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CH.5

T/F
1. A work sheet is a mandatory form that must be prepared along with an income
statement and balance sheet.
2. If a work sheet is used, financial statements can be prepared before adjusting
entries are journalized.
3. If total credits in the income statement columns of a work sheet exceed total debits,
the enterprise has net income.
4. It is not necessary to prepare formal financial statements if a work sheet has been
prepared because financial position and net income are shown on the work sheet.
5. The adjustments on a work sheet can be posted directly to the accounts in the
ledger from the work sheet.
6. The adjusted trial balance columns of a work sheet are obtained by subtracting the
adjustment columns from the trial balance columns.
7. The balance of the depreciation expense account will appear in the income
statement debit column of a work sheet.
8. Closing entries are unnecessary if the business plans to continue operating in the
future and issue financial statements each year.
9. The owner's drawing account is closed to the Income Summary account in order
to properly determine net income (or loss) for the period.
10. After closing entries have been journalized and posted, all temporary accounts in
the ledger should have zero balances.
11. Closing revenue and expense accounts to the Income Summary account is an
optional bookkeeping procedure.
12. Closing the drawing account to Capital is not necessary if net income is greater
than owner's drawings during the period.
13. The owner's drawing account is a permanent account whose balance is carried
forward to the next accounting period.
14. Closing entries are journalized after adjusting entries have been journalized.
15. The amounts appearing on an income statement should agree with the amounts
appearing on the post-closing trial balance.
16. Retailers and wholesalers are both considered merchandising enterprises.
17. The steps in the accounting cycle are different for a merchandising company than
for a service enterprise.
18. Sales minus operating expenses equals gross profit.
19. Under a perpetual inventory system, the cost of goods sold is determined each
time a sale occurs.
20. A periodic inventory system requires a detailed inventory record of inventory items.
21. Freight terms of FOB Destination means that the seller pays the freight costs.
22. Freight costs incurred by the seller on outgoing merchandise are an operating
expense to the seller.
23. Sales revenues are earned during the period cash is collected from the buyer.
24. The Sales Returns and Allowances account and the Sales Discount account are
both classified as expense accounts.
25. The revenue recognition principle applies to merchandising companies by
recognizing sales revenues when they are earned.
26. Sales Allowances and Sales Discounts are both designed to encourage customers
to pay their accounts promptly.
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27. To grant a customer a sales return, the seller normally prepares a debit
memorandum.
28. If net sales are $1,000,000 and cost of goods sold is $700,000, the gross profit
rate is 30%.
MCQ

1. An enterprise which sells goods to customers is known as a


a. proprietorship. c. retailer.
b. corporation. d. service firm.
2. Which of the following would not be considered a merchandising operation?
a. Retailer c. Service firm
b. Wholesaler d. Trading concern
3. A merchandiser that sells directly to consumers is a
a. retailer. c. broker.
b. wholesaler. d. service enterprise.
4. Two categories of expenses in merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
5. The primary source of revenue for a wholesaler is
a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.
6. Sales revenue less cost of goods sold is called
a. gross profit. c. net income.
b. net profit. d. marginal income.
7. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin. c. gross profit on sales.
b. net income. d. net margin.
8. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
9. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
10. A perpetual inventory system would likely be used by a(n)
a. automobile dealership. c. drugstore.
b. hardware store. d. convenience store.
11. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis. c. on an annual basis.
b. on a monthly basis. d. with each sale.
12. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
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d. uses a perpetual inventory system.


