Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET

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1 Supplement to CHAPTER 3 CLOSING ENTRIES AND THE WORK SHEET Answers to Review Questions 1. No, the work sheet cannot be used as a substitute for the financial statements. It is a tool used in preparing financial statements. Work sheets and financial statements serve different purposes. The work sheet is simply an internal working paper for the accountant. Financial statements are formal reports, required by law and by GAAP, for external as well as internal distribution. 2. The Adjusted Trial columns should be totaled before the adjusted amounts are carried to the Income Statement and Sheet columns to prove the balance. The Income Statement and Sheet columns cannot be correct unless the Adjusted Trial columns balance. If the adjusted trial balance columns were not totaled before amounts were carried to the Income Statement and Sheet problems, any error would carry through and the financial statements could be misstated. If the error were discovered at a later time, more numbers would need to be corrected. 3. The amounts should be extended line by line to the proper debit or credit column of the Income Statement or Sheet columns, beginning with the first line. This procedure avoids overlooking an account. 4. Not usually. The difference is the amount of net income or loss for the period. Net income and net loss would equal each other in case the company exactly broke even, with zero profit and zero loss. 5. The totals do not usually agree. Included in the Sheet credit column are accumulated depreciation accounts, for example, which appear on the baltained earnings before the balance sheet is ance sheet as deductions from the associated asset accounts. Also, dividends are included with the debits in the Sheet columns, whereas they are deducted from the Retained Earnings account balance in the statement of re- prepared. 6. The adjusting entries are posted before the closing entries; otherwise, the closing entries would not set temporary, or nominal, accounts to zero balcounts reflect actual revenues and expenses for the period. Furthermore, ances. Also, adjusting entries should be made first so that the temporary acafter all adjusting entries have been made, closing entries can be determined from the adjusted ledger balances. 7. The posting of adjusting entries to the ledger often follows the preparation of the work sheet because the necessary adjustments are determined on the work sheet. 163

2 Chapter 3S, E 1. Dec. 31 Repair Revenue 25,620 Income Summary To close the credit balance account 31 Income Summary 16,830 Wages Expense Rent Expense Supplies Expense Insurance Expense Depreciation Expense Repair Equipment Income Taxes Expense To close the debit balance accounts 31 Income Summary 8,790 Retained Earnings To close the Income Summary account 31 Retained Earnings 5,000 Dividends To close the Dividends account 25,620 8,110 1,200 4, ,345 1,000 8,790 5,

3 Chapter 3S, E Trial balance amounts entered on the work sheet 2. Work sheet completed Account Name Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation Office Equipment Accounts Payable Unearned Service Revenue Common Stock Retained Earnings Dividends Service Revenue Utilities Expense Wages Expense Insurance Expense Depreciation Expense Office Equipment Wages Payable Supplies Expense Income Taxes Expense Income Taxes Payable Net Income *$4 $1 = $3 Work Sheet For the Month Ended October 31, Trial Adjustments Adjusted Trial Income Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit (a) (e) (c) (b) (b) (d) (a) (c) (d) (e) 3 * 3 3 (f) (f)

4 Chapter 3S, P T accounts opened and balances entered Closing entries entered in T accounts Retained Earnings (d) June 30 54, ,150 (c) June 30 83, ,300 Dividends 54,000 (d) June 30 54,000 Income Summary (b) June ,550 (a) June ,700 (c) 30 83,150 Revenue from Court Fees (a) June , ,100 Revenue from Locker Fees (a) June 30 9,600 9,600 Wages Expense 351,000 (b) June ,000 Maintenance Expense 51,600 (b) June 30 51,600 Advertising Expense 39,750 (b) June 30 39,750 Utilities Expense 64,800 (b) June 30 64,800 Supplies Expense 6,000 (b) June 30 6,

5 Chapter 3S, P 1. (Continued) Depreciation Expense Building 30,000 (b) June 30 30,000 Depreciation Expense Equipment 12,000 (b) June 30 12,000 Property Taxes Expense 22,500 (b) June 30 22,500 Miscellaneous Expense 6,900 (b) June 30 6,900 Income Taxes Expense 20,000 (b) June 30 20,

