Chapter 4
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DO IT!
Worksheet
Action Plan
✔ Balance sheet: Extend
assets to debit column.
Extend liabilities to credit
column. Extend contra
assets to credit column.
Extend drawings account
to debit column.
✔ Income statement:
Extend expenses to debit
column. Extend revenues
to credit column.
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Completing the Accounting Cycle
Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.
Cash
Accumulated Depreciation—Equipment
Accounts Payable
Owner’s Drawings
Service Revenue
Salaries and Wages Expense
Solution
Income statement debit column—Salaries and Wages Expense
Income statement credit column—Service Revenue
Balance sheet debit column—Cash; Owner’s Drawings
Balance sheet credit column—Accumulated Depreciation—Equipment; Accounts
Payable
Related exercise material: BE4-1, BE4-2, BE4-3, E4-1, E4-2, E4-5, E4-6, and DO IT! 4-1.
DO IT!
Closing Entries
The worksheet for Hancock Company shows the following in the financial statement columns:
Owner’s drawings $15,000
Owner’s capital $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner’s capital.
Solution
Action Plan
✔ Close Income
Summary to Owner’s
Capital.
✔ Close Owner’s
Drawings to Owner’s
Capital.
Dec. 31
31
Income Summary
Owner’s Capital
(To close net income to capital)
18,000
Owner’s Capital
Owner’s Drawings
(To close drawings to capital)
15,000
18,000
Related exercise material: BE4-4, BE4-5, BE4-6, E4-4, E4-7, E4-8, E4-11, and DO IT! 4-2.
D-18
15,000
DO IT!
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D-19
DO IT!
Assets Section of
Classified Balance
Sheet
Baxter Hoffman recently received the following information related to Hoffman Company’s
December 31, 2014, balance sheet.
Prepaid insurance
Cash
Equipment
$ 2,300
800
10,700
Inventory
Accumulated depreciation—
equipment
Accounts receivable
$3,400
2,700
1,100
Prepare the assets section of Hoffman Company’s classified balance sheet.
Solution
Action Plan
✔ Present current assets
first. Current assets are
cash and other resources
that the company expects
to convert to cash or use
up within one year.
✔ Present current assets
in the order in which
the company expects to
convert them into cash.
✔ Subtract accumulated
depreciation—equipment
from equipment to
determine the book value
of equipment.
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Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid insurance
$
800
1,100
3,400
2,300
Total current assets
$ 7,600
Property, plant, and equipment
Equipment
Less: Accumulated depreciation—equipment
10,700
2,700
Total assets
8,000
$15,600
Related exercise material: BE4-10 and DO IT! 4-3.
DO IT!
Balance Sheet
Classifications
The following accounts were taken from the financial statements of Callahan Company.
________ Salaries and wages payable
________ Service revenue
________ Interest payable
________ Goodwill
________ Debt investments (short-term)
________ Mortgage payable (due in 3 years)
________ Stock investments (long-term)
________ Equipment
________ Accumulated depreciation—
equipment
________ Depreciation expense
________ Owner’s capital
________ Unearned service revenue
Match each of the following to its proper balance sheet classification, shown below. If the
item would not appear on a balance sheet, use “NA.”
Current assets (CA)
Long-term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long-term liabilities (LTL)
Owner’s equity (OE)
Solution
Action Plan
✔ Analyze whether each
financial statement item
is an asset, liability, or
owner’s equity.
✔ Determine if asset and
liability items are shortterm or long-term.
__CL__
__NA__
__CL__
__IA__
__CA__
__LTL__
Salaries and wages payable
Service revenue
Interest payable
Goodwill
Debt investments (short-term)
Mortgage payable (due
in 3 years)
__LTI__
__PPE__
__PPE__
__NA__
__OE__
__CL__
Stock investments (long-term)
Equipment
Accumulated depreciation—
equipment
Depreciation expense
Owner’s capital
Unearned service revenue
Related exercise material: BE4-11, E4-14, E4-15, E4-16, E4-17, and DO IT! 4-4.
D-20
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4 Completing the Accounting Cycle
Comprehensive DO IT!
At the end of its first month of operations, Watson Answering Service has the following unadjusted trial balance.
Action Plan
✔ In completing the
worksheet, be sure to
(a) key the adjustments;
(b) start at the top of the
adjusted trial balance
columns and extend
adjusted balances to
the correct statement
columns; and (c) enter
net income (or net loss)
in the proper columns.
✔ In preparing a
classified balance sheet,
know the contents of each
of the sections.
✔ In journalizing closing
entries, remember that
there are only four
entries and that Owner’s
Drawings is closed to
Owner’s Capital.
WATSON ANSWERING SERVICE
August 31, 2014
Trial Balance
Debit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Owner’s Capital
Owner’s Drawings
Service Revenue
Salaries and Wages Expense
Utilities Expense
Advertising Expense
Credit
$ 5,400
2,800
1,300
2,400
60,000
$40,000
2,400
30,000
1,000
4,900
3,200
800
400
$77,300
$77,300
Other data:
1.