13. A company shows the following balances:
Sales $1,000,000
Sales Returns and Allowances 175,000
Sales Discounts 25,000
Cost of Goods Sold 600,000
What is the gross profit percentage?
a. 60% c. 40%
b. 75% d. 25%
(800,000 net sales - 600,000 Cost of Goods Sold) / 800,000 X 100 =25%
14. The information for preparing a trial balance on a work sheet is obtained from
a. financial statements.
b. general ledger accounts.
c. general journal entries.
d. business documents.
15. After the adjusting entries are journalized and posted to the accounts in the general
ledger, the balance of each account should agree with the balance shown on the
a. adjusted trial balance.
b. post-closing trial balance.
c. the general journal.
d. adjustment columns of the work sheet.
16. If the total debit column exceeds the total credit column of the income statement
columns on a work sheet, then the company has
a. earned net income for the period.
b. an error because debits do not equal credits.
c. suffered a net loss for the period.
d. to make an adjusting entry.
17. A work sheet is a multiple column form that facilitates the
a. identification of events.
b. measurement process.
c. preparation of financial statements.
d. analysis process.
18. Which of the following companies would be least likely to use a work sheet to
facilitate the adjustment process?
a. Large company with numerous accounts
b. Small company with numerous accounts
c. All companies, since work sheets are required under generally accepted
accounting principles
d. Small company with few accounts
19. A work sheet can be thought of as a(n)
a. permanent accounting record.
b. optional device used by accountants.
c. part of the general ledger.
d. part of the journal.
20. The account, Supplies, will appear in the following debit columns of the work sheet.
a. Trial balance
b. Adjusted trial balance
c. Balance sheet
d. All of these
21. Assuming that there is a net loss for the period, debits equal credits in all but
which section of the work sheet?
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a. Income statement columns


b. Adjustment columns
c. Trial balance columns
d. Adjusted trial balance columns
22. Adjusting entries are prepared from
a. source documents.
b. the adjustment columns of the work sheet.
c. the general ledger.
d. last year's work sheet.
10. Net income is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet debit column.
d. income statement debit column and balance sheet credit column.
23. Depreciation is the process of
a. valuing an asset at its fair market value.
b. increasing the value of an asset over its useful life in a rational and systematic
manner.
c. allocating the cost of an asset to expense over its useful life in a rational and
systematic manner.
d. writing down an asset to its real value each accounting period
24. In computing depreciation, the number of years of useful life of the asset is
a. always fixed at 15 years.
b. an estimate.
c. known with certainty.
d. always fixed at 3 years.
25. Clark Real Estate signed a five-month note payable in the amount of $40,000 on
September 1. The note requires interest at an annual rate of 12%.The amount of
interest to be accrued at the end of December is
a. $160.
b. $1,600.
c. $480.
d. $120.
26. An accumulated depreciation account
a. has a normal credit balance.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. is a contra-liability account.
27. Quirk Company purchased office supplies costing $3,000 and debited Office Supplies
for the full amount. At the end of the accounting period, a physical count of office
supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to
be made at the end of the period would be
a. Debit Office Supplies Expense, $1,600; Credit Office Supplies, $1,600.
b. Debit Office Supplies, $1,400; Credit Office Supplies Expense, $1,400.
c. Debit Office Supplies Expense, $1,400; Credit Office Supplies, $1,400.
d. Debit Office Supplies, $1,600; Credit Office Supplies Expense, $1,600.
28. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
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29. Unearned revenues are


a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.
30. Depreciation expense for a period is computed by taking the
a. original cost of an asset – accumulated depreciation.
b. depreciable cost  depreciation rate.
c. (cost of the asset –salvage)  useful life.
d. market value of the asset  useful life.
31. Which of the following is a common time period chosen by businesses as their
accounting period?
a. Daily b. Monthly c. Quarterly d. Annually
32. Net income is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet debit column.
d. income statement debit column and balance sheet credit column.
33 . Net Loss is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet debit column.
d. income statement debit column and balance sheet credit column.

Summary of Merchandising Operations


Transaction Perpetual System(inventory) periodic System(inventory)

Assume that : Account Name Dr Cr Account Name Dr Cr

Purchases, $ 3900, in term Inventory 3,900 Purchases 3,900


2/10,n/30
Account payable 3,900 Account payable 3,900

Freight in $150, (buyer pays Inventory 150 Freight in 150


Freight costs)
cash 150 cash 150
FOB shipping point

Freight out $150 (seller pays Freight-out 150 Freight-out 150


Freight costs) FOB destination
cash 150 cash 150

Purchase Return, $300 Accounts payable 300 Accounts payable 300

Inventory 300 Purchase Return 300

Purchase Allowance, $100 Accounts payable 100 Accounts payable 100

Inventory 100 Purchase Allowance 100


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Purchase Discounts=3500 x Accounts payable 3,500 Accounts payable 3,500