6 Chapter 3S, P 1. (Continued) 3. Income statement, statement of retained earnings, and balance sheet prepared Settles Tennis Club, Inc. Income Statement For the Year Ended June 30, Revenues Revenue from court fees Revenue from locker fees Total revenues Expenses Wages expense Utilities expense Maintenance expense Advertising expense Depreciation expense building Property taxes expense Income taxes expense Depreciation expense equipment Miscellaneous expense Supplies expense Total expenses Net income Settles Tennis Club, Inc. Statement of Retained Earnings For the Year Ended June 30, Retained earnings, June 30, 2010 Net income Subtotal Less dividends Retained earnings, June 30, $351,000 64,800 51,600 39,750 30,000 22,500 20,000 12,000 6,900 6,000 $678,100 9,600 $687, ,550 $ 83,150 $271,150 83,150 $354,300 54,000 $300,

7 Chapter 3S, P 1. (Continued) Settles Tennis Club, Inc. Sheet June 30, Assets Prepaid advertising Supplies Land Building Less accumulated depreciation Equipment Less accumulated depreciation Total assets Liabilities Accounts payable Wages payable Property taxes payable Unearned revenue locker fees Income taxes payable Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholdlers' equity $ 26,200 9,600 1, ,000 $645, , ,200 $156,000 50, ,600 $627,800 $ 73,000 9,000 22,500 3,000 20,000 $200, ,300 $127, ,300 $627, Reason for closing entries explained Closing entries are journal entries made at the end of the accounting period to accomplish two purposes: (1) to set the stage for the next accounting period by clearing the temporary accounts (income statement accounts and Dividends) of their balances and transferring them to retained earnings and (2) to summarize revenues and expenses. 169

8 Chapter 3S, P Entries for May prepared 3. Adjusting entries for May prepared 6. Closing entries for May prepared May Description General Journal Page 1 Ref. Debit Credit ,000 Common Stock 311 5,000 To issue stock 1 Store Rent Expense To pay one month's rent 1 Prepaid Insurance To purchase one-year policy 2 Repair Equipment 144 4, Accounts Payable 212 3,600 To purchase repair equipment, one- seventh down 5 Repair Supplies Accounts Payable To purchase repair supplies on credit from AWD Company 8 Advertising Expense To purchase newspaper advertisement Repair Revenue To record receipt of revenue for the first half of the month 21 Accounts Payable To make payment on account to AWD Company 170

9 May May Page 2 Ref. Debit Credit Repair Revenue To record receipt of revenue for the last half of the month 31 Dividends To declare and pay dividend Adjusting entries: Description General Journal 31 Insurance Expense Prepaid Insurance To record one month's expired insurance $ = $40 31 Repair Supplies Expense Repair Supplies To record supplies used during May $468 $169 = $ Depreciation Expense Repair Equipment Accumulated Depreciation Repair Equipment To record depreciation for one month 31 Income Taxes Expense Income Taxes Payable To record one month's estimated income taxes 171

10 May Closing entries: Description General Journal Page 3 Ref. Debit Credit 31 Repair Revenue 411 1,375 Income Summary 314 1,375 To close the credit balance account 31 Income Summary Store Rent Expense Advertising Expense Insurance Expense Repair Supplies Expense Depreciation Expense Repair Equipment Income Taxes Expense To close the debit balance accounts 31 Income Summary Retained Earnings To close the Income Summary account 31 Retained Earnings Dividends To close the Dividends account 172

11 4. May adjusted trial balance prepared Javier's Repair Service, Inc. Adjusted Trial May 31, Prepaid Insurance Repair Supplies Repair Equipment Accumulated Depreciation Repair Equipment Accounts Payable Income Taxes Payable Common Stock Dividends Repair Revenue Store Rent Expense Advertising Expense Insurance Expense Repair Supplies Expense Depreciation Expense Repair Equipment Income Taxes Expense $ 4, ,200 $ 70 3, , , $10,338 $10,

