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
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 4,260 915 1,345 1,000 8,790 5,000 164
Chapter 3S, E 2. 1. 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 4 4 4 7 7 7 2 (a) 1 1 1 4 (e) 3 1 1 8 8 8 1 (c) 1 2 2 4 4 4 3 (b) 2 1 1 5 5 5 7 7 7 6 6 6 23 (b) 2 25 25 2 2 2 10 (d) 1 11 11 43 43 (a) 1 1 1 (c) 1 1 1 (d) 1 1 1 (e) 3 * 3 3 (f) 1 1 1 (f) 1 1 1 9 9 46 46 19 25 27 21 6 6 25 25 27 27 165
Chapter 3S, P 1. 1. 2. T accounts opened and balances entered Closing entries entered in T accounts Retained Earnings (d) June 30 54,000 271,150 (c) June 30 83,150 300,300 Dividends 54,000 (d) June 30 54,000 Income Summary (b) June 30 604,550 (a) June 30 687,700 (c) 30 83,150 Revenue from Court Fees (a) June 30 678,100 678,100 Revenue from Locker Fees (a) June 30 9,600 9,600 Wages Expense 351,000 (b) June 30 351,000 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 6,000 166
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 20,000 167
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 $687,700 604,550 $ 83,150 $271,150 83,150 $354,300 54,000 $300,300 168
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 1,200 100,000 $645,200 260,000 385,200 $156,000 50,400 105,600 $627,800 $ 73,000 9,000 22,500 3,000 20,000 $200,000 300,300 $127,500 500,300 $627,800 4. 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
Chapter 3S, P 2. 1. 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 1 111 5,000 Common Stock 311 5,000 To issue stock 1 Store Rent Expense 511 425 111 425 To pay one month's rent 1 Prepaid Insurance 117 480 111 480 To purchase one-year policy 2 Repair Equipment 144 4,200 111 600 Accounts Payable 212 3,600 To purchase repair equipment, one- seventh down 5 Repair Supplies 119 468 Accounts Payable 212 468 To purchase repair supplies on credit from AWD Company 8 Advertising Expense 512 60 111 60 To purchase newspaper advertisement 15 111 400 Repair Revenue 411 400 To record receipt of revenue for the first half of the month 21 Accounts Payable 212 225 111 225 To make payment on account to AWD Company 170
May May Page 2 Ref. Debit Credit 31 111 975 Repair Revenue 411 975 To record receipt of revenue for the last half of the month 31 Dividends 313 300 111 300 To declare and pay dividend Adjusting entries: Description General Journal 31 Insurance Expense 513 40 Prepaid Insurance 117 40 To record one month's expired insurance $480 12 = $40 31 Repair Supplies Expense 514 299 Repair Supplies 119 299 To record supplies used during May $468 $169 = $299 31 Depreciation Expense Repair Equipment 515 70 Accumulated Depreciation Repair Equipment 145 70 To record depreciation for one month 31 Income Taxes Expense 516 50 Income Taxes Payable 213 50 To record one month's estimated income taxes 171
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 314 944 Store Rent Expense 511 425 Advertising Expense 512 60 Insurance Expense 513 40 Repair Supplies Expense 514 299 Depreciation Expense Repair Equipment 515 70 Income Taxes Expense 516 50 To close the debit balance accounts 31 Income Summary 314 431 Retained Earnings 312 431 To close the Income Summary account 31 Retained Earnings 312 300 Dividends 313 300 To close the Dividends account 172
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 $ 4,285 440 169 4,200 $ 70 3,843 50 5,000 300 1,375 425 60 40 299 70 50 $10,338 $10,338 173
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, $425 299 70 60 50 40 $1,375 944 $ 431 $ 431 $ 431 300 $ 131 174
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 $4,285 440 169 $4,200 70 4,130 $9,024 $3,843 50 $5,000 131 $3,893 5,131 $9,024 7. 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 $4,285 440 169 4,200 $ 70 3,843 50 5,000 131 $9,094 $9,094 175
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 511 425 111 425 To pay one month's rent 1 Accounts Payable 212 300 111 300 To make monthly payment to Motley Company 6 Repair Supplies 119 863 Accounts Payable 212 863 To purchase repair supplies on credit from AWD Company 15 111 914 Repair Revenue 411 914 To record receipt of revenue for the first half of the month 20 Advertising Expense 512 60 111 60 To purchase additional advertisement 23 Accounts Payable 212 600 111 600 To make payment on account to AWD Company 30 111 817 Repair Revenue 411 817 To record receipt of revenue for the last half of the month 30 Dividends 313 300 111 300 To declare and pay dividend 176
June Adjusting entries: Page 5 Ref. Debit Credit 30 Insurance Expense 513 40 Prepaid Insurance 117 40 To record one month's expired insurance 30 Repair Supplies Expense 514 619 Repair Supplies 119 619 To record supplies used during June $1,032 $413 = $619 30 Depreciation Expense Repair Equipment 515 70 Accumulated Depreciation Repair Equipment 145 70 To record depreciation for one month 30 Income Taxes Expense 516 50 Income Taxes Payable 213 50 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 511 425 Advertising Expense 512 60 Insurance Expense 513 40 Repair Supplies Expense 514 619 Depreciation Expense Repair Equipment 515 70 Income Taxes Expense 516 50 To close the debit balance accounts 177
