CHAPTER. Closing Entries and the Postclosing Trial Balance

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 121 CHAPTER 6 Closing Entries and the Postclosing Trial Balance Chapter Opener: Students should recognize that financial statements can be used to evaluate Thinking Critically net profit or loss, return on investments, expense trends, or growth in company net assets. The income statement is used to measure net income or loss, while the balance sheet can be used to measure growth in assets or liabilities. Executives and managers would use financial statements to make decisions about expanding business, investing in new ventures, or hiring new employees. Fast Facts Carnival has 80,000 employees world wide. Of the 3 million passengers Carnival serves annually, approximately 1,000,000 are seniors and 500,000 are children. Carnival became a publicly traded company in 1987. Carnival Corporation is comprised of distinct brands operating in North and South America, the United Kingdom, Germany, Italy, France, Spain and Australia, which account for nearly 90 percent of cruise passengers worldwide. Carnival Corporation operates 84 ships with 21 new vessels scheduled for delivery between now and 2011. Managerial Answers will vary but could include monthly or quarterly. Students should Implications: want financial statements frequently so that trends can be observed and timely Thinking Critically decisions made before the business is negatively impacted. Discussion Questions These questions are designed to check the students understanding of the new terms, concepts, and procedures presented in the chapter. 1. Avoids errors, proves total debits and credits are equal after the closing process. 2. Asset, liability, and owner s capital. 3. Steps to classify, record, and summarize financial data. 4. (1) analyze (2) journalize (3) post (4) prepare worksheet (5) prepare financial statements (6) journalize and post adjusting entries (7) journalize and post closing entries (8) prepare postclosing trial balance (9) interpret financial information. 5. Source document info to general journal, to general ledger, to worksheet, to financial statements. 6. Journalize and post adjusting entries; Journalize and post closing entries; Prepare a postclosing trial balance. 7. Adjustments columns of the worksheet. 8. Transfer results of operations to the owner s capital account; Reduce balances of revenue, expense, and drawing accounts to zero. 9. Balances of revenue and expense accounts are transferred to Income Summary. Next the balance of the Income Summary account is transferred to the owner s equity account. 10. Worksheet. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 121

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 122 EXERCISE 6.1 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 97 50000 Income Summary 97 50000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 54 00000 Depreciation Expense 450000 Salaries Expense 32 00000 Supplies Expense 500000 Telephone Expense 420000 Utilities Expense 830000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 43 50000 Hayward Anderson, Capital 43 50000 13 13 14 14 15 15 31 Hayward Anderson, Capital 25 00000 Hayward Anderson, Drawing 25 00000 16 16 17 17 18 18 19 19 20 20 21 21 EXERCISE 6.2 1. Cash 2. Accounts Receivable 3. Supplies 4. Equipment 5. Accumulated Depreciation 6. Accounts Payable 7. Sally Harris, Capital 122 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 123 EXERCISE 6.3 1. Analyze transactions. 2. Journalize the transactions. 3. Post the journal entries. 4. Prepare a worksheet. 5. Prepare financial statements. 6. Record adjusting entries. 7. Record closing entries. 8. Prepare a postclosing trial balance. 9. Interpret the financial information. EXERCISE 6.4 1. B 2. I 3. B 4. B 5. I 6. B 7. E 8. B 9. I 10. B 11. I, E 12. B, E 13. B 14. I 15. B EXERCISE 6.5 1. Total revenue for the period is $46,500. 2. Total expenses for the period are $30,300. 3. Net income for the period is $16,200. 4. Owner s withdrawals for the period are $5,000. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 123

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 124 EXERCISE 6.6 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Mar. 31 Fees Income 401 276 00000 Income Summary 399 276 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 399 206 58000 Depreciation Expense Equipment 510 10 0 8 0 00 Insurance Expense 511 960000 Rent Expense 514 28 80000 Salaries Expense 517 141 6 0 0 00 Supplies Expense 518 3 9 0 0 00 Telephone Expense 519 540000 Utilities Expense 523 720000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 31 Income Summary 399 69 42000 Elizabeth Chavez, Capital 301 69 42000 15 15 16 16 17 17 31 Elizabeth Chavez, Capital 301 600000 Elizabeth Chavez, Drawing 302 600000 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 124 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 125 EXERCISE 6.6 (continued) GENERAL LEDGER Elizabeth Chavez, Capital ACCOUNT NO. 301 REF. Mar. 31 Balance 117 6 0 0 00 31 Closing J4 69 42000 18702000 31 Closing J4 600000 18102000 Elizabeth Chavez, Drawing ACCOUNT NO. 302 REF. Mar. 31 Balance 600000 31 Closing J4 600000 0 00 Income Summary ACCOUNT NO. 399 REF. Mar. 31 Closing J4 276 00000 27600000 31 Closing J4 206 58000 6942000 31 Closing J4 69 42000 0 00 Fees Income ACCOUNT NO. 401 REF. Mar. 31 Balance 276 0 0 0 00 31 Closing J4 276 00000 0 00 Depreciation Expense Equipment ACCOUNT NO. 510 REF. Mar. 31 Balance 1008000 31 Closing J4 10 08000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 125

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 126 EXERCISE 6.6 (continued) GENERAL LEDGER Insurance Expense ACCOUNT NO. 511 REF. Mar. 31 Balance 960000 31 Closing J4 960000 0 00 Rent Expense ACCOUNT NO. 514 REF. Mar. 31 Balance 2880000 31 Closing J4 28 8 0 0 00 0 00 Salaries Expense ACCOUNT NO. 517 REF. Mar. 31 Balance 141 6 0 0 00 31 Closing J4 141 6 0 0 00 0 00 Supplies Expense ACCOUNT NO. 518 REF. Mar. 31 Balance 390000 31 Closing J4 3 9 0 0 00 0 00 Telephone Expense ACCOUNT NO. 519 REF. Mar. 31 Balance 540000 31 Closing J4 5 4 0 0 00 0 00 126 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 127 EXERCISE 6.6 (continued) GENERAL LEDGER Utilities Expense ACCOUNT NO. 523 REF. Mar. 31 Balance 720000 31 Closing J4 7 2 0 0 00 0 00 EXERCISE 6.7 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Gladys Zamarripa, Capital 54 00000 Income Summary 54 00000 1 1 2 2 3 3 4 4 5 5 31 Gladys Zamarripa, Capital 600000 Gladys Zamarripa, Drawing 600000 6 6 7 7 8 8 The new balance of Gladys Zamarripa, Capital is $36,000 ($96,000 $54,000 $6,000). Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 127