12 5. May income statement, statement of retained earnings, and balance sheet prepared Javier's Repair Service, Inc. Income Statement For the Month Ended May 31, Revenue Repair revenue Expenses Store rent expense Repair supplies expense Depreciation expense repair equipment Advertising expense Income taxes expense Insurance expense Total expenses Net income Javier's Repair Service, Inc. Statement of Retained Earnings For the Month Ended May 31, Retained earnings, May 1, Net income Subtotal Less dividends Retained earnings, May 31, $ $1, $ 431 $ 431 $ $

13 Prepaid insurance Repair supplies Repair equipment Less accumulated depreciation Total assets Accounts payable Income taxes payable Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Javier's Repair Service, Inc. Sheet May 31, Assets Liabilities Stockholders' Equity $4, $4, ,130 $9,024 $3, $5, $3,893 5,131 $9, May post-closing trial balance prepared Javier's Repair Service, Inc. Post-Closing Trial May 31, Prepaid Insurance Repair Supplies Repair Equipment Accumulated Depreciation Repair Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings $4, ,200 $ 70 3, , $9,094 $9,

14 8. Journal entries for June prepared 9. Adjusting entries for June prepared 12. Closing entries for June prepared June Description General Journal Page 4 Ref. Debit Credit 1 Store Rent Expense To pay one month's rent 1 Accounts Payable To make monthly payment to Motley Company 6 Repair Supplies Accounts Payable To purchase repair supplies on credit from AWD Company Repair Revenue To record receipt of revenue for the first half of the month 20 Advertising Expense To purchase additional advertisement 23 Accounts Payable To make payment on account to AWD Company Repair Revenue To record receipt of revenue for the last half of the month 30 Dividends To declare and pay dividend 176

15 June Adjusting entries: Page 5 Ref. Debit Credit 30 Insurance Expense Prepaid Insurance To record one month's expired insurance 30 Repair Supplies Expense Repair Supplies To record supplies used during June $1,032 $413 = $ Depreciation Expense Repair Equipment Accumulated Depreciation Repair Equipment To record depreciation for one month 30 Income Taxes Expense Income Taxes Payable To record one month's estimated income taxes Closing entries: Description General Journal 30 Repair Revenue 411 1,731 Income Summary 314 1,731 To close the credit balance account 30 Income Summary 314 1,264 Store Rent Expense Advertising Expense Insurance Expense Repair Supplies Expense Depreciation Expense Repair Equipment Income Taxes Expense To close the debit balance accounts 177

16 June Description General Journal Page 6 Ref. Debit Credit 30 Income Summary Retained Earnings To close the Income Summary account 30 Retained Earnings Dividends To close the Dividends account 178

17 Account No. 111 May 1 J1 5,000 5,000 1 J ,575 1 J ,095 2 J ,495 8 J1 60 3, J , J , J , J ,285 June 1 J ,860 1 J , J , J4 60 4, J , J , J ,331 Prepaid Insurance Account No. 117 May 1 J Adjustment J June 30 Adjustment J

18 Repair Supplies Account No. 119 May 5 J Adjustment J June 6 J , Adjustment J Repair Equipment Account No. 144 May 2 J1 4,200 4,200 Accumulated Depreciation Repair Equipment Account No. 145 May 31 Adjustment J June 30 Adjustment J Accounts Payable Account No. 212 May 2 J1 3,600 3,600 5 J , J ,843 June 1 J ,543 6 J , J ,

19 Income Taxes Payable Account No. 213 May 31 Adjustment J June 30 Adjustment J Common Stock Account No. 311 May 1 J1 5,000 5,000 Retained Earnings Account No. 312 May 31 Closing entry J Closing entry J June 30 Closing entry J Closing entry J Dividends Account No. 313 May 31 J Closing entry J3 300 June 30 J Closing entry J

