Question

James and Susan Morley recently converted a large turn-of-the-century house into a hotel and incorporated the business as Saginaw Enterprises. Their accountant is inexperienced and has made the following closing entries at the end of Saginaw’s first year of operations:

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GENERAL JOURNAL

IMPACT ON FINANCIAL STATEMENTS

INCOME STATEMENT

BALANCE SHEET

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY	REVENUE	EXPENSES	NET INCOME
1		Closing Entries
2	Dec. 31	Income Summary		210,000.00				↓
3		Service Revenue			177,000.00			↑	↑		↑
4		Accumulated Depreciation			33,000.00	↓
5	31	Depreciation Expense		33,000.00				↓		↑	↓
6		Income Taxes Expense		8,200.00				↓		↑	↓
7		Utilities Expense		12,700.00				↓		↑	↓
8		Wages Expense		66,000.00				↓		↑	↓
9		Supplies Expense		31,000.00				↓		↑	↓
10		Accounts Payable		4,500.00			↓
11		Income Summary			155,400.00			↑
12	31	Income Summary		54,600.00				↓
13		Retained Earnings			54,600.00			↑
14	31	Dividends		3,200.00				↓
15		Income Summary			3,200.00			↑

Required:

Prepare the correct closing entries. Assume that all necessary accounts are presented above and that the amounts given are correct.

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Chart of Accounts

CHART OF ACCOUNTS
James and Susan
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 122 Notes Receivable 123 Supplies 124 Prepaid Insurance 125 Prepaid Rent 126 Inventory 127 Interest Receivable 130 Investment 131 Land 132 Buildings 133 Equipment 134 Furniture 135 Trucks 139 Accumulated Depreciation LIABILITIES 211 Accounts Payable 212 Notes Payable 213 Income Taxes Payable 214 Wages Payable 215 Utilities Payable 216 Insurance Payable 217 Rent Payable 221 Interest Payable 222 Unearned Service Revenue 223 Unearned Rent Revenue 231 Bonds Payable EQUITY 311 Common Stock 321 Retained Earnings 331 Dividends 350 Income Summary	REVENUE 411 Sales Revenue 412 Service Revenue 413 Interest Income 414 Rent Revenue EXPENSES 511 Cost of Goods Sold 512 Advertising Expense 513 Supplies Expense 514 Utilities Expense 515 Rent Expense 516 Insurance Expense 521 Wages Expense 531 Interest Expense 532 Depreciation Expense 541 Income Taxes Expense

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General Journal

Prepare the correct closing entries. Assume that all necessary accounts are presented above and that the amounts given are correct.

General Journal Instructions

Refer to the Chart of Accounts for the exact wording of the account titles.

CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries.

CNOW journals will automatically indent a credit entry when a credit amount is entered.

Select an up ↑ or down ↓ arrow to show the impact on the financial statements. Be sure to include an arrow in Net Income and Equity when Revenue or Expenses are affected.

PAGE 1

GENERAL JOURNAL

IMPACT ON FINANCIAL STATEMENTS

INCOME STATEMENT

BALANCE SHEET

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY	REVENUE	EXPENSES	NET INCOME
1		Closing Entries
2						↓↑	↓↑	↓↑	↓↑	↓↑	↓↑
3						↓↑	↓↑	↓↑	↓↑	↓↑	↓↑
4						↓↑	↓↑	↓↑	↓↑	↓↑	↓↑
5						↓↑	↓↑	↓↑	↓↑	↓↑	↓↑
6						↓↑	↓↑	↓↑	↓↑	↓↑	↓↑J

Answer 1

Closing entries are the entries passed for closing the temporary accounts (Revenue and Expenses Accounts) at the end of the accounting period. They are done after the financial statement for the accounting year has been prepared. This is done to make the temporary accounts zero so that these temporary accounts begins with zero balance in the next accounting period.

Closing credit/debit entry is passed in all temporary accounts having debit balance/credit balance before passing the closing entry. The credit /debit amount entered is equal to the debit/credit balance prior to passing the closing entry.

The net amount of closing entries is the Net Income /(Loss) for the period which is ultimately transferred to retained earnings.