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 128 EXERCISE 6.8 Analyze transactions Journalize transactions Post transactions Prepare a worksheet Prepare financial statements Record adjusting entries Record closing entries Prepare postclosing trial balance Interpret financial information 128 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 129 PROBLEM 6.1A GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Jan. 31 Supplies Expense 112000 Supplies 112000 1 1 2 2 3 3 4 4 5 5 31 Rent Expense 600000 Prepaid Rent 600000 6 6 7 7 8 8 31 Depreciation Expense Office Equipment 224000 Accumulated Depreciation Office Equipment 224000 9 9 10 10 11 11 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jan. 31 Fees Income 87 00000 Income Summary 87 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 66 74500 Depreciation Expense Office Equipment 224000 Rent Expense 600000 Salaries Expense 46 20000 Supplies Expense 112000 Telephone Expense 9 8 5 00 Travel Expense 928000 Utilities Expense 9 2 0 00 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 31 Income Summary 20 25500 Jeff Sager, Capital 20 25500 15 15 16 16 17 17 31 Jeff Sager, Capital 540000 Jeff Sager, Drawing 540000 18 18 19 19 20 20 Analyze: Credit the drawing account; debit the capital account. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 129

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 130 PROBLEM 6.2A GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Dec. 31 Supplies Expense 517 120000 Supplies 121 120000 1 1 2 2 3 3 4 4 5 5 31 Advertising Expense 526 1 5 0 0 00 Prepaid Advertising 131 150000 6 6 7 7 8 8 31 Depreciation Expense Equipment 523 120000 Accumulated Depreciation Equipment 142 120000 9 9 10 10 11 11 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 401 37 50000 Income Summary 309 37 50000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 309 12 00000 Supplies Expense 517 120000 Advertising Expense 526 150000 Depreciation Expense Equipment 523 120000 Salaries Expense 511 720000 Utilities Expense 514 9 0 0 00 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 309 25 50000 Patonia Bell, Capital 301 25 50000 13 13 14 14 15 15 31 Patonia Bell, Capital 301 420000 Patonia Bell, Drawing 302 420000 16 16 17 17 18 18 130 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 131 PROBLEM 6.2A (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance 300000 31 Adjusting J3 120000 180000 Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance 1200000 31 Adjusting J3 150000 1050000 Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J3 120000 120000 Patonia Bell, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance 6600000 31 Closing J4 25 50000 9150000 31 Closing J4 420000 8730000 Patonia Bell, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance 420000 31 Closing J4 420000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 131

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 132 PROBLEM 6.2A (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J4 37 50000 3750000 31 Closing J4 12 00000 2550000 31 Closing J4 25 50000 0 00 Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance 3750000 31 Closing J4 37 50000 0 00 GENERAL LEDGER Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance 720000 31 Closing J4 720000 0 00 Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance 90000 31 Closing J4 9 0 0 00 0 00 Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J3 1 2 0 0 00 120000 31 Closing J4 1 2 0 0 00 0 00 132 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 133 PROBLEM 6.2A (continued) Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J3 120000 120000 31 Closing J4 120000 0 00 Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J3 150000 150000 31 Closing J4 150000 0 00 Bell Enterprises Postclosing Trial Balance December 31, ACCOUNT NAME Cash 46 20000 Accounts Receivable 600000 Supplies 180000 Prepaid Advertising 10 50000 Equipment 3000000 Accumulated Depreciation Equipment 120000 Accounts Payable 600000 Patonia Bell, Capital 8730000 Totals 94 50000 9450000 Analyze: Fifteen accounts are listed in the Adjusted Trial Balance section. Eight accounts are listed on the postclosing trial balance. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 133

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 134 PROBLEM 6.3A GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 401 138 00000 Income Summary 399 138 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 399 44 82000 Advertising Expense 511 480000 Depreciation Expense Equipment 514 9 0 0 00 Rent Expense 517 360000 Salaries Expense 519 28 80000 Utilities Expense 523 672000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 399 93 18000 Monica Cavazos, Capital 301 93 18000 13 13 14 14 15 15 31 Monica Cavazos, Capital 301 720000 Monica Cavazos, Drawing 302 720000 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 134 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 135 PROBLEM 6.3A (continued) GENERAL LEDGER Monica Cavazos, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance 5562000 31 Closing J4 93 18000 14880000 31 Closing J4 720000 14160000 Monica Cavazos, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance 720000 31 Closing J4 720000 0 00 Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J4 138 00000 13800000 31 Closing J4 44 82000 9318000 31 Closing J4 93 18000 0 00 Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance 13800000 31 Closing J4 138 00000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 135

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 136 PROBLEM 6.3A (continued) GENERAL LEDGER Advertising Expense ACCOUNT NO. 511 REF. Dec. 31 Balance 480000 31 Closing J4 480000 0 00 Depreciation Expense Equipment ACCOUNT NO. 514 REF. Dec. 31 Balance 90000 31 Closing J4 9 0 0 00 0 00 Rent Expense ACCOUNT NO. 517 REF. Dec. 31 Balance 360000 31 Closing J4 360000 0 00 136 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 137 PROBLEM 6.3A (continued) GENERAL LEDGER Salaries Expense ACCOUNT NO. 519 REF. Dec. 31 Balance 2880000 31 Closing J4 28 80000 0 00 Utilities Expense ACCOUNT NO. 523 REF. Dec. 31 Balance 672000 31 Closing J4 672000 0 00 Analyze: The balance in the Salaries Expense account is $0.0 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 137