20 Income Summary Account No. 314 May 31 Closing entry J3 1,375 1, Closing entry J Closing entry J3 431 June 30 Closing entry J5 1,731 1, Closing entry J5 1, Closing entry J6 467 Repair Revenue Account No. 411 May 15 J J , Closing entry J3 1,375 June 15 J J , Closing entry J5 1,731 Store Rent Expense Account No. 511 May 1 J Closing entry J3 425 June 1 J Closing entry J

21 Advertising Expense Account No. 512 May 8 J Closing entry J3 60 June 20 J Closing entry J5 60 Insurance Expense Account No. 513 May 31 Adjustment J Closing entry J3 40 June 30 Adjustment J Closing entry J5 40 Repair Supplies Expense Account No. 514 May 31 Adjustment J Closing entry J3 299 June 30 Adjustment J Closing entry J5 619 Depreciation Expense Repair Equipment Account No. 515 May 31 Adjustment J Closing entry J3 70 June 30 Adjustment J Closing entry J

22 Income Taxes Expense Account No. 516 May 31 Adjustment J Closing entry J3 50 June 30 Adjustment J Closing entry J

23 10. June adjusted trial balance prepared Javier's Repair Service, Inc. Adjusted Trial June 30, Prepaid Insurance Repair Supplies Repair Equipment Accumulated Depreciation Repair Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings Dividends Repair Revenue Store Rent Expense Advertising Expense Insurance Expense Repair Supplies Expense Depreciation Expense Repair Equipment Income Taxes Expense $ 4, ,200 $ 140 3, , , $10,908 $10,

24 11. June income statement, statement of retained earnings, and balance sheet prepared Javier's Repair Service, Inc. Income Statement For the Month Ended June 30, Revenue Repair revenue Expenses Repair supplies expense Store rent expense Depreciation expense repair equipment Advertising expense Income taxes expense Insurance expense Total expenses Net income Javier's Repair Service, Inc. Statement of Retained Earnings For the Month Ended June 30, Retained earnings, May 31, Net income Subtotal Less dividends Retained earnings, June 30, $ $1,731 1,264 $ 467 $ $ $

25 Prepaid insurance Repair supplies Repair equipment Less accumulated depreciation Total assets Accounts payable Income taxes payable Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Javier's Repair Service, Inc. Sheet June 30, Assets Liabilities Stockholders' Equity $4, $4, ,060 $9,204 $3, $5, $3,906 5,298 $9, June post-closing trial balance prepared Javier's Repair Service, Inc. Post-Closing Trial June 30, Prepaid Insurance Repair Supplies Repair Equipment Accumulated Depreciation Repair Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings $4, ,200 $ 140 3, , $9,344 $9,

26 Chapter 3S, P Work sheet completed Account Name Accounts Receivable Prepaid Insurance Office Supplies Cleaning Supplies Land Building Accumulated Depreciation Building Theater Furnishings Accumulated Depreciation Theater Furnishings Office Equipment Accumulated Depreciation Office Equipment Accounts Payable Gift Books Liability Mortgage Payable Common Stock Retained Earnings Dividends Ticket Sales Revenue Theater Rental Revenue Usher Wages Expense Office Wages Expense Utilities Expense Interest Expense Insurance Expense Office Supplies Expense Cleaning Supplies Expense Depreciation Expense Building Depreciation Expense Theater Furnishings Depreciation Expense Office Equipment Wages Payable Income Taxes Expense Income Taxes Payable Net Income Beauchamp Theater Corporation Work Sheet For the Year Ended June 30, Adjusted Trial Adjustments Trial Income Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit 31,800 31,800 31,800 18,544 18,544 18,544 19,600 (a) 17,400 2,200 2, (b) ,590 (c) 3, ,000 20,000 20, , , ,000 39,400 (d) 14,000 53,400 53, , , ,000 65,000 (e) 36, , ,000 31,600 31,600 31,600 15,560 (f) 3,160 18,720 18,720 45,506 45,506 45,506 41,900 (g) 37,800 4,100 4, , , , , , , , , ,648 60,000 60,000 60, ,400 (g) 37, , ,200 45,200 45,200 45, ,000 (h) , ,860 24,000 24,000 24, , , ,700 27,000 27,000 27,000 1,276,614 1,276,614 (a) 17,400 17,400 17,400 (b) (c) 3,122 3,122 3,122 (d) 14,000 14,000 14,000 (e) 36,000 36,000 36,000 (f) 3,160 3,160 3,160 (h) (i) 20,000 20,000 20,000 (i) 20,000 20,000 20, , ,878 1,350,634 1,350, , , , ,234 78,622 78, , , , ,

