Chapter 4, Problem 4.2COP

1,3, 5 and 8

To determine

To Prepare: T-accounts for the accounts on the trial balance and enter beginning balances.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

(a)The title of the account

(b)The left or debit side

(c)The right or credit side

Prepare the T-account:

2.

To determine

To record: Journal entries for transactions (1) to (10).

Explanation of Solution

Journal entries for the transactions (1) to (10) as follows:

Date	Account Title and Explanation			Debit ($)	Credit ($)
1)	Cash (+A)			12
			Notes payable (Short-term) (+L)		12
	(To record borrowed cash on note)
2)	Land (+A)			9
			Cash (-A)		9
	(To record purchase of land for building site)
3)	Cash (+A)			23
		Common Stock (+SE)			23
	(To record issued common stock for cash)
4)	Software (+A)			10
			Cash (-A)		10
	(To record Purchase of additional software)
5)	Supplies (+A)			18
			Accounts payable  (+L)		18
	(To record supplies purchased for future use)
6)	Accounts payable (-L)			13
	Cash (-A)				13
	(To record cash paid to creditors)
7)	No entry required, Because no revenue has been earned in 2015
8)	Cash (+A)			120
	Accounts Receivable (+A)			40
		Service Revenue (+R, +SE)			160
	(To record service revenue earned during the year 2015)
9)	Salaries and Wages Expense (+E, -SE)			85
		Cash (-A)			85
	(To record salaries and wages expense incurred during 2015)
10)	Cash (+A)			24
		Accounts Receivable (-A)			24
	(To record cash collected on customer’s account)

Table (1)

3.

To determine

To Prepare: An unadjusted trial balance from requirement 2.

Explanation of Solution

Incorporation H&H
Unadjusted Trial Balance
At December 31, 2015
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	30
Land	9
Equipment	60
Accumulated Depreciation–Equipment		6
Software	25
Accumulated Amortization		5
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable
Interest Payable
Income Taxes Payable
Common Stock		94
Retained Earnings		8
Service Revenue		160
Salaries and Wages Expense	85
Supplies Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Total	295	295

Table (2)

4.

To determine

To record: Adjusting journal entries (11) to (16)

Explanation of Solution

Prepare adjusting journal entries (11) to (16):

Date	Account Title and Explanation			Debit ($)	Credit ($)
11.	Amortization Expense (+E, -SE)			5
			Accumulated Amortization (+xA, -A)		5
	(To record adjusting entry for amortization expenses)
12.	Supplies expense (+E, -SE) (1)			20
			Supplies(-A)		20
	(To record the use of supplies)
13.	Depreciation expense (+E, -SE)			6
		Accumulated depreciation –Equipment (+xA, -A)			6
	(To record adjusting entry for depreciation expense)
14.	Interest expense (+E, -SE)			1
			Interest payable(+L)		1
	(To record the adjusting entry for interest expense)
15.	Salaries and wages expense (+E, -SE)			12
			Salaries and wages payable (+L)		12
	(To record the adjusting entry for salaries and wages expenses)
16.	Income tax expense(+E, -SE)			8
			Income tax payable(+L)		8
	(To record the adjusting entry for income tax expense)

Table (3)

Working notes:

12. Calculation of supplies expenses:

$\begin{array}{c}\text{Supplies expenses=Beginning supplies+Purchase of supplies}-\text{Ending supplies}\\ \text{=\$12+\$18}-\$10\\ =\$20\end{array}$ (1)

5.

To determine

To Prepare: An adjusted trial balance from requirement 4.

Explanation of Solution

Prepare an adjusted trial balance for Incorporation H&H for December 31, 2015:

Incorporation H&H
Adjusted Trial Balance
At December 31, 2015
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	10
Land	9
Equipment	60
Accumulated Depreciation–Equipment		12
Software	25
Accumulated Amortization		10
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable		12
Interest Payable		1
Income Taxes Payable		8
Common Stock		94
Retained Earnings		8
Service Revenue		160
Salaries and Wages Expense	97
Supplies Expense	20
Depreciation Expense	6
Amortization expense	5
Interest Expense	1
Income Tax Expense	8
Total	327	327

Table (4)

6.