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 138 PROBLEM 6.4A Nationwide Auto Detailing Service Worksheet Month Ended December 31, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash 31 05000 Accounts Receivable 495000 Supplies 400000 (a) 160000 Prepaid Advertising 300000 (b) 140000 Equipment 20 00000 Accumulated Depreciation Equipment (c) 4 8 0 00 Accounts Payable 500000 Richard Harris, Capital 35 50000 Richard Harris, Drawing 200000 Fees Income 30 00000 Supplies Expense (a) 160000 Advertising Expense (b) 140000 Depreciation Expense Equipment (c) 4 8 0 00 Salaries Expense 480000 Utilities Expense 7 0 0 00 Totals 70 50000 7050000 348000 348000 Net Income 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 138 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 139 PROBLEM 6.4A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET 3105000 3105000 495000 495000 240000 240000 160000 160000 2000000 2000000 48000 48000 500000 500000 3550000 3550000 200000 200000 3000000 3000000 160000 160000 140000 140000 48000 48000 480000 480000 70000 70000 7098000 7098000 898000 3000000 6200000 4098000 2102000 2102000 3000000 3000000 6200000 6200000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 139

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 140 PROBLEM 6.4A (continued) GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Dec. 31 Supplies Expense 517 160000 Supplies 121 160000 1 1 2 2 3 3 4 4 5 5 (b) 31 Advertising Expense 526 140000 Prepaid Advertising 131 140000 6 6 7 7 8 8 9 9 (c) 31 Depreciation Expense Equipment 523 4 8 0 00 Accumulated Depreciation Equipment 142 4 8 0 00 10 10 11 11 12 12 13 13 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 401 30 00000 Income Summary 309 30 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 309 898000 Salaries Expense 511 480000 Utilities Expense 514 7 0 0 00 Supplies Expense 517 1 6 0 0 00 Depreciation Expense Equipment 523 4 8 0 00 Advertising Expense 526 1 4 0 0 00 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 309 21 02000 Richard Harris, Capital 301 21 02000 13 13 14 14 15 15 31 Richard Harris, Capital 301 200000 Richard Harris, Drawing 302 200000 16 16 17 17 18 18 140 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 141 PROBLEM 6.4A (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance 400000 31 Adjusting J3 160000 240000 Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance 300000 31 Adjusting J3 140000 160000 Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J3 4 8 0 00 4 8 0 00 Richard Harris, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance 3550000 31 Closing J4 21 02000 5652000 31 Closing J4 200000 5452000 Richard Harris, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance 200000 31 Closing J4 200000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 141

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 142 PROBLEM 6.4A (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J4 30 00000 3000000 31 Closing J4 898000 2102000 31 Closing J4 21 02000 0 00 Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance 3000000 31 Closing J4 30 00000 0 00 GENERAL LEDGER Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance 480000 31 Closing J4 480000 0 00 Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance 70000 31 Closing J4 7 0 0 00 0 00 Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J3 160000 160000 31 Closing J4 160000 0 00 142 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 143 PROBLEM 6.4A (continued) Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J3 4 8 0 00 4 8 0 00 31 Closing J4 4 8 0 00 0 00 Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J3 140000 140000 31 Closing J4 140000 0 00 Nationwide Auto Detailing Service Postclosing Trial Balance December 31, ACCOUNT NAME Cash 31 05000 Accounts Receivable 495000 Supplies 240000 Prepaid Advertising 160000 Equipment 2000000 Accumulated Depreciation Equipment 4 8 0 00 Accounts Payable 500000 Richard Harris, Capital 54 52000 Totals 60 00000 6000000 Analyze: Total debits of $62,000 were posted to the general ledger to complete the closing entries. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 143

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 144 PROBLEM 6.1B GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Jan. 31 Supplies Expense 523 286000 Supplies 121 286000 (b) 31 Insurance Expense 514 148000 Prepaid Insurance 134 148000 (c) 31 Depreciation Expense Machinery 511 112000 Accumulated Depreciation Machinery 142 112000 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jan. 31 Fees Income 401 32 80000 Income Summary 309 32 80000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 309 25 31000 Depreciation Expense Machinery 511 112000 Insurance Expense 514 148000 Rent Expense 517 300000 Salaries Expense 520 16 00000 Supplies Expense 523 2 8 6 0 00 Telephone Expense 526 2 1 0 00 Utilities Expense 529 6 4 0 00 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 31 Income Summary 309 749000 James Wilson, Capital 301 749000 15 15 16 16 17 17 31 James Wilson, Capital 301 240000 James Wilson, Drawing 302 240000 18 18 19 19 20 20 Analyze: The adjusting entry for expired insurance created a debit to Insurance Expense, increasing the Insurance Expense account balance to $1,480. 144 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 145 PROBLEM 6.2B GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Dec. 31 Supplies Expense 517 300000 Supplies 121 300000 (b) 31 Advertising Expense 526 1 2 0 0 00 Prepaid Advertising 131 120000 (c) 31 Depreciation Expense Equipment 523 150000 Accumulated Depreciation Equipment 142 150000 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 401 46 80000 Income Summary 399 46 80000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 399 21 90000 Salaries Expense 511 14 40000 Utilities Expense 514 1 8 0 0 00 Supplies Expense 517 300000 Depreciation Expense Equipment 523 150000 Advertising Expense 526 120000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 399 24 90000 James McDonald, Capital 301 24 90000 13 13 14 14 15 15 31 James McDonald, Capital 301 840000 James McDonald, Drawing 302 840000 16 16 17 17 18 18 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 145

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 146 PROBLEM 6.2B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance 600000 31 Adjusting J3 300000 300000 Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance 900000 31 Adjusting J3 120000 780000 Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J3 150000 150000 James McDonald, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance 8220000 31 Closing J4 24 90000 10710000 31 Closing J4 840000 9870000 James McDonald, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance 840000 31 Closing J4 840000 0 00 146 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 147 PROBLEM 6.2B (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J4 46 80000 4680000 31 Closing J4 21 90000 2490000 31 Closing J4 24 90000 0 00 Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance 4680000 31 Closing J4 46 80000 0 00 Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance 1440000 31 Closing J4 14 40000 0 00 Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance 180000 31 Closing J4 1 8 0 0 00 0 00 Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J3 3 0 0 0 00 300000 31 Closing J4 3 0 0 0 00 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 147