2/100=70
Cash 3,430 Cash 3,430
Pay Purchases cost during
discount period Inventory 70 Purchase Discount 70

Pay Purchases cost after Accounts payable 3,500 Accounts payable 3,500
discount period
Cash 3,500 Cash 3,500

Sales operations

Sales, $3,800 in term 3/9,n/45 Accounts receivable 3,800 Accounts receivable 3,800
merchandise cost $2,400.
Sales revenue 3,800 Sales revenue 3,800

Cost of goods sold 2,400 No entry

Inventory 2,400

Sales Return, $ 200, Sales returns 200 Sales returns 200


merchandise cost $140
Accounts receivable 200 Accounts receivable 200

Inventory 140 No entry

Cost of goods sold 140

Sales Allowance, $ 100, Sales Allowance 100 Sales Allowance 100

Accounts receivable 100 Accounts receivable 100

Sales Discounts, Collect cash Cash 3,395 Cash 3,395


during discount period =
3800-(200+100) x 3/100 =105 Sales discounts 105 Sales discounts 105

Accounts receivable 3,500 Accounts receivable 3,500

Collect cash after discount Cash 3,500 Cash 3,500


period
Accounts receivable 3,500 Accounts receivable 3,500

Ex1. On September 1, Segar Supply had an inventory of 15 back packs at a cost of $20
each. The company uses a perpetual inventory system. During September, the
following transactions and events occurred.
Sept. 4 Purchased 40 back packs at $20 each from Janzen, terms 2/10, n/30.
Sept. 6 Received credit of $100 for the return of 5 back packs purchased on Sept. 4
that were defective.
Sept. 9 Sold 20 back packs for $28 each to McGill Books, terms 2/10, n/30.
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Sept. 13 Sold 15 back packs for $28 each to Calvin Office Supply, terms n/30.
Sept. 14 Paid Janzen in full, less discount.
Sept. 18 collect cash from McGill Books.
Instructions
Journalize the September transactions for Segar Supply.
The answer

Sept. 4 Inventory .................................................................................. 800


Accounts Payable ............................................................. 800
Sept. 6 Accounts Payable ...................................................................... 100
Inventory ........................................................................ 100
Sept. 9 Accounts Receivable ................................................................. 560
Sales ................................................................................. 560

Cost of Goods Sold .................................................................... 400


Inventory ........................................................................ 400
Sept. 13 Accounts Receivable ................................................................. 420
Sales ................................................................................. 420
Cost of Goods Sold .................................................................... 300
Inventory ........................................................................ 300
Sept. 14 Accounts Payable ($800 – $100) ............................................... 700
............................................................. 686
.................................................. 14
Sept. 18 .............................................................. 448
...................................................... 112
Accounts Receivable ........................................................ 560

Ex .2 On April 1, the Small Bicycle Store had an inventory of 40 speed bicycles at a


cost of $150 each. During the month of April the following transactions occurred.

April. 4 Purchased 40 bicycles at a cost of $150 each from the Lyons Bicycle
Company, terms 2/10, n/30.
5 Paid freight of $ 100 on the April 4 purchase.
6 Sold 10 bicycles to Team America for $225 each, terms 2/10, n/30.
7 Received credit from the Lyons Bicycle Company for the return of 4 defective
bicycles.
13 Issued a credit memo to Team America for the return of 2 defective bicycle.
14 Paid Lyons Bicycle Company in full, less discount.
15 collect cash reminded from Team America
Instructions
1- Prepare the journal entries to record the transactions assuming the company uses
a perpetual inventory system.