To determine

To prepare: An income statement, Statement of retained earnings and balance sheet.

Explanation of Solution

Prepare an income statement for the year ended December 31, 2015:

Incorporation H&H
Income Statement
For the year ended December 31, 2015
(in thousands)
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	160
Total revenues		160
Less: Expenses
Salaries and wage expense	97
Supplies expense	20
Depreciation expense	6
Amortization expense	5
Interest expense	1
Income tax expense	8
Total expenses		137
Net income		23

(2)

Table (5)

Prepare a statement of retained earnings:

Incorporation H&H
Statement of Retained Earnings
For the year ended December 31, 2015
(in thousands)
Particulars	Amount ($)	Amount ($)
Balance, January 1, 2015	8
Add: Net income	23
		31
Less: Dividends		(0)
Balance, December 31, 2015		31

Table (6)

Prepare a balance sheet for the year December 31, 2015:

Incorporation H&H
Balance Sheet
At December 31, 2015
(in thousands)
Particulars	Amount($)	Amount($)
Assets
Current Assets:
Cash	65
Accounts Receivable	21
Supplies	10
Total current assets		96
Land		9
Equipment	60
Accumulated Depreciation	(12)
Equipment, net		48
Software	25
Accumulated amortization	(10)	15
Total Assets		168

Liabilities :
Current liabilities :
Accounts Payable	10
Notes payable (short-term)	12
salaries and wages payable	12
Interest payable	1
Income Taxes Payable	8
Total Current Liabilities		43
Stockholders’ Equity
Common Stock	94
Retained Earnings	31
Total Stockholders’ Equity		125
Total liabilities and stockholders’ equity		168

Table (7)

7.

To determine

To prepare: The closing entry for Incorporation H&H on December 31, 2015.

Explanation of Solution

Prepare closing entries for Incorporation H&H on December 31, 2015:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2015	Sales revenue(-R)	160
	Salaries and wages expense(-E)		97
	Depreciation expense(-E)		6
	Supplies expense(-E)		20
	Amortization expense (-E)		5
	Income tax expense(-E)		8
	Interest expense (-E)		1
	Retained earnings(+SE) (2)		23
	(To record the closing entries for Incorporation H&H)

Table (8)

For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts will be transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.

8.

To determine

To prepare: Post closing trial balance from the requirement 7.

Explanation of Solution

Prepare a Post-closing trial balance for Incorporation H&H for December 31, 2015:

Incorporation H&H
Post-closing Trial Balance
At December 31, 2015
(in thousands)
Account Titles	Debit ($)	Credit ($)
Cash	65
Accounts Receivable	21
Supplies	10
Land	9
Equipment	60
Accumulated Depreciation–Equipment		12
Software	25
Accumulated Amortization		10
Accounts Payable		10
Notes Payable (short–term)		12
Salaries and Wages Payable		12
Interest Payable		1
Income Taxes Payable		8
Common Stock		94
Retained Earnings		31
Dividends	0
Service Revenue		0
Salaries and Wages Expense	0
Supplies Expense	0
Depreciation Expense	0
Amortization expense	0
Interest Expense	0
Income Tax Expense	0
Total	190	190

Table (9)

9.

To determine

To know: The net income of Incorporation H&H has been generated during 2015 and to determine the net profit margin and to explain the company has been financed primarily by liabilities or stockholders’ equity and to find the current ratio.

Explanation of Solution

The net income of Incorporation H&H for 2015:

Incorporation H&H generated net income in the year 2015 is $23(thousand).

Calculation of net profit margin:

$\begin{array}{c}\text{Net profit margin =}\frac{\text{Net income }}{\text{Total revenues}}\times 100\\ =\frac{\$23}{\$160}\times 100\\ =14.4\%\end{array}$

The net profit margin of Incorporation H&H is 14.4%.

To see whether the Incorporation H&H is financed primarily by liabilities or stockholders’ equity:

The Incorporation H&H is financed primarily by stockholders’ equity, where by providing stockholders’ equity for $125(thousand) with the total assets and liabilities providing for $43(thousand).

Calculation of current ratio:

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$96}{\$13}\\ =2.23:1\end{array}$

The current ratio is 2.23:1.