June Description General Journal Page 6 Ref. Debit Credit 30 Income Summary 314 467 Retained Earnings 312 467 To close the Income Summary account 30 Retained Earnings 312 300 Dividends 313 300 To close the Dividends account 178
Account No. 111 May 1 J1 5,000 5,000 1 J1 425 4,575 1 J1 480 4,095 2 J1 600 3,495 8 J1 60 3,435 15 J1 400 3,835 21 J1 225 3,610 31 J2 975 4,585 31 J2 300 4,285 June 1 J4 425 3,860 1 J4 300 3,560 15 J4 914 4,474 20 J4 60 4,414 23 J4 600 3,814 30 J4 817 4,631 30 J4 300 4,331 Prepaid Insurance Account No. 117 May 1 J1 480 480 31 Adjustment J2 40 440 June 30 Adjustment J5 40 400 179
Repair Supplies Account No. 119 May 5 J1 468 468 31 Adjustment J2 299 169 June 6 J4 863 1,032 30 Adjustment J5 619 413 Repair Equipment Account No. 144 May 2 J1 4,200 4,200 Accumulated Depreciation Repair Equipment Account No. 145 May 31 Adjustment J2 70 70 June 30 Adjustment J5 70 140 Accounts Payable Account No. 212 May 2 J1 3,600 3,600 5 J1 468 4,068 21 J1 225 3,843 June 1 J4 300 3,543 6 J4 863 4,406 23 J4 600 3,806 180
Income Taxes Payable Account No. 213 May 31 Adjustment J2 50 50 June 30 Adjustment J5 50 100 Common Stock Account No. 311 May 1 J1 5,000 5,000 Retained Earnings Account No. 312 May 31 Closing entry J3 431 431 31 Closing entry J3 300 131 June 30 Closing entry J6 467 598 30 Closing entry J6 300 298 Dividends Account No. 313 May 31 J2 300 300 31 Closing entry J3 300 June 30 J4 300 300 30 Closing entry J6 300 181
Income Summary Account No. 314 May 31 Closing entry J3 1,375 1,375 31 Closing entry J3 944 431 31 Closing entry J3 431 June 30 Closing entry J5 1,731 1,731 30 Closing entry J5 1,264 467 30 Closing entry J6 467 Repair Revenue Account No. 411 May 15 J1 400 400 31 J2 975 1,375 31 Closing entry J3 1,375 June 15 J4 914 914 30 J4 817 1,731 30 Closing entry J5 1,731 Store Rent Expense Account No. 511 May 1 J1 425 425 31 Closing entry J3 425 June 1 J4 425 425 30 Closing entry J5 425 182
Advertising Expense Account No. 512 May 8 J1 60 60 31 Closing entry J3 60 June 20 J4 60 60 30 Closing entry J5 60 Insurance Expense Account No. 513 May 31 Adjustment J2 40 40 31 Closing entry J3 40 June 30 Adjustment J5 40 40 30 Closing entry J5 40 Repair Supplies Expense Account No. 514 May 31 Adjustment J2 299 299 31 Closing entry J3 299 June 30 Adjustment J5 619 619 30 Closing entry J5 619 Depreciation Expense Repair Equipment Account No. 515 May 31 Adjustment J2 70 70 31 Closing entry J3 70 June 30 Adjustment J5 70 70 30 Closing entry J5 70 183
Income Taxes Expense Account No. 516 May 31 Adjustment J2 50 50 31 Closing entry J3 50 June 30 Adjustment J5 50 50 30 Closing entry J5 50 184
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 $ 4,331 400 413 4,200 $ 140 3,806 100 5,000 131 300 1,731 425 60 40 619 70 50 $10,908 $10,908 185
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, $619 425 70 60 50 40 $1,731 1,264 $ 467 $ 131 467 $ 598 300 $ 298 186
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 $4,331 400 413 $4,200 140 4,060 $9,204 $3,806 100 $5,000 298 $3,906 5,298 $9,204 13. 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 $4,331 400 413 4,200 $ 140 3,806 100 5,000 298 $9,344 $9,344 187
Chapter 3S, P 3. 1. 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 2,200 780 (b) 536 244 244 3,590 (c) 3,122 468 468 20,000 20,000 20,000 400,000 400,000 400,000 39,400 (d) 14,000 53,400 53,400 370,000 370,000 370,000 65,000 (e) 36,000 101,000 101,000 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 4,100 300,000 300,000 300,000 200,000 200,000 200,000 112,648 112,648 112,648 60,000 60,000 60,000 411,400 (g) 37,800 449,200 449,200 45,200 45,200 45,200 157,000 (h) 860 157,860 157,860 24,000 24,000 24,000 112,700 112,700 112,700 27,000 27,000 27,000 1,276,614 1,276,614 (a) 17,400 17,400 17,400 (b) 536 536 536 (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) 860 860 860 (i) 20,000 20,000 20,000 (i) 20,000 20,000 20,000 132,878 132,878 1,350,634 1,350,634 415,778 494,400 934,856 856,234 78,622 78,622 494,400 494,400 934,856 934,856 188
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 $157,860 112,700 36,000 27,000 24,000 20,000 17,400 14,000 3,160 3,122 536 $494,400 415,778 $ 78,622 $112,648 78,622 $191,270 60,000 $131,270 189
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 2,200 244 468 20,000 $400,000 53,400 346,600 $370,000 101,000 269,000 $ 31,600 18,720 12,880 $701,736 $ 45,506 4,100 860 20,000 300,000 $200,000 131,270 $370,466 331,270 $701,736 190
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 = $536 30 Cleaning Supplies Expense 3,122 Cleaning Supplies To record cleaning supplies used $3,590 $468 = $3,122 30 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 17,400 536 3,122 14,000 36,000 3,160 37,800 860 191
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 20,000 494,400 157,860 24,000 112,700 27,000 17,400 536 3,122 14,000 36,000 3,160 20,000 78,622 60,000 192