(LO 1, 2) AP Lee Chang opened Lee's Window Washing on July 1, 2021. In July,...
(LO 1, 2) AP Lee Chang opened Lee's Window Washing on July 1, 2021. In July, the following transactions were completed:
|
July 1 |
Invested $20,000 cash in the business. |
|
1 |
Purchased a used truck for $25,000, paying $5,000 cash and signing a note payable for the balance. |
|
1 |
Paid $2,800 on a one-year insurance policy, effective July 1. |
|
5 |
Billed customers $3,300 for cleaning services. |
|
12 |
Purchased supplies for $2,100 on account. |
|
18 |
Paid $3,000 for employee salaries. |
|
25 |
Billed customers $8,900 for cleaning services. |
|
28 |
Collected $3,300 from customers billed on July 5. |
|
31 |
Paid $550 for repairs on the truck. |
|
31 |
Withdrew $2,600 cash for personal use. |
Instructions
a.
Journalize and post the July transactions to the general ledger.
b.
Prepare a trial balance at July 31.
c.
Journalize and post the following July 31 adjustments:
- 1.Services of $1,500 were provided but remained unbilled and uncollected at July 31.
- 2.The truck has an estimated useful life of five years.
- 3.One twelfth of the insurance expired.
- 4.An inventory count shows $700 of supplies on hand at July 31.
- 5.Accrued but unpaid employee salaries were $800.
- 6.The note payable has a 5.5% annual interest rate.
d.
Prepare an adjusted trial balance.
e.
Prepare the income statement and statement of owner's equity for July, and a classified balance sheet at July 31, 2021. Of the note payable, $5,000 must be paid by June 30, 2022.
f.
Journalize and post the closing entries.
g.
Prepare a post-closing trial balance at July 31.
Taking It Further
Do companies need to make adjusting and closing entries at the end of every month?
Homework Answers
Ans.A. The journal entries for the month of July will be as follows :
|
Journal entries in the books of Lee's Window Washing |
|||
|
Date |
Particulars |
Debit amount |
Credit amount |
|
1-Jul |
Cash |
$20,000 |
|
|
Capital |
$20,000 |
||
|
(Being capital $20,000 invested in the form of cash) |
|||
|
1-Jul |
Truck |
$25,000 |
|
|
Cash |
$5,000 |
||
|
Note Payable |
$20,000 |
||
|
(Being truck purchased on cash and on credit) |
|||
|
1-Jul |
Prepaid insurance |
$2,800 |
|
|
Cash |
$2,800 |
||
|
5-Jul |
Accounts Receivable |
$3,300 |
|
|
Service Revenue |
$3,300 |
||
|
(Being services rendered and accounts receivable) |
|||
|
12-Jul |
Supplies |
$2,100 |
|
|
Accounts Payable |
$2,100 |
||
|
(Being supplies purchased on credit) |
|||
|
18-Jul |
Salaries |
$3,000 |
|
|
Cash |
$3,000 |
||
|
(Being employee salaries paid) |
|||
|
25-Jul |
Accounts Receivable |
$8,900 |
|
|
Service Revenue |
$8,900 |
||
|
(Being services rendered and accounts receivable) |
|||
|
28-Jul |
Cash |
$3,300 |
|
|
Accounts Receivable |
$3,300 |
||
|
(Being accounts receivable dated July 5 received) |
|||
|
31-Jul |
Repairs |
$550 |
|
|
Cash |
$550 |
||
|
(Being cash paid for repairs on truck) |
|||
|
31-Jul |
Drawings |
$2,600 |
|
|
Cash |
$2,600 |
||
|
(Being cash withdrawn for personal use) |
Ans.B. The trial balance as on July 31 is presented as below:
|
Trial balance as on July 31 |
||
|
Particulars |
Debit |
Credit |
|
Cash |
$ 9,350 |
|
|
Capital |
$ 20,000 |
|
|
Prepaid insurance |
$2,800 |
|
|
Truck |
$ 25,000 |
|
|
Note Payable |
$ 20,000 |
|
|
Accounts receivable |
$ 8,900 |
|
|
Service revenue |
$ 12,200 |
|
|
Supplies |
$ 2,100 |
|
|
Accounts payable |