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 148 PROBLEM 6.2B (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J3 150000 150000 31 Closing J4 150000 0 00 Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J3 120000 120000 31 Closing J4 120000 0 00 Big Valley Nursery and Landscape Postclosing Trial Balance December 31, ACCOUNT NAME Cash 32 40000 Accounts Receivable 600000 Supplies 300000 Prepaid Advertising 780000 Equipment 60 00000 Accumulated Depreciation Equipment 150000 Accounts Payable 900000 James McDonald, Capital 98 70000 Totals 109 20000 10920000 Analyze: Total credits of $102,000 were posted to the general ledger to complete the closing entries. 148 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 149 PROBLEM 6.3B GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 401 108 00000 Income Summary 399 108 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 399 41 40000 Advertising Expense 511 660000 Depreciation Expense Equipment 514 1 8 0 0 00 Rent Expense 517 420000 Salaries Expense 519 21 60000 Utilities Expense 523 720000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 399 66 60000 Patty Slade, Capital 301 66 60000 13 13 14 14 15 15 31 Patty Slade, Capital 301 720000 Patty Slade, Drawing 302 720000 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 149

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 150 PROBLEM 6.3B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance 600000 Prepaid Rent ACCOUNT NO. 131 REF. Dec. 31 Balance 4620000 Equipment ACCOUNT NO. 141 REF. Dec. 31 Balance 7200000 Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Balance 180000 Patty Slade, Capital ACCOUNT NO. 301 REF. Dec. 1 Balance 11490000 31 Closing J4 66 60000 18150000 31 Closing J4 720000 17430000 150 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 151 PROBLEM 6.3B (continued) GENERAL LEDGER Patty Slade, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance 720000 31 Closing J4 720000 0 00 Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J4 108 00000 10800000 31 Closing J4 41 40000 6660000 31 Closing J4 66 60000 0 00 Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance 10800000 31 Closing J4 108 00000 0 00 Advertising Expense ACCOUNT NO. 511 REF. Dec. 31 Balance 660000 31 Closing J4 660000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 151

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 152 PROBLEM 6.3B (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 514 REF. Dec. 31 Balance 180000 31 Closing J4 1 8 0 0 00 0 00 Rent Expense ACCOUNT NO. 517 REF. Dec. 31 Balance 420000 31 Closing J4 420000 0 00 152 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 153 PROBLEM 6.3B (continued) GENERAL LEDGER Salaries Expense ACCOUNT NO. 519 REF. Dec. 31 Balance 2160000 31 Closing J4 21 60000 0 00 Utilities Expense ACCOUNT NO. 523 REF. Dec. 31 Balance 720000 31 Closing J4 720000 0 00 Analyze: Fees Income, Income Summary, Patty Slade Capital, Patty Slade Drawing, Advertising, Depreciation, Rent, Salaries, and Utilities Expense. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 153

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 154 PROBLEM 6.4B Scott Wilson, CPA Worksheet Month Ended June 30, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash 31 95000 Accounts Receivable 11 34000 Supplies 15 75000 (a) 270000 Computers 28 80000 Accumulated Depreciation Computers 288000 (b) 24000 Accounts Payable 12 60000 Scott Wilson, Capital 62 23500 Scott Wilson, Drawing 12 00000 Fees Income 67 95000 Salaries Expense 37 72500 Supplies Expense (a) 270000 Depreciation Expense Computers (b) 2 4 0 00 Travel Expense 540000 Utilities Expense 2 7 0 0 00 Totals 145 6 6 5 00 145 66500 294000 294000 Net Income 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 154 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 155 PROBLEM 6.4B (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET 3195000 3195000 1134000 1134000 1305000 1305000 2880000 2880000 312000 312000 1260000 1260000 6223500 6223500 1200000 1200000 6795000 6795000 3772500 3772500 270000 270000 24000 24000 540000 540000 270000 270000 14590500 14590500 4876500 6795000 9714000 7795500 1918500 1918500 6795000 6795000 9714000 9714000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 155

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 156 PROBLEM 6.4B (continued) GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Jun. 30 Supplies Expense 517 270000 Supplies 121 270000 1 1 2 2 3 3 4 4 5 5 6 6 30 Depreciation Expense Computers 523 2 4 0 00 Accumulated Depreciation Computers 142 2 4 0 00 7 7 8 8 9 9 10 10 11 11 12 12 13 13 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jun. 30 Fees Income 401 67 95000 Income Summary 309 67 95000 1 1 2 2 3 3 4 4 5 5 30 Income Summary 309 48 76500 Salaries Expense 511 37 72500 Supplies Expense 517 2 7 0 0 00 Depreciation Expense Computers 523 2 4 0 00 Travel Expense 519 5 4 0 0 00 Utilities Expense 514 2 7 0 0 00 6 6 7 7 8 8 9 9 10 10 11 11 12 12 30 Income Summary 309 19 18500 Scott Wilson, Capital 301 19 18500 13 13 14 14 15 15 30 Scott Wilson, Capital 301 12 00000 Scott Wilson, Drawing 302 12 00000 16 16 17 17 18 18 156 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 157 PROBLEM 6.4B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Jun. 30 Balance 1575000 30 Adjusting J3 270000 1305000 Computers ACCOUNT NO. 131 REF. Jun. 30 Balance 2880000 Accumulated Depreciation Computers ACCOUNT NO. 142 REF. Jun. 30 Balance 288000 30 Adjusting J3 2 4 0 00 312000 Scott Wilson, Capital ACCOUNT NO. 301 REF. Jun. 30 Balance 6223500 30 Closing J4 19 18500 8142000 30 Closing J4 12 00000 6942000 Scott Wilson, Drawing ACCOUNT NO. 302 REF. Jun. 30 Balance 1200000 30 Closing J4 12 00000 0 00 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 157