2.
3.
4.
Insurance expires at the rate of $200 per month.
$1,000 of supplies are on hand at August 31.
Monthly depreciation on the equipment is $900.
Interest of $500 on the notes payable has accrued during August.
Instructions
(a) Prepare a worksheet.
(b) Prepare a classified balance sheet assuming $35,000 of the notes payable are long-term.
(c) Journalize the closing entries.
Solution to Comprehensive
DO IT!
WATSON ANSWERING SERVICE
(a)
(a)
Worksheet for the Month Ended August 31, 2014
Trial
Balance
Account Titles
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Owner’s Capital
Owner’s Drawings
Service Revenue
Salaries and
Wages Expense
Utilities Expense
Advertising Expense
Totals
Dr.
Cr.
5,400
2,800
1,300
2,400
60,000
Adjustments
Dr.
Cr.
Adjusted Trial
Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
5,400
2,800
(b) 300 1,000
(a) 200 2,200
60,000
40,000
2,400
30,000
1,000
1,000
4,900
3,200
800
400
Cr.
40,000
2,400
30,000
1,000
77,300 77,300
Dr.
5,400
2,800
1,000
2,200
60,000
40,000
2,400
30,000
4,900
3,200
800
400
Balance
Sheet
4,900
3,200
800
400
DO IT!
Insurance Expense
Supplies Expense
Depreciation Expense
Accumulated Depreciation—
Equipment
Interest Expense
Interest Payable
(a) 200
(b) 300
(c) 900
200
300
900
(c) 900
(d) 500
Totals
1,900
200
300
900
900
900
500
(d) 500
D-21
500
500
500
1,900 78,700 78,700
6,300 4,900 72,400 73,800
Net Loss
1,400
Totals
1,400
6,300 6,300 73,800 73,800
Explanation: (a) insurance expired, (b) supplies used, (c) depreciation expensed, (d) interest accrued.
(b)
WATSON ANSWERING SERVICE
Balance Sheet
August 31, 2014
Assets
Current assets
Cash
Accounts receivable
Supplies
Prepaid insurance
$ 5,400
2,800
1,000
2,200
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation—equipment
$11,400
60,000
900
Total assets
59,100
$70,500
Liabilities and Owner’s Equity
Current liabilities
Notes payable
Accounts payable
Interest payable
$ 5,000
2,400
500
Total current liabilities
Long-term liabilities
Notes payable
Total liabilities
Owner’s equity
Owner’s capital
Total liabilities and owner’s equity
*Owner’s capital, $30,000 less drawings $1,000 and net loss $1,400.
$ 7,900
35,000
42,900
27,600*
$70,500
D-22
4 Completing the Accounting Cycle
(c)
Aug. 31
31
31
31
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Service Revenue
Income Summary
(To close revenue account)
Income Summary
Salaries and Wages Expense
Depreciation Expense
Utilities Expense
Interest Expense
Advertising Expense
Supplies Expense
Insurance Expense
(To close expense accounts)
Owner’s Capital
Income Summary
(To close net loss to capital)
Owner’s Capital
Owner’s Drawings
(To close drawings to capital)
4,900
4,900
6,300
3,200
900
800
500
400
300
200
1,400
1,400
1,000
1,000
DO IT! Review
Prepare a worksheet.
(LO 1), C
DO IT! 4-1 Bradley Decker is preparing a worksheet. Explain to Bradley how he should
extend the following adjusted trial balance accounts to the financial statement columns of
the worksheet.
Service Revenue
Notes Payable
Owner’s Capital
Prepare closing entries.
(LO 2), AP
Accounts Receivable
Accumulated Depreciation
Utilities Expense
DO IT! 4-2 The worksheet for Tsai Company shows the following in the financial statement columns.
Owner’s drawings
Owner’s capital
Net income
$22,000
70,000
41,000
Prepare the closing entries at December 31 that affect owner’s capital.
Prepare assets section of the
balance sheet.
DO IT! 4-3 Ryan Newton recently received the following information related to Ryan
Company’s December 31, 2014, balance sheet.
(LO 6), AP
Inventory
Cash
Equipment
Stock investments (long-term)
$ 2,900
4,300
21,700
6,500
Debt investments (short-term)
Accumulated depreciation
Accounts receivable
Prepare the assets section of Ryan Company’s classified balance sheet.
$1,200
5,700
4,300
DO IT!
D-23
Match accounts to balance
sheet classifications.
DO IT! 4-4 The following accounts were taken from the financial statements of Lee
Company.
(LO 6), C
________ Interest revenue
________ Utilities payable
ment
________ Accounts payable
________ Supplies
________ Bonds payable
________ Goodwill
________ Owner’s capital
________ Accumulated depreciation—equip________ Equipment
________ Salaries and wages expense
________ Debt investments (long-term)
________ Unearned rent revenue
Match each of the accounts to its proper balance sheet classification, as shown below. If
the item would not appear on a balance sheet, use “NA.”
Current assets (CA)
Long-term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long-term liabilities (LTL)
Owner’s equity (OE)