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Exercise 1

Exercise 1. E.3-7. A partial adjusted trial balance of Piper Co at January 31, 2005 shows the following : Debit Credit Supplies $ 700 Prepaid Insurance $ 2,400 Salaries Payable $ 800

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Exercise 1

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  1. Exercise 1 • E.3-7. A partial adjusted trial balance of Piper Co at January 31, 2005 shows the following : DebitCredit • Supplies $ 700 • Prepaid Insurance $ 2,400 • Salaries Payable $ 800 • Unearned Revenue $ 750 • Supplies Expense $ 950 • Insurance Expense $ 400 • Salaries Expense $ 1,800 • Service Revenue $ 2,000 • Answer the following questions, assuming the year begins January 1. • If the amount in Supplies Exp is the Jan’31 adjusting entry and $ 850 of supplies was purchased in Jan what was the balance in Supplies on Jan’1. • If the amount in Insurance Expense is the January 31 adjusting entry and the original insurance premium was for one year, what was the total premium and when was the policy purchased. • If $ 2,500 of salaries was paid in January, what was the balance in Salaries payable at December 31, 2004. • If $ 1,600 was received in Jan for services performed in Jan, what was the balance in Unearned revenue at Dec 31, 2004.

  2. Answer of Exercise 1 • Ending balance of supplies $ 700 • + Adjusting entry 950 • - Purchases _850 • Beginning balance of supplies 800 • b.Total prepaid insurance (400 x 12) $ 4,800 • Amount used (6 x $ 400) _ 2,400 • Present balance 2,400 • The policy was purchased six months ago (Augt 1,2004) • c. The entry in January to record salary expense was • Salaries Expense 1,800 • Salaries Payable 700 • Cash 2,500

  3. Answer of Exercise 1 c. continued… The beginning balance of Salaries Payable : Ending balance of salaries payable $ 800 + Reduction of salaries payable _ 700 Beginning balance of salaries payable 1,500 d. Service revenue $ 2,000 Cash received _ 1,600 Unearned revenue reduced 400 Ending unearned revenue January 31,2005 $ 750 + Unearned revenue reduced _ 400 Beginning unearned revenue Dec 31,2004 1,150

  4. Exercise 2 P.3-7. Presented below are the trial balance and the other information related to Muhammad Ali, a consulting engineer at December 31, 2005 shows the following : DebitCredit Cash $ 31,500 Account Receivable 49,600 Allowance for Doubtful Accounts $ 750 Engineering Supplies Inventory 1,960 Unexpired Insurance 1,100 Furniture and Equipment 25,000 Accumulated Depr Furniture and Equipment 6,250 Notes Payable 7,200 Muhammad Ali, Capital 35,010 Service Revenue 100,000 Rent Expense 9,750 Office Salaries Expense 28,500 Heat, Light and Water Expense 1,080 Miscellaneous Office Expense _ 720_ _ $ 149,210 $ 149,210

  5. Exercise 2 • Fees received in advance from clients $ 6,900. • Services performed for clients that were not recorded by December 31, $ 4,900. • Bad debt expense for the year is $ 1,430. • Insurance expired during the year $ 480. • Furniture and equipment is being depreciated at 12,5 % per year. • Muhammad Ali gave the bank a 90 day, 10 % note for $ 7,200 on December 1, 2005. • Rent of the building is $ 750 per month. The rent for 2005 has been paid, as has that for January 2006. • Office salaries earned but unpaid December 31, 2005, $ 2,510. • Instructions : • From the trial balance and other information given, prepare annual adjusting entries as of December 31, 2005. • Prepare an income statement for 2005, a balance sheet, and a statement of owner’s equity. Muhammad Ali withdraw $ 17,000 cash for personal use during the year.

  6. Answer of Exercise 2 • 1. Service Revenue 6,900 • Unearned Service Revenue 6,900 •   2. Accounts Receivable 4,900 • Service Revenue 4,900 • 3. Bad Debt Expense 1,430 • Allowance for Doubtful Accounts 1,430 •   4. Insurance Expense 480 • Unexpired Insurance 480 • 5. Depreciation Expense—Furniture and Eqp 3,125 • Accum. Depr.—Furniture and Equipment 3,125 • ($ 25,000 x 0.125 = $ 3,125) • 6. Interest Expense 60 • Interest Payable ($ 7,200 x 0.10 x 30/360) 60 • 7. Prepaid Rent 750 • Rent Expense 750 •   8. Office Salaries Expense 2,510 • Salaries Payable 2,510

  7. Answer of Exercise 2 (b) Muhammad Ali, Consulting Engineer Income Statement For the Year Ended December 31, 2005 Service Revenue ($ 100,000 – $ 6,900 + $ 4,900) $ 98,000 Deduct Expenses : Office salaries expense ($ 28,500 + $ 2,510) $ 31,010 Heat, light, and water expense 1,080 Rent expense ($ 9,750 – $ 750) 9,000 Insurance expense 480 Bad debt expense 1,430 Depreciation expense 3,125 Miscellaneous office expense 720 Interest expense 60 Total expenses 46,905 Net income $ 51,095

  8. Answer of Exercise 2 Muhammad Ali, Consulting Engineer Balance Sheet December 31, 2005 Assets Current assets Cash $ 31,500 Accounts receivable(49,600 + $ 4,900) $ 54,500 Less: Allowance for doubtful accounts (2,180)* 52,320 Engineering supplies inventory 1,960 Unexpired insurance ($ 1,000 – 480) 620 Prepaid rent 750 Total current assets $ 87,150 Furniture and equipment 25,000 Less: Accum. Depreciation (9,375) 15,625 Total assets $ 102,775 *($ 750 + $ 1,430)

  9. Answer of Exercise 2 Muhammad Ali, Consulting Engineer Balance Sheet December 31, 2005 Liabilities and Owner’s Equity Current liabilities Unearned service revenue $ 6,900 Interest payable 60 Salaries payable 2,510 Notes payable 7,200 16,670 Muhammad Ali, Capital ($ 35,010 + $ 51,095) 86,105 Total liabilities and capital $ 102,775

  10. Answer of Exercise 2 Muhammad Ali, Consulting Engineer Statement of Owner’s Equity For the Year Ended December 31, 2005 Muhammad Ali, Capital, as of January 1, 2005 $ 52,010a Add: Net income 51,095 Deduct: Withdrawals ( 17,000) Muhammad Ali, Capital, as of December 31, 2005 $ 86,105 aMuhammad Ali, Capital—trial balance $ 35,010 Withdrawals during the year 17,000 Muhammad Ali, Capital, as of January 1, 2005 $ 52,010

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