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 158 PROBLEM 6.4B (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 309 REF. Jun. 30 Closing J4 67 95000 6795000 30 Closing J4 48 76500 1918500 30 Closing J4 19 18500 0 00 Fees Income ACCOUNT NO. 401 REF. Jun. 30 Balance 6795000 30 Closing J4 67 95000 0 00 Salaries Expense ACCOUNT NO. 511 REF. Jun. 30 Balance 3772500 30 Closing J4 37 72500 0 00 Utilities Expense ACCOUNT NO. 514 REF. Jun. 30 Balance 270000 30 Closing J4 2 7 0 0 00 0 00 Supplies Expense ACCOUNT NO. 517 REF. Jun. 30 Adjusting J3 270000 270000 30 Closing J4 270000 0 00 158 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 159 PROBLEM 6.4B (continued) GENERAL LEDGER Travel Expense ACCOUNT NO. 519 REF. Jun. 30 Balance 540000 30 Closing J4 5 4 0 0 00 0 00 Depreciation Expense Computers ACCOUNT NO. 523 REF. Jun. 30 Adjusting J3 2 4 0 00 2 4 0 00 30 Closing J4 2 4 0 00 0 00 Scott Wilson, CPA Postclosing Trial Balance June 30, ACCOUNT NAME Cash 31 95000 Accounts Receivable 11 34000 Supplies 13 05000 Computers 28 80000 Accumulated Depreciation Computers 312000 Accounts Payable 1260000 Scott Wilson, Capital 6942000 Totals 85 14000 8514000 Analyze: Net Income for Scott Wilson, CPA for the month of June was $19,185. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 159

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 160 CRITICAL THINKING PROBLEM 6.1 The Style Shop Worksheet Month Ended December 31, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash 81 6 0 0 00 Accounts Receivable 18 00000 Supplies 14 40000 (a) 720000 Prepaid Insurance 21 6 0 0 00 (b) 4 8 0 0 00 Machinery 168 0 0 0 00 Accumulated Depreciation Machinery (c) 2 4 0 0 00 Accounts Payable 27 0 0 0 00 Sarah Palmer, Capital 149 16000 Sarah Palmer, Drawing 12 00000 Fees Income 165 0 0 0 00 Supplies Expense (a) 720000 Insurance Expense (b) 4 8 0 0 00 Salaries Expense 22 2 0 0 00 Depreciation Expense Machinery (c) 2 4 0 0 00 Utilities Expense 3 3 6 0 00 Totals 341 1 6 0 00 341 16000 1440000 1440000 Net Income 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 160 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 161 CRITICAL THINKING PROBLEM 6.1 (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET 8160000 8160000 1800000 1800000 720000 720000 1680000 1680000 16800000 16800000 240000 240000 2700000 2700000 14916000 14916000 1200000 1200000 16500000 16500000 720000 720000 480000 480000 2220000 2220000 240000 240000 336000 336000 34356000 34356000 3996000 16500000 30360000 17856000 12504000 12504000 16500000 16500000 30360000 30360000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 161

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 162 CRITICAL THINKING PROBLEM 6.1 (continued) The Style Shop Income Statement Month Ended December 31, Revenue Fees Income 16500000 Expenses Supplies Expense 720000 Insurance Expense 480000 Salaries Expense 22 20000 Depreciation Expense Machinery 2 4 0 0 00 Utilities Expense 3 3 6 0 00 Total Expenses 3996000 Net Income 12504000 The Style Shop Statement of Owner s Equity Month Ended December 31, Sarah Palmer, Capital, December 1, 149 16000 Net Income for December 125 04000 Less Withdrawals for December 12 00000 Increase in Capital 11304000 Sarah Palmer, Capital, December 31, 262 20000 162 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 163 CRITICAL THINKING PROBLEM 6.1 (continued) The Style Shop Balance Sheet December 31, Assets Cash 8160000 Accounts Receivable 1800000 Supplies 720000 Prepaid Insurance 1680000 Machinery 168 00000 Accumulated Depreciation Machinery 2 4 0 0 00 165 60000 Total Assets 28920000 Liabilities and Owner s Equity Liabilities Accounts Payable 2700000 Owner s Equity Sarah Palmer, Capital 262 20000 Total Liabilities and Owner s Equity 289 20000 GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Dec. 31 Supplies Expense 720000 Supplies 720000 1 1 2 2 3 3 4 4 5 5 31 Insurance Expense 480000 Prepaid Insurance 480000 6 6 7 7 8 8 31 Depreciation Expense Machinery 240000 Accumulated Depreciation Machinery 240000 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 163

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 164 CRITICAL THINKING PROBLEM 6.1 (continued) GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income 165 00000 Income Summary 165 00000 1 1 2 2 3 3 4 4 5 5 31 Income Summary 39 96000 Supplies Expense 720000 Insurance Expense 480000 Salaries Expense 22 2 0 0 00 Depreciation Expense Machinery 240000 Utilities Expense 336000 6 6 7 7 8 8 9 9 10 10 11 11 12 12 31 Income Summary 125 04000 Sarah Palmer, Capital 125 04000 13 13 14 14 15 15 31 Sarah Palmer, Capital 12 00000 Sarah Palmer, Drawing 12 00000 16 16 17 17 18 18 The Style Shop Postclosing Trial Balance December 31, ACCOUNT NAME Cash 81 60000 Accounts Receivable 18 00000 Supplies 720000 Prepaid Insurance 16 80000 Machinery 168 00000 Accumulated Depreciation Machinery 240000 Accounts Payable 2700000 Sarah Palmer, Capital 262 20000 Totals 291 60000 29160000 Analyze: The net income would be $134,640. 164 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 165 CRITICAL THINKING PROBLEM 6.2 1. Reed made the following errors preparing the closing entries: a. Accumulated Depreciation and Accounts Payable are permanent accounts that continue from accounting period to accounting period and, consequently, are not closed. b. The Drawing account is not an expense account to be closed to Income Summary but is a reduction of equity and is closed directly to the Capital account. Wilson Reed closed accounts based on what kind of balance they had (debit/credit) rather than looking at the type of account (permanent/temporary) they were. Only temporary, or nominal, accounts are closed. 2. GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. Dec. 31 James Walker, Capital 20 75000 Accumulated Depreciation 425000 Accounts Payable 16 5 0 0 00 To correct errors made in closing entries 1 1 2 2 3 3 4 4 5 5 6 6 3. The proof of this entry is: Fees Income 49,000 Expenses: Salaries Expense 39,000 Supplies Expense 2,500 Depreciation Expense 1,200 42,700 Net Income 6,300 Withdrawals (3,500) Increase in Capital 2,800 Capital, Beginning 25,000 Capital, Ending 27,800 Corrected balance per Reed s entries 48,550 Less debit from correcting entry (20,750) Corrected ending Capital balance 27,800 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 165