2- Prepare the journal entries to record the transactions assuming the company uses
a periodic inventory system.
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Solution
(1) perpetual inventory system.
April. 4 Inventory (40 x 150) ............................................................ 6,000
Accounts Payable ...................................................... 6,000

5 Inventory ............................................................................ 100


Cash .......................................................................... 100

6 Accounts Receivable ......................................................... 2,250


Sales ......................................................................... 2,250

Cost of Goods Sold ............................................................ 1,500


Inventory ................................................................... 1,500

7 Accounts Payable (4x150) ................................................. 600


Inventory ................................................................... 600

13 Sales Returns ..................................................................... 450


Accounts Receivable ................................................. 450

Inventory ............................................................................ 300


Cost of Goods Sold ................................................... 300

14 Accounts Payable ($6,000 – $600) .................................... 5,400


Cash ($5,400  .98) ................................................... 5,292
Inventory ($5,400  .02) ............................................ 108

15 cash ($1,800 – $36) ........................................................... 1,764


Sales discounts ($1,800 x 2%) ............................................. 36
Accounts receivable ($2,250-450) ................................. 1,800

(2) periodic inventory system


Oct. 4 Purchases ........................................................................... 6,000
Accounts Payable ...................................................... 6,000

5 Freight in .............................................................................. 100


Cash .......................................................................... 100

6 Accounts Receivable ......................................................... 2,250


Sales ......................................................................... 2,250

7 Accounts Payable .............................................................. 600


Purchase Return ........................................................... 600

13 Sales Returns ..................................................................... 450


Accounts Receivable ................................................. 450

14 Accounts Payable ($6,000 – $600) .................................... 5,400


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Cash ($5,400  .98).................................................... 5,292


Purchase Discount ($5,400  .02) ................................. 108

15 cash ($1,800 – $36) ........................................................... 1,764


Sales discounts ($1,800 x 2%) ............................................. 36
Accounts receivable ($2,250-450) ................................. 1,800

Ex2. The income statement columns of Rice Company's year-end work sheet are as
follows: Income Statement

Debit Credit
Sales $520,000
Sales Returns and Allowances $ 20,000
Sales Discounts 7,000
Cost of Goods Sold 347,000
Freight-out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Store Salaries Expense 45,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 25,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the
year ended December 31, 2013
2. Determined the Gross profit rate.

solution

Income Statement
For the Year Ended December 31, 2015
Sales revenues
Sales ...................................................................... $520,000
Less: Sales returns and allowances ...................... $ 20,000
Sales discounts ........................................... ( 7,000 )
Net sales ................................................................ 493,000
Cost of goods sold ................................................... 347,000
Gross profit ............................................................ 146,000
Operating expenses
Selling expenses
Freight-out.................................................... $ 2,000
Advertising expense ..................................... 15,000
Store salaries expense ................................. 45,000
Total selling expenses ............................ 62,000
Administrative expenses
Utilities expense ........................................... 18,000
Depreciation expense .................................. 7,000
Total administrative expenses ................ 25,000
Total operating expenses ................. 87,000
Income from operations....................................................... 59,000
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Other revenues and gains


Interest revenue ................................................. 25,000
Other expenses and losses
Interest expense ................................................ 19,000 6,000
Net income ......................................................... $ 65,000
Gross profit rate = Gross profit ÷ Net sales = 146,000 ÷ 493,000 = 29.6%

Ex3. The Floyd Company gathered the following condensed data for the year
ended December 31, 2013:
Cost of goods sold $ 664,000
Net sales 1,250,000
Administrative expenses 239,000
Interest expense 58,000
Dividend revenue 38,000
Loss from employee strike 233,000
Selling expenses 45,000
Instructions
1. Prepare a single-step income statement for the year ended December 31, 2013.
2. Prepare a multiple-step income statement for the year ended December 31, 2013.

Solution

1. FLOYD COMPANY
Income Statement
For the Year Ended December 31, 2013

Revenues
Net sales
.............................................................................................. $1,250,000
Dividend revenue .......................................................................... 38,000
Total revenues ...................................................................... 1,288,000

Expenses
Cost of goods sold ........................................................................ $664,000
Selling expenses ........................................................................... 45,000
Administrative expenses ............................................................... 239,000
Interest expense ............................................................................ 58,000
Loss from employee strike ............................................................. 233,000
Total expenses ..................................................................... 1,239,000

Net income ................................................................................... $ 49,000

2. FLOYD COMPANY
Income Statement
For the Year Ended December 31, 2013

Net sales
......................................................................... $1,250,000
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Cost of goods sold ....................................................