$ 2,100 |
|
|
Salaries |
$ 3,000 |
|
|
Repairs |
$ 550 |
|
|
Drawings |
$ 2,600 |
|
|
Total |
$ 54,300 |
$ 54,300 |
Working notes:
1. Normally, after preparing the journal entries, the same are posted in ledger accounts from which the ending balances of each account is derived. These ending balances are then recorded in the trial balance. So, for example all entries related to cash will be entered in Cash A/c in ledger and the ending balance will be recorded in trial balance. However, here we have worked it out directly as follows:
2. So, we see all entries related to cash. Entry dated 1 July adds to cash balance $20,000(cash being real account, debit means addition),then second entry on 1 July involves cash outgo(credit) of $5,000 and third entry too outgo of $2,800. So, this will reduce cash balance. Further, on 18 July, there is cash outgo of $3,000(reduction in cash balance), on July 28, there is cash inflow (addition) of $3,300 and on July 31, there is cash outflow of $550 and $2,600. So, the ending cash balance = $20,000-$5,000-$2,800-$3,000+$3,300-$550-$2,600 = $9,350.
3. Similarly, for accounts receivable, ending balance = $3,300+$8,900-$3,300=$8,900.
4. For service revenue, ending balance = $3,300+$8,900 = $12,200.
Ans.C.
The adjustment entries will be as follows:
|
Adjustment entries on July 31 |
|||
|
S.No. |
Particulars |
Debit amount |
Credit amount |
|
1 |
Accounts receivable |
$1,500 |
|
|
Service revenue |
$1,500 |
||
|
(Being unrecorded service revenue in July) |
|||
|
2 |
Depreciation |
$416.67 |
|
|
Truck |
$416.67 |
||
|
(Being depreciation on truck for July recorded) |
|||
|
3 |
Insurance expense |
$233.33 |
|
|
Prepaid insurance |
$233.33 |
||
|
(Being insurance expired for July) |
|||
|
4 |
Supplies expense |
$1,400 |
|
|
Supplies |
$1,400 |
||
|
(Being $1,400 of supplies consumed) |
|||
|
5 |
Salaries |
$800 |
|
|
Accrued salaries |
$800 |
||
|
(Being salaries for July $800 due) |
|||
|
6 |
Interest expense |
$91.67 |
|
|
Interest payable |
$91.67 |
||
|
(Being interest at 5.5.%annualon note payable, for July) |
Working notes:
1. Service revenue unbilled and uncollected so it will have to be recorded.
2. Though this statement is incomplete, however, assuming straight line depreciation and zero salvage value from the information given, monthly depreciation = $20,000/(5*12) = $416.67
3. Total prepaid insurance =$2,800. Expired insurance = $2800/12 = $233.33
4. Supplies purchased were $2,100 and inventory count shows $700. Therefore, supplies consumed in July = $2100-$700 = $1,400.
5. Accrued salary expense recorded
6. Annual interest on note payable = 5.5%*$20,000 = $1,100. Monthly interest expense = $1100/12 = $91.67
Ans.D. The adjusted trial balance is prepared by incorporating the balances of adjusting entries (like in Part B) in existing accounts and new accounts, as follows:
|
Adjusted trial balance as on July 31 |
|
P4.5A
(LO 1, 2) AP Lee Chang opened
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transactions were completed:
July 1
Invested $20,000 cash in the business.
1
Purchased a used truck for $25,000, paying $5,000 cash and
signing a note payable for the balance.
1
Paid $2,800 on a one-year insurance policy, effective July
1.
5
Billed customers $3,300 for cleaning services.
12
Purchased supplies for $2,100 on account.
18
Paid $3,000 for employee salaries.
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