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 166 CRITICAL THINKING PROBLEM 6.2 (continued) Note: It is not necessary to make an entry to correct the closing of the Drawing account to the Income Summary account. Closing the Drawing account to the Income Summary account, which in turn was closed to the Capital account, results in reducing the Capital account by the amount of the withdrawals. So, while incorrect, Reed s entry with regard to Drawing achieves the correct end result. The balance of the Capital account after closing entries have been posted must agree with the ending Capital balance as shown. Posting the entry closing the Income Summary account increases the Capital account by the amount of the net income (or decreases it by the amount of a net loss), while posting the entry closing the Drawing account decreases the Capital account. These postings reflect the same changes to Capital that are shown on the statement of owner s equity and on the balance sheet, and therefore, the ending Capital amount must be the same for both. Note that the errors Reed made in preparing the closing entries would not be revealed by the postclosing trial balance. Since each entry Reed made had equal debits and credits, the postclosing trial balance would be in balance. The errors would not become evident until the next year when postings were made to the Accumulated Depreciation and Accounts Payable accounts or when the ledger account balances were compared to the balance sheet amounts. Business Connections Managerial Focus: 1. No. A thorough analysis of the components of the income statement would reveal how costs directly impact net income. The balance sheet helps determine the amount of the firm s assets and its liquidity, liabilities, and equity. 2. Current assets compared with current liabilities. 3. Timely preparation of financial statements support future planning, prompt payment of debts, developing effective credit policies. 4. The income statement might help determine the adequacy of profit, how to improve revenue and hold down expenses, how to reduce expenses without decreasing revenue, and how to even out the business operating cycle. Balance sheet data might influence decisions concerning growth of equity, the return on investment, adequacy of the firm s assets, whether collections on accounts receivable should be accelerated, and whether more capital is needed. Ethical Dilemma: You should wait to verify the invoice is an actual invoice. At the end of the year, Miscellaneous Expense will be closed and the $1,000 expense will be in the previous year and not given the verification it so badly needs. 166 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 167 Streetwise: 1. Answers will vary, but permanent accounts may include Cash and Cash Equivalents, Short-Term Investments, Receivables, etc. Temporary accounts include Sales, Selling and Store Operating Expenses, Interest and Investment Income. 2. Dr. Inc. Summ., $20,110 million; Cr. Selling, General and Administrative, $18,348 million; credit Depreciation and Amortization, $1,762 million. Financial Statement Analysis: 1. Dr. Inc. Summ., $7,440,000,000; Dr. Gain on Insurance Recoveries, $168,000,000; Cr. Labor and Fringe, $2,922,000,000; Cr. Materials, Supplies, and Other $1,889,000; Cr. Conrail Fees, Rents, and Services, $75,000,000; Cr. Inland Trans., $242,000,000; Cr. Depreciation, $856,000,000; Cr. Fuel, $1,112,000,000; Cr. Equipment & Other Rents, $512,000,000 2. Dr. Intermodal, $1,412,000,000; Dr. Rail, $8,154,000,000; Cr. Inc. Summ., $9,566,000,000 Analyze Online: Answers will vary depending on the year. Extending the Thought: Answers will vary. Students may suggest that skipping the preparation of the worksheet will increase the chance for errors in the accounting records. Business Communication: Students reports will vary. Students should demonstrate an understanding of the types of accounts that should be closed at the end of an accounting period. Team Work: 1) Analyze transactions, 2) journalize the data about transactions, 3) post the data about transactions, 4) prepare a worksheet, 5) prepare financial statements, 6) record adjusting entries, 7) record closing entries, 8) prepare a postclosing trial balance, and 9) interpret the financial information. Internet Connection: 1. Requirements Experience: At least 2 years full-time experience or the part-time or freelance equivalent. 2. Examination: Candidates must pass a 4-part national examination, including 2 parts given at any Prometric Test Center (there are over 300 nationwide). 3. Code of Ethics: Applicants must sign a Code of Ethics. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 167

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 168 Chapter 6 Practice Test Answer Key Part A True-False 1. F 2. F 3. T 4. F 5. T 6. F 7. T 8. F 9. F 10. T Part B Matching 1. d 2. e 3. c 4. b 5. a 168 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 169 MINI-PRACTICE SET1 Service Business Accounting Cycle GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. 2011 Jan. 2 Supplies 121 300000 Cash 101 300000 Bought supplies for cash, Check 1015 1 1 2 2 3 3 4 4 5 5 2 Prepaid Insurance 134 480000 Cash 101 480000 Purchased one year of insurance, Check 1016 6 6 7 7 8 8 9 9 7 Cash 101 15 00000 Accounts Receivable 111 180000 Fees Income 401 16 80000 Performed services for cash and on account 10 10 11 11 12 12 13 13 14 14 12 Cash 101 1 5 0 0 00 Accounts Receivable 111 150000 Received cash on account 15 15 16 16 17 17 18 18 12 Advertising Expense 526 215000 Cash 101 215000 Paid for advertising on radio, Check 1017 19 19 20 20 21 21 22 22 13 Cash 101 225000 Accounts Receivable 111 225000 Received cash on account 23 23 24 24 25 25 26 26 14 Cash 101 2 7 5 00 Supplies 121 2 7 5 00 Returned damaged supplies for cash refund 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 169