664,000
Gross profit ............................................................... 586,000
Operating expenses
Selling expenses .............................................. $ 45,000
Administrative expenses ................................... 239,000
Total operating expenses ........................ 284,000
Income from operations............................................. 302,000
Other revenues and gains
Dividend revenue.............................................. 38,000
Other expenses and losses
Interest expense ............................................... $ 58,000
Loss from employee strike ................................ 233,000 291,000 253,000
Net income ................................................................ $ 49,000

Correcting Entries

Ex .1 On May 18, Beirut Co. purchased on account equipment costing $4500. The
transaction was journalized and posted as a debit to Equipment $450 and a credit to
Accounts Payable $450. The error was discovered on June 3,
Instructions: Correcting Entry on June 3
The answer

Incorrect entry
Equipment………………….. ................................................................................... 450
Accounts payable .................................................................................... ………..450
Correct entry
Equipment………………… .................................................................................... 4500
Accounts payable .................................................................................... ………..4500
Correcting entry
Equipment…………………. .................................................................................... 4050
Accounts payable .................................................................................... ………….4050
Ex .2 On May 18, Tripoli Co. purchased on account equipment costing $5,000. The
transaction was journalized and posted as a debit to Equipment $50,000 and a credit to
Accounts Payable $50,000. The error was discovered on June 3,
Instructions: Correcting Entry on June 3
The answer

Incorrect entry
Equipment 50,000
Accounts payable 50,000
Correct entry
Equipment 5,000
Accounts payable 5,000
Correcting entry
Accounts payable 45,000
Equipment 45,000
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Ex .3 On May 10, Rabie Co. journalized and posted a $50 cash collection on account
from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid the remaining
balance in full.

Incorrect entry
Cash 50
Service revenue 50
Correct entry
Cash 50
Accounts receivable 50

Correcting entry
Service revenue 50
Accounts receivable 50
MCQ
1. Ethics are the standards of conduct by which one's actions are judged as:
a. right or wrong. c. fair or not fair.
b. honest or dishonest. d. all of these options.
2. Combining the activities of Kellogg and General Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
3. A business organized as a separate legal entity under state law having
ownership divided into shares of stock is a
a. proprietorship. c. corporation.
b. partnership. d. sole proprietorship.
4. Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
5. Which of the following financial statements is prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
6. Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
7. Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.
8. Posting:
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a. normally occurs before journalizing.


b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.
9. A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited to Supplies and credited to Cash.
c. a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and
credited to Cash for $100.
d. a $450 payment on account is debited to Accounts Payable for $45 and credited
to Cash for $45.
10. The time period assumption states that:
a. revenue should be recognized in the accounting period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into artificial time periods.
d. the fiscal year should correspond with the calendar year.
11. One of the following statements about the accrual basis of accounting is false. That
statement is:
a. Events that change a company’s financial statements are recorded in the
periods in which the events occur.
b. Revenue is recognized in the period in which it is earned.
c. The accrual basis of accounting is in accord with generally accepted accounting
principles.
d. Revenue is recorded only when cash is received, and expenses are recorded
only when cash is paid.
12.Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which they are earned.
c. balance sheet and income statement accounts have correct balances at the end
of an accounting period.
d. all of the above.
13.Which of the following statements is incorrect concerning the adjusted trial balance?
a. An adjusted trial balance proves the equality of the total debit balances and the
total credit balances in the ledger after all adjustments are made.
b. The adjusted trial balance provides the primary basis for the preparation of
financial statements.
c. The adjusted trial balance lists the account balances segregated by assets and
liabilities.
d. The adjusted trial balance is prepared after the adjusting entries have been
journalized and posted.
14.Net loss is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet debit column.
d. income statement debit column and balance sheet credit column.
15. Cash, and other resources that are reasonably expected to be realized in cash or sold or
consumed in the business within one year or the operating cycle, are called:
a. Current assets. b. Intangible assets.
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c. Long-term investments. d. Property, plant, and equipment.


