telephone bill on September 10, and (3) receipt of all the interest due ($4,200) on September 15.

d) What is the interest revenue for the month of September 2021, assuming the principal balance was fully repaid on September 15?