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 170 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. 2011 Jan. 15 Cash 101 18 25000 Accounts Receivable 111 237500 Fees Income 401 20 62500 Performed services for cash and on account 1 1 2 2 3 3 4 4 5 5 6 6 20 Supplies 121 180000 Accounts Payable 202 180000 Bought supplies on account 7 7 8 8 9 9 10 10 20 Cash 101 905000 Accounts Receivable 111 585000 Fees Income 401 14 90000 Performed services for cash and on account 11 11 12 12 13 13 14 14 15 15 20 Cash 101 175000 Accounts Receivable 111 175000 Received cash on account 16 16 17 17 18 18 19 19 21 Maintenance Expense 529 425000 Cash 101 425000 Paid cash for equipment maintenance, Check 1018 20 20 21 21 22 22 23 23 24 24 22 Advertising Expense 526 275000 Cash 101 275000 Paid cash for newspaper ads, Check 1019 25 25 26 26 27 27 28 28 23 Telephone Expense 532 4 1 0 00 Cash 101 4 1 0 00 Paid monthly telephone bill, Check 1020 29 29 30 30 31 31 32 32 26 Cash 101 457000 Accounts Receivable 111 457000 Received cash on account 33 33 34 34 35 35 36 36 37 37 38 38 39 39 170 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 171 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 5 DATE DESCRIPTION POST. REF. 2011 Jan. 27 Accounts Payable 202 200000 Cash 101 200000 Made payment to creditor, Check 1021 1 1 2 2 3 3 4 4 5 5 28 Utilities Expense 514 105000 Cash 101 105000 Paid monthly utility bill, Check 1022 6 6 7 7 8 8 9 9 29 Cash 101 14 05000 Accounts Receivable 111 225000 Fees Income 401 16 30000 Performed services for cash and on account 10 10 11 11 12 12 13 13 14 14 31 Salaries Expense 511 15 50000 Cash 101 15 50000 Paid monthly salaries, Checks 1023 1027 15 15 16 16 17 17 18 18 31 Carolyn Wells, Drawing 302 600000 Cash 101 600000 Owner withdrew cash for personal use, Check 1028 19 19 20 20 21 21 22 22 23 23 31 Maintenance Expense 529 105000 Cash 101 105000 Paid for monthly maintenance services, Check 1029 24 24 25 25 26 26 27 27 28 28 31 Equipment 141 1050000 Cash 101 550000 Accounts Payable 202 500000 Bought equipment for cash and on account, Check 1030 29 29 30 30 31 31 32 32 33 33 34 34 31 Cash 101 285000 Accounts Receivable 111 145000 Fees Income 401 430000 Performed services for cash and on account 35 35 36 36 37 37 38 38 39 39 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 171

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 172 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 6 DATE DESCRIPTION POST. REF. Adjusting Entries 2011 Jan. 31 Supplies Expense 517 352500 Supplies 121 352500 1 1 2 2 3 3 4 4 5 5 31 Insurance Expense 535 4 0 0 00 Prepaid Insurance 134 4 0 0 00 6 6 7 7 8 8 31 Rent Expense 520 400000 Prepaid Rent 137 400000 9 9 10 10 11 11 31 Depreciation Expense Equipment 523 1 8 3 00 Accumulated Depreciation Equipment 142 1 8 3 00 12 12 13 13 14 14 Closing Entries 15 15 16 16 31 Fees Income 401 72 92500 Income Summary 309 72 92500 17 17 18 18 19 19 31 Income Summary 309 35 26800 Salaries Expense 511 15 50000 Utilities Expense 514 105000 Supplies Expense 517 352500 Rent Expense 520 400000 Depreciation Expense Equipment 523 1 8 3 00 Advertising Expense 526 490000 Maintenance Expense 529 530000 Telephone Expense 532 4 1 0 00 Insurance Expense 535 4 0 0 00 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 Income Summary 309 37 65700 Carolyn Wells, Capital 301 37 65700 31 31 32 32 33 33 31 Carolyn Wells, Capital 301 600000 Carolyn Wells, Drawing 302 600000 34 34 35 35 36 36 37 37 38 38 39 39 172 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 173 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 REF. 2011 Jan. 1 Balance 11135000 2 J3 300000 10835000 2 J3 480000 10355000 7 J3 1500000 11855000 12 J3 150000 12005000 12 J3 215000 11790000 13 J3 225000 12015000 14 J3 27500 12042500 15 J4 1825000 13867500 20 J4 905000 14772500 20 J4 175000 14947500 21 J4 425000 14522500 22 J4 275000 14247500 23 J4 41000 14206500 26 J4 457000 14663500 27 J5 200000 14463500 28 J5 105000 14358500 29 J5 1405000 15763500 31 J5 1550000 14213500 31 J5 600000 13613500 31 J5 105000 13508500 31 J5 550000 12958500 31 J5 285000 13243500 Accounts Receivable ACCOUNT NO. 111 REF. 2011 Jan. 1 Balance 500000 7 J3 180000 680000 12 J3 150000 530000 13 J3 225000 305000 15 J4 237500 542500 20 J4 585000 1127500 20 J4 175000 952500 26 J4 457000 495500 29 J5 225000 720500 31 J5 145000 865500 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 173

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 174 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. 2011 Jan. 1 Balance 100000 2 J3 300000 400000 14 J3 27500 372500 20 J4 180000 552500 31 Adjusting J6 352500 200000 Prepaid Insurance ACCOUNT NO. 134 REF. 2011 Jan. 2 J3 480000 480000 31 Adjusting J6 4 0 0 00 440000 Prepaid Rent ACCOUNT NO. 137 REF. 2011 Jan. 1 Balance 400000 31 Adjusting J6 400000 0 00 Equipment ACCOUNT NO. 141 REF. 2011 Jan. 1 Balance 1100000 31 J5 1050000 2150000 Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. 2011 Jan. 1 Balance 18300 31 Adjusting J6 1 8 3 00 3 6 6 00 174 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 175 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Accounts Payable ACCOUNT NO. 202 REF. 2011 Jan. 1 Balance 350000 20 J4 180000 530000 27 J5 200000 330000 31 J5 500000 830000 Carolyn Wells, Capital ACCOUNT NO. 301 REF. 2011 Jan. 1 Balance 12866700 31 Closing J6 37 65700 16632400 31 Closing J6 600000 16032400 Carolyn Wells, Drawing ACCOUNT NO. 302 REF. 2011 Jan. 31 J5 600000 600000 31 Closing J6 600000 0 00 Income Summary ACCOUNT NO. 309 REF. 2011 Jan. 31 Closing J6 72 92500 7292500 31 Closing J6 35 26800 3765700 31 Closing J6 37 65700 0 00 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 175