16. Patents and copyrights are
a. Current assets. b. Intangible assets.
c. Long-term investments. d. Property, plant, and
equipment.
17. Which of the following is not a long-term liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
18. In a perpetual inventory system, a return of defective merchandise by a purchaser is
recorded by crediting:
a. Purchases c. Purchase Allowance
b. Purchase Returns d. Inventory
19. The cost of goods sold is determined and recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.
20. The multiple-step income statement for a merchandiser shows each of the following
features except:
a. gross profit. c. a sales revenue section.
b. cost of goods sold. d. investing activities section.

Ex.1 The Trial Balance Columns of Work Sheet Salma company at the December 31,
2016 ( the End of the Year )
Trial Balance

Account Titles Dr Cr

Cash 400,100

Prepaid Insurance 3,100

Supplies 20,000

Land 59,000

Building 155,000

Notes Payable 100,000

Unearned Rent Revenue 5,000

Salma, Capital 515,400

Salma, Drawing 20,000

Service Revenue
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75,600
Rent Revenue
24,000
Salaries Expense
30,000
Advertising Expense
17,000
Utilities Expense
15,800

Totals 720,000 720,000


Other data:
1. Supplies Expense 15000$
1. 1,700 $ for the Insurance that has expired.
2. The Expected salvage of Building is $ 13,000 after 20 year
3. Earned 3,000$ from Unearned Rent Revenue
4. The company signed Notes Payable on 1/4/2016 at an annual rate of 12%.
Instruction: Prepare:
1. Prepare Adjusting entries at the end of year.
2. Prepare Full work sheet.
3. Prepare three main statements.
4. Closing entries.
5. Trial Balance post-closing.
The answer

1-Adjusting Journal Entries

NO Account title Dr Cr
1 Supplies Expense 15,000
Supplies 15,000
2 Insurance Expense 1,700
Prepaid Insurance 1,700
3 Depreciation Expense-Building 7,100
Accum. Depr.—Building 7,100
(155,000 -13,000 ) /20 years = 7,100
4 Unearned Rent Revenue 3,000
Rent Revenue 3,000
5 Interest Expense 9,000
Interest Payable 9,000
=100,000 x 0.12 x 9/12 =9000$
2- Work Sheet For the Year Ended December 31, 2016
Trial Balance Adjustments Adjusted Income Statement Balance Sheet
Account Titles Trial Balance

Dr Cr Dr Cr Dr Cr Expense Revenue Assets L+ O.E


s s
Cash 400,100 400,100 400,100
(2)
Prepaid Insurance 3,100 1,700 1,400 1,400
(1)
Supplies 20,000 15,000 5,000 5,000
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Land 59,000 59,000 59,000

Building 155,000 155,000 155,000

Accounts Payable 100,000 100,000 100,000


(4)
Unearned Rent 5,000 3,000 2,000 2,000
Revenue

Salma, Capital 515,400 515,400 515,400

Salma, Drawing 20,000 20,000 20,000

Service Revenue 75,600 75,600 75,600


(4)
Rent Revenue 24,000 3,000 27,000 27,000

Salaries Expense 30,000 30,000 30,000

Advertising Expense 17,000 17,000 17,000

Utilities Expense 15,800 15,800 15,800

Totals 720,000 720,000 (1)


Supplies Expense 15,000 15,000 15,000
(2)
Insurance Expense 1,700 1,700 1,700

(3)
Depr. Expense— 7,100 7,100 7,100 7,100
Building (3)
7,100 7,100
Accum. Depr.—
Building (5)
9,000 9,000 9,000
Interest Expense (5) 9,000
9,000 9,000
Interest Payable

95,600 102,600
Net Income 7,000 7,000
Totals 35,800 35,800 736,100 736,100 102,600 102,600 640,500 640,500

3. closing entries December 31, 2016


(a) Service Revenue 75,600
Rent Revenue 27,000
Income Summary ............................................................... 102,600
(b) Income Summary ……………………………………… 95,600
Salaries Expense 30,000
Advertising Expense 17,000
Utilities Expense 15,800
Supplies Expense 15000
Insurance Expense 1700
Depr. Expense—Building 7100
Interest Expense 9000
(c) Income Summary balance = Cr 102,600 – Dr 95,600 = 7000 Cr
Income Summary ................................................................................................. 7000
Salma, Capital .......................................................................................... 7000
(d) Salma, Capital ..................................................................................................... 20,000
Salma, Drawing ....................................................................................... 20,000
17