27 Chapter 3S, P 3. (Continued) 2. Income statement, statement of retained earnings, and balance sheet prepared Beauchamp Theater Corporation Income Statement For the Year Ended June 30, Revenues Ticket sales revenue Theater rental revenue Total revenues Expenses Usher wages expense Utilities expense Depreciation expense theater furnishings Interest expense Office wages expense Income taxes expense Insurance expense Depreciation expense building Depreciation expense office equipment Cleaning supplies expense Office supplies expense Total expenses Net income Beauchamp Theater Corporation Statement of Retained Earnings For the Year Ended June 30, Retained earnings, June 30, 2010 Net income Subtotal Less dividends Retained earnings, June 30, $449,200 45,200 $157, ,700 36,000 27,000 24,000 20,000 17,400 14,000 3,160 3, $494, ,778 $ 78,622 $112,648 78,622 $191,270 60,000 $131,

28 Chapter 3S, P 3. (Continued) Beauchamp Theater Corporation Sheet June 30, Assets Accounts receivable Prepaid insurance Office supplies Cleaning supplies Land Building Less accumulated depreciation Theater furnishings Less accumulated depreciation Office equipment Less accumulated depreciation Total assets Liabilities Accounts payable Gift books liability Wages payable Income taxes payable Mortgage payable Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 31,800 18,544 2, ,000 $400,000 53, ,600 $370, , ,000 $ 31,600 18,720 12,880 $701,736 $ 45,506 4, , ,000 $200, ,270 $370, ,270 $701,

29 Chapter 3S, P 3. (Continued) 3. Adjusting and closing entries prepared General Journal Description Debit Adjusting entries: June 30 Insurance Expense 17,400 Prepaid Insurance To record expired insurance 30 Office Supplies Expense 536 Office Supplies To record office supplies used $780 $244 = $ Cleaning Supplies Expense 3,122 Cleaning Supplies To record cleaning supplies used $3,590 $468 = $3, Depreciation Expense Building 14,000 Accumulated Depreciation Building To record depreciation on building for the year 30 Depreciation Expense Theater Furnishings 36,000 Accumulated Depreciation Theater Furnishings To record depreciation on theater furnishings for the year 30 Depreciation Expense Office Equipment 3,160 Accumulated Depreciation Office Equipment To record depreciation on office equipment for the year 30 Gift Books Liability 37,800 Ticket Sales Revenue To record gift books redeemed 30 Usher Wages Expense 860 Wages Payable To record accrued wages at the end of the period Credit 17, ,122 14,000 36,000 3,160 37,

30 Chapter 3S, P 3. (Continued) June June General Journal Description Debit 30 Income Taxes Expense 20,000 Income Taxes Payable To record estimated income taxes Closing entries: 30 Ticket Sales Revenue 449,200 Theater Rental Revenue 45,200 Income Summary To close the credit balance accounts 30 Income Summary 415,778 Usher Wages Expense Office Wages Expense Utilities Expense Interest Expense Insurance Expense Office Supplies Expense Cleaning Supplies Expense Depreciation Expense Building Depreciation Expense Theater Furnishings Depreciation Expense Office Equipment Income Taxes Expense To close the debit balance accounts 30 Income Summary 78,622 Retained Earnings To close the Income Summary account 30 Retained Earnings 60,000 Dividends To close the Dividends account Credit 20, , ,860 24, ,700 27,000 17, ,122 14,000 36,000 3,160 20,000 78,622 60,

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