DEMONSTRATION PROBLEM (S.O. 1, 2, and 6)
Gardin Company's December 31, 2006 trial balance is as follows:
GARDIN COMPANY
December 31, 2006
Trial Balance
Debit Credit
Cash............................................................................................ $16,000
Accounts Receivable.................................................................. 4,500
Prepaid Insurance....................................................................... 2,500
Supplies....................................................................................... 3,000
Equipment................................................................................... 41,500
Accounts Payable....................................................................... $ 5,500
Unearned Revenue..................................................................... 1,500
Notes Payable............................................................................. 28,000
Common Stock........................................................................... 6,000
Retained Earnings, 1/1/06........................................................... 18,000
Dividends..................................................................................... 2,500
Revenue...................................................................................... 16,000
Salaries Expense........................................................................ 3,700
Utilities Expense.......................................................................... 400
Marketing Expense..................................................................... 900 _
Totals................................................................................ $75,000 $75,000
Gardin Company needs to make the year-end adjusting entries concerning the following data:
a. Insurance expires at the rate of $100 per month.
b. There are $2,400 of supplies on hand at December 31.
c. Monthly depreciation is $200 on the equipment.
d. Interest of $2,800 has accrued on the Notes Payable.
e. Unearned revenue amounted to $700 on December 31.
f. Accrued salaries are $3,200.
Instructions
(a) Prepare a work sheet.
(b) Prepare a classified balance sheet assuming $20,000 of the notes payable are long-term.
(c) Journalize the closing entries.
SOLUTION TO DEMONSTRATION PROBLEM
(a)
GARDIN COMPANY
Work Sheet
For the Year Ended Dec. 31, 2006
_________________________________________________________________________________________________________
Adjusted Income
Account Titles Trial Balance Adjustments Trial Balance Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
___________________________________________________________________________________________________________
Cash 16,000 16,000 16,000
Accounts Receivable 4,500 4,500 4,500
Prepaid Insurance 2,500 (a) 1,200 1,300 1,300
Supplies 3,000 (b) 600 2,400 2,400
Equipment 41,500 41,500 41,500
Accounts Payable 5,500 5,500 5,500
Unearned Revenue 1,500 (e) 800 700 700
Notes Payable 28,000 28,000 28,000
Common Stock 6,000 6,000 6,000
Retained Earnings 18,000 18,000 18,000
Dividends 2,500 2,500 2,500
Revenue 16,000 (e) 800 16,800 16,800
Salaries Expense 3,700 (f) 3,200 6,900 6,900
Utilities Expense 400 400 400
Marketing Expense 900 ______ 900 900
Totals 75,000 75,000
Insurance Expense (a) 1,200 1,200 1,200
Supplies Expense (b) 600 600 600
Depreciation Expense (c) 2,400 2,400 2,400
Accum. Depr.—Equip. (c) 2,400 2,400 2,400
Interest Expense (d) 2,800 2,800 2,800
Interest Payable (d) 2,800 2,800 2,800
Salaries Payable ______ (f) 3,200 ______ _3,200 ______ ______ ______ __ 3,200
Totals 11,000 11,000 83,400 83,400 15,200 16,800 68,200 66,600
Net Income 1,600 ______ ______ 1,600
Totals 16,800 16,800 68,200 68,200
(b) GARDIN COMPANY
Balance Sheet
December 31, 2006
Assets
Current assets
Cash.............................................................................................. $16,000
Accounts Receivable.................................................................... 4,500
Prepaid Insurance......................................................................... 1,300
Supplies........................................................................................ 2,400
........ Total current assets............................................................. 24,200
Property, plant, and equipment
Equipment..................................................................................... $41,500
Less: Accumulated depreciation¾equipment............................. 2,400 39,100
........ Total assets.......................................................................... $63,300
Liabilities and Stockholders' Equity
Current liabilities
Notes Payable.............................................................................. $ 8,000
Accounts Payable......................................................................... 5,500
Unearned Revenue...................................................................... 700
Salaries Payable........................................................................... 3,200
Interest Payable............................................................................ 2,800
........ Total current liabilities.......................................................... 20,200
Long-term liabilities
Notes Payable.............................................................................. 20,000
........ Total liabilities....................................................................... 40,200
Stockholders' equity
Common Stock............................................................................ 6,000
Retained Earnings........................................................................ 17,100*
Total liabilities and stockholders' equity............................... $63,300
*Retained Earnings, $18,000 less dividends $2,500 and plus net income $1,600.
(c)
Dec. 31 Revenue............................................................................ 16,800
Income Summary....................................................... 16,800
(To close revenue account)
31 Income Summary............................................................. 15,200
Salaries Expense........................................................ 6,900
Utilities Expense.......................................................... 400
Marketing Expense..................................................... 900
Insurance Expense..................................................... 1,200
Supplies Expense........................................................ 600
Depreciation Expense................................................. 2,400
Interest Expense......................................................... 2,800
(To close expense account)
Dec. 31 Income Summary............................................................. 1,600
Retained Earnings....................................................... 1,600
(To close net income to retained earnings)
31 Retained Earnings............................................................. 2,500
Dividends..................................................................... 2,500
(To close dividends to retained earnings)
REVIEW QUESTIONS AND EXERCISES
TRUE¾FALSE
Indicate whether each of the following is true (T) or false (F) in the space provided.
_____ 1. (S.O. 1) A work sheet is not a permanent accounting record.
_____ 2. (S.O. 1) If total debits exceed total credits in the income statement columns on a work sheet, net income has resulted.
_____ 3. (S.O. 1) After a work sheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.
_____ 4. (S.O. 1) A work sheet is not a journal, but it can be used as a basis for posting to ledger accounts.
_____ 5. (S.O. 2) All balance sheet accounts are considered to be permanent or real ac-counts.
_____ 6. (S.O. 2) After the closing entries are posted, all nominal accounts will have zero balances.
_____ 7. (S.O. 2) The journalizing and posting of closing entries is a required step in the ac-counting cycle.
_____ 8. (S.O. 2) To close net income to retained earnings, Income Summary is debited and Retained Earnings is credited.
_____ 9. (S.O. 2) Revenue accounts are closed by debiting the individual revenue accounts and crediting Income Summary for total revenues.
_____ 10. (S.O. 2) In closing, Dividends is credited and Income Summary is debited.
_____ 11. (S.O. 2) Income Summary is used in preparing both adjusting and closing entries.
_____ 12. (S.O. 3) The post-closing trial balance will contain only retained earnings statement accounts and balance sheet accounts.
_____ 13. (S.O. 3) The preparation of reversing entries is an optional step in the accounting cycle.
_____ 14. (S.O. 5) Correcting entries are only made at the end of an accounting period.
_____ 15. (S.O. 6) The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.
_____ 16. (S.O. 6) Current assets are listed in the order of liquidity.
_____ 17. (S.O. 6) Long-term investments are resources that are not expected to be converted into cash within one year or the operating cycle, whichever is longer.
_____ 18. (S.O. 6) Property, plant, and equipment are tangible assets that are reported at market value in the balance sheet.
_____ 19. (S.O. 6) Current liabilities must be expected to be payable out of existing current assets or through the creation of other current liabilities.
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