4/a) Income Statement


Salma COMPANY
Income Statement
For the Year Ended December 31, 2016
Revenues
Service Revenue 75,600
Rent Revenue 27,000
Total revenues .................................................................................. $102,600
Expenses
Salaries Expense 30,000
Advertising Expense 17,000
Utilities Expense 15,800
Supplies Expense 15000
Insurance Expense 1700
Depr. Expense—Building 7100
Interest Expense 9000
Total Expenses ( $95,600)
Net income ........................................................................................................... …….$7000

4/b) Owner's Equity Statement


Salma COMPANY
Owner's Equity Statement
For the Year Ended December 31, 2016

Salma, Capital, 1/ 1 /2016 $515,400


Add: Net Income 7000
522,400
Less: Drawings (20,000)
Salma, Capital, 31/12/2016 $502,400

4/c) Balance Sheet


Salma COMPANY
Balance Sheet
December 31, 2015
Assets
Current assets
Cash
400,100

$22,800
Prepaid insurance
1400

4,800
Supplies
5000

002,300
Total current assets $ 406,500

45,300
Property, plant, and equipment
Land 59000
Building 155000
Less: Accumulated depreciation ( 7100 )
18

147900

018,000 026,000)
Total assets 206900
Total assets $ 613,400
Notes Payable 100000
Unearned Rent Revenue 2000
Interest Payable 9000
Total Liabilities 111,000

Salma, Capital $ 502,400


Totals Liabilities & Owner Equity $ 613,400

5. Trial Balance post-closing.


Salma COMPANY
The Trial Balance post-closing
31/12/2016
Trial Balance post-closing
Account Titles Dr Cr
Cash 400,100

Prepaid Insurance 1,400

Supplies 5,000

Land 59,000

Building 155,000

Notes Payable 100,000

Unearned Rent Revenue 2,000

Salma, Capital 502,400

Accumulated depreciation 7,100

Interest Payable 9,000


Total 620,500 620,500
Ex.2
At December 31, 2016, account balances after adjustments for Morgan Cinema are
as follows:
Account Balances
Accounts (After Adjustment)
land $ 80,000
Cash 10,000
Concession Supplies 4,000
Theatre Equipment 40,000
Accumulated Depreciation—Theatre Equipment 12,000
Notes Payable 80,000
Accounts Payable 5,000
19

Morgan, Capital 20,000


Morgan, Drawing 12,000
Admission Ticket Revenues 50,000
Popcorn Revenues 37,000
Candy Revenues 19,000
Advertising Expense 12,000
Concession Supplies Expense 15,000
Depreciation Expense 4,000
Film Rental Expense 16,000
Rent Expense 12,000
Salaries Expense 13,000
Utilities Expense 5,000
Instructions
1. Prepare the closing journal entries for Morgan Cinema.
2. Prepare income statement for the year ended December 31, 2016.
3. Prepare an owner's equity statement for the year ended December 31, 2016.
4. Trial Balance post-closing.
The answer
Dec. 31 Admission Ticket Revenues ................................................ 50,000
Popcorn Revenues .............................................................. 37,000
Candy Revenues ................................................................. 19,000
Income Summary
106,000
(To close revenue accounts)
Dec. 31 Income Summary ................................................................ 77,000
Advertising Expense .................................................. 12,000
Concession Supplies Expense .................................. 15,000
Depreciation Expense ............................................... 4,000
Film Rental Expense ................................................. 16,000
Rent Expense ............................................................ 12,000
Salaries Expense ...................................................... 13,000
Utilities Expense ........................................................ 5,000
(To close expense accounts)
Dec. 31 Income Summary ................................................................ 29,000
Morgan, Capital ......................................................... 29,000
(To transfer net income to capital)
Dec. 31 Morgan, Capital ................................................................... 12,000
Morgan, Drawing ....................................................... 12,000
(To close drawings to capital)
(2)
Morgan COMPANY
Income Statement
For the Year Ended December 31, 2016
Revenues
Admission Ticket Revenues ................................................................ 50,000
Popcorn Revenues .............................................................. 37,000
Candy Revenues ................................................................. 19,000
Total revenues .................................................................................. $106,000
Expenses
Advertising Expense............................................................................. 12,000
20