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 176 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Fees Income ACCOUNT NO. 401 REF. 2011 Jan. 7 J3 16 80000 1680000 15 J4 2062500 3742500 20 J4 1490000 5232500 29 J5 1630000 6862500 31 J5 430000 7292500 31 Closing J6 72 92500 0 00 Salaries Expense ACCOUNT NO. 511 REF. 2011 Jan. 31 J5 15 50000 1550000 31 Closing J6 15 50000 0 00 Utilities Expense ACCOUNT NO. 514 REF. 2011 Jan. 28 J5 105000 105000 31 Closing J6 105000 0 00 Supplies Expense ACCOUNT NO. 517 REF. 2011 Jan. 31 Adjusting J6 352500 352500 31 Closing J6 3 5 2 5 00 0 00 Rent Expense ACCOUNT NO. 520 REF. 2011 Jan. 31 Adjusting J6 400000 400000 31 Closing J6 400000 0 00 176 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 177 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 523 REF. 2011 Jan. 31 Adjusting J6 1 8 3 00 1 8 3 00 31 Closing J6 1 8 3 00 0 00 Advertising Expense ACCOUNT NO. 526 REF. 2011 Jan. 12 J3 215000 215000 22 J4 275000 490000 31 Closing J6 490000 0 00 Maintenance Expense ACCOUNT NO. 529 REF. 2011 Jan. 21 J4 425000 425000 31 J5 105000 530000 31 Closing J6 530000 0 00 Telephone Expense ACCOUNT NO. 532 REF. 2011 Jan. 23 J4 4 1 0 00 4 1 0 00 31 Closing J6 4 1 0 00 0 00 Insurance Expense ACCOUNT NO. 535 REF. 2011 Jan. 31 Adjusting J6 4 0 0 00 4 0 0 00 31 Closing J6 4 0 0 00 0 00 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 177

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 178 MINI-PRACTICE SET 1 (continued) Wells Consulting Services Worksheet Month Ended January 31, 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash 132 4 3 5 00 Accounts Receivable 865500 Supplies 552500 (a) 352500 Prepaid Rent 400000 (b) 400000 Prepaid Insurance 480000 (c) 40000 Equipment 21 5 0 0 00 Accumulated Depreciation Equipment 1 8 3 00 (d) 1 8 3 00 Accounts Payable 8 3 0 0 00 Carolyn Wells, Capital 128 66700 Carolyn Wells, Drawing 600000 Income Summary Fees Income 72 9 2 5 00 Salaries Expense 15 50000 Utilities Expense 105000 Supplies Expense (a) 352500 Rent Expense (b) 400000 Depreciation Expense Equipment (d) 1 8 3 00 Insurance Expense (c) 4 0 0 00 Advertising Expense 490000 Telephone Expense 4 1 0 00 Maintenance Expense 530000 Totals 210 0 7 5 00 210 0 7 5 00 810800 810800 Net Income 24 25 26 27 28 29 30 31 32 33 34 35 36 37 178 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 179 MINI-PRACTICE SET 1 (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET 132 4 3 5 00 132 4 3 5 00 865500 865500 200000 200000 0 00 0 00 440000 440000 2150000 2150000 36600 36600 830000 830000 128 6 6 7 00 128 6 6 7 00 600000 600000 7292500 7292500 1550000 1550000 105000 105000 352500 352500 400000 400000 18300 18300 40000 40000 490000 490000 41000 41000 530000 530000 21025800 21025800 3526800 7292500 17499000 13733300 3765700 3765700 7292500 7292500 17499000 17499000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 179 25 26 27 28 29 30 31 32 33 34 35 36 37

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 180 MINI-PRACTICE SET 1 (continued) Wells Consulting Services Income Statement Month Ended January 31, 2011 Revenue Fees Income 7292500 Expenses Salaries Expense 15 5 0 0 00 Utilities Expense 105000 Supplies Expense 352500 Rent Expense 400000 Depreciation Expense Equipment 1 8 3 00 Insurance Expense 4 0 0 00 Advertising Expense 490000 Telephone Expense 4 1 0 00 Maintenance Expense 530000 Total Expenses 3526800 Net Income 3765700 Wells Consulting Services Statement of Owner s Equity Month Ended January 31, 2011 Carolyn Wells, Capital, January 1, 2011 128 6 6 7 00 Net Income for January 37 65700 Less Withdrawals for January 600000 Increase in Capital for January 31 6 5 7 00 Carolyn Wells, Capital, January 31, 2011 160 3 2 4 00 180 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 181 MINI-PRACTICE SET 1 (continued) Wells Consulting Services Balance Sheet January 31, 2011 Assets Cash 132 4 3 5 00 Accounts Receivable 865500 Supplies 200000 Prepaid Insurance 440000 Equipment 21 5 0 0 00 Less Accumulated Depreciation Equipment 3 6 6 00 21 1 3 4 00 Total Assets 168 6 2 4 00 Liabilities and Owner s Equity Liabilities Accounts Payable 830000 Owner s Equity Carolyn Wells, Capital 160 3 2 4 00 Total Liabilities and Owner s Equity 168 6 2 4 00 Wells Consulting Services Postclosing Trial Balance January 31, 2011 ACCOUNT NAME Cash 132 43500 Accounts Receivable 865500 Supplies 200000 Prepaid Insurance 440000 Equipment 21 5 0 0 00 Accumulated Depreciation Equipment 3 6 6 00 Accounts Payable 830000 Carolyn Wells, Capital 160 3 2 4 00 Totals 168 9 9 0 00 168 9 9 0 00 Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 181

pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 182 MINI-PRACTICE SET 1 (continued) Analyze: a. Total assets increased by $36,457 ($168,624 $132,167). Total liabilities increased by $4,800 ($8,300 $3,500). Owner s capital increased by $31,657 ($160,324 128,667). b. The balance of Cash increased by $21,085 ($132,435 $111,350). The balance of Accounts Receivable increased by $3,655 ($8,655 $5,000). c. Yes. The firm s financial position improved through the increases in capital of $31,657 ($160,324 $128,667). 182 Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.