Question

Exercise 5-7 Juan Morales Company had the following account balances at year-end: Cost of Goods Sold $63,970, Inventory $15,740, Operating Expenses $31,040, Sales Revenue $125,200, Sales Discounts $1,250, and Sales Returns and Allowances $1,670. A physical count of Inventory determines that merchandise inventory on hand is $12,430. Prepare the adjusting entry necessary as a result of the physical count. (Credit account titles are automatically Indented when amount is entered. Do not indent manually.) A nt Titles Esplanation SHOW LIST OF ACCOUNTS LINK TO TEXT Prepare closing entries. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) (To close accounts with credit balances To co net income ) SHOW LIST OF ACCOUNTS LINK TO TEXT Question Attempts: 0 of 4 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

Credit Account Titles and Explanatior Cost of Goods Sold Merchandise inventory Debit $3,310 ($15,740 - $12,430] $3,310 NOTE: Inventory's account's normal balance is debit. As the physical count is less than ledger value of inventory account, it is credited and cost of goods sold is debited. Closing Entries: Closing entries are those entries recorded at the last day of reporting period to close revenue and expense accounts to retained earnings using a temperary account called income summary. When closing entries are recorded for revenues, Income Summary account shall be credited and Revenue accounts shall be debited; Similarly, when closing entries are recorded for expenses, Income Summary account shall be debited and Expense accounts shall be credited. Finally, balance in Income Summary account will represent either Net income or Net loss for the reporting period which shall be closed to Retained Earnings. Therefore, it is clear that revenues, expenses and dividends related accounts shall be closed to retained earnings whereas other balance sheet related accounts shall not be closed. That is,

Credit Account Titles and Explanatior Debit Sales Revenue $125,200 Income Summary (To close accounts with credit balances) $125,200 Income Summary $101,240 Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances (To close accounts with debit balances) $67,280 ($63,970 + $3,310] $31,040 $1,250 $1,670 $23,960 Income Summary Retained Earnings (To close net income) ($125200 - $101240] $23,960 NOTE: As credit to income summary account is more than debit to income summary account, it is considered as net income and closed to retained earnings account by debiting income summary account.