Concession Supplies Expense .................................. 15,000


Depreciation Expense ............................................... 4,000
Film Rental Expense ................................................. 16,000
Rent Expense ............................................................ 12,000
Salaries Expense ...................................................... 13,000
Utilities Expense ........................................................ 5,000
Total Expenses (77,000)
Net income ................................................................................................ …….$29,000
(3)
Morgan COMPANY
Owner's Equity Statement
For the Year Ended December 31, 2016

Morgan, Capital, January 1,2016 $ 20,000


Add: Net income 29,000
49,000
Less: Drawings - 12,000
Morgan, Capital, December 31,2016 $ 37,000

(4) Trial Balance post-closing.


Morgan COMPANY
The Trial Balance post-closing
31/12/2016

Trial Balance post-closing


Account Titles Dr Cr
land $ 80,000
Cash 10,000
Concession Supplies 4,000
Accumulated Depreciation-Theatre 12,000
Equipment 40,000
Notes Payable 80,000
Accounts Payable 5,000
Morgan, Capital 37,000
Total $134,000 $134,000

Ex.3 The following some Transactions of Ahmed Company for the month of October 2016.
The Beginning balance of: Account receivable $8000, Ahmed’s capital $60000 ,
land $32000, account payable $15100, cash $27000.
1/10 Invested an additional $40,000 cash in the business.
2/10 Purchased land costing $28,000 for cash.
3/10 Purchased equipment costing $8,000 for $4,000 cash and the remainder on credit.
4/10 Purchased supplies on account for $800.
5/10 Paid $1,000 for a one-year insurance policy.
6/10 Received $2,000 cash for services performed.
7/10 Received $4,000 for services previously performed on account.
8/10 Paid wages to employees for $2,500.
9/10 Ahmed withdrew $600 cash from the business.
10/10 paid 1,900 cash for previously Purchased equipment(Transaction No. 3)
21

Instructions:
1. Prepare Journal entries to each transaction .
2. Compute ending balance of: Ahmed’s capital, land, Account receivable, cash & Accounts
Payable by using T account..
The answer
1/10 Cash ..................................................................................... 40,000
Ahmed’s capital............................................................... 40,000
2/10 Land ..................................................................................... 28,000
Cash ......................................................................... 28,000
3/10 Equipment ............................................................................ 8,000
Cash ....................................................................... 4,000
Accounts Payable ................................................... 4,000
4/10 Supplies ................................................................................ 800
Accounts Payable .................................................... 800
5/10 Prepaid Insurance ................................................................. 1,000
Cash ........................................................................ 1,000
6/10 Cash ..................................................................................... 2,000
Service Revenue ...................................................... 2,000
7/10 Cash ..................................................................................... 4,000
Accounts Receivable ................................................ 4,000
8/10 Wages Expense .................................................................... 2,500
Cash ...................................................................... 2,500
9/10 Ahmed, Drawing .................................................................... 600
Cash ......................................................................... 600
10/10 Accounts Payable ................................................................ 1,900
Cash ......................................................................... 1,900
Ahmed’s capital

Debit Credit

Beginning balance 60,000

1/10 40,000

Ending balance 100,000

Land

Debit Credit

Beginning balance 32000

1/10 28000

Ending balance 60,000


22

Cash

Debit Credit

Beginning balance 27000 2/10 28000

1/10 40000 3/10 4000

6/10 2000 5/10 1000

7/10 4000 8/10 2500

9/10 600

10/10 1900

Ending balance 35,000

Account receivable

Debit Credit

Beginning balance 8000 7/10 4,000

Ending balance 4,000

Accounts Payable

Debit Credit

10/10 1900 Beginning balance 15100

3/10 4000

4/10 800

Total 19,900 Total 19,900

Ending balance 18,000