CHAPTER 4 – COMPLETE THE ACCOUNTING CYCLE

PRACTICE SET A SOLUTIONS

Exercise 4.1A – Prepare correcting entries

Prepare the necessary correcting entry for each of the following.

a. A payment on account of $720 was debited to Accounts Payable $270 and credited to
Cash $270.
b. The collection of Accounts Receivable of $570 was recorded as a debit to Cash $570 and a
credit to Service Revenue $570.
c. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit
to Cash.
d. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a
credit to Accounts Payable.
e. A collection on account of $350 from a customer was credited to Accounts Receivable
$530 and debited to Cash $530.
f. The purchase of supplies on account for $310 was recorded as a debit to Equipment $310
and a credit to Accounts Payable $310.

Solution

a. Accounts Payable ......................................................................................... 450

Cash ............................................................................................................. 450

b. Service Revenue ........................................................................................... 570

Accounts Receivable ........................................................................... 570
c. Salaries and Wages Expense .................................................................. 5,000

Supplies Expense...................................................................................... 5,000

 d. Supplies ............................................................................................................ 1,000
Equipment ................................................................................................... 1,000

e. Accounts Receivable ................................................................................... 180

Cash................................................................................................................. 180

f. Supplies ............................................................................................................ 310

Equipment ................................................................................................... 310

Exercise 4.2A – Preparing correcting entries

As Mel Smith was doing his year-end accounting, he noticed that the bookkeeper had made
errors in recording several transactions. The erroneous transactions are as follows:

a. A check for $700 was issued for goods previously purchased on account. The bookkeeper
debited Accounts Receivable and credited Cash for $700.
b. A check for $180 was received as payment on account. The bookkeeper debited Accounts
Payable for $810 and credited Accounts Receivable for $810.
c. When making the entry to record the year’s depreciation expense, the bookkeeper
debited Accumulated Depreciation—Equipment for $1,000 and credited Cash for $1,000.
d. When accruing interest on a note payable, the bookkeeper debited Interest Receivable for
$200 and credited Interest Payable for $200.

Instructions

Prepare the appropriate correcting entries. (Do not reverse the original entries.)

Solution

(a) Accounts Payable ............................................................................................. 700

Accounts Receivable ........................................................................... 700

(b) Cash ....................................................................................................................... 180

Accounts Receivable....................................................................................... 630
Accounts Payable.................................................................................. 810
(c) Cash ....................................................................................................................... 1,000
Depreciation Expense.................................................................................... 1,000
Accumulated Depreciation—Equipment .................................. 2,000

(d) Interest Expense .............................................................................................. 200

Interest Receivable .............................................................................. 200

Exercise 4.3A – Preparing worksheet

The account balances appearing on the trial balance (below) were taken from the general ledger
of Speedy Copy Shop at September 30.

Additional information for the month of September which has not yet been recorded in the
accounts is as follows:

a. A physical count of supplies indicates $500 on hand at September 30.

b. The amount of insurance that expired in the month of September was $400.
c. Depreciation on equipment for September was $600.
d. Rent owed on the copy shop for the month of September was $750 but will not be paid
until October.

Instructions

Using the above information, complete the worksheet on the following page for Speedy Copy
Shop for the month of September.
 SPEEDY COPY SHOP
Worksheet
For the Month Ended September 30, 2020

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 3,000
Supplies 1,500
Prepaid Insurance 2,400
Equipment 24,000
Accum.
Depreciation— 4,800
Equipment

Accounts Payable 2,400

Notes Payable 4,000
Owner’s Capital 15,600
Owner’s Drawings 2,200
Service Revenue 6,700
Utilities Expense 400
Totals 33,500 33,500
Supplies Expense
Insurance Expense
Depreciation
Expense
Rent Expense
Rent Payable
Totals
Net Income
Totals
Solution

SPEEDY COPY SHOP

Worksheet
For the Month Ended September 30, 2020
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 3,000 3,000 3,000
Supplies 1,500 (a) 1,000 500 500
Prepaid Insurance 2,400 (b) 400 2,000 2,000
Equipment 24,000 24,000 24,000
Accum.
Depreciation— 4,800 (c) 600 5,400 5,400
Equipment
Accounts Payable 2,400 2,400 2,400
Notes Payable 4,000 4,000 4,000
Owner’s Capital 15,600 15,600 15,600
Owner’s Drawings 2,200 2,200 2,200
Service Revenue 6,700 6,700 6,700
Utilities Expense 400 400 400
Totals 33,500 33,500
Supplies Expense (a) 1,000 1,000 1,000
Insurance Expense (b) 400 400 400
Depreciation Expense (c) 600 600 600
Rent Expense (d) 750 750 750
Rent Payable (d) 750 750 750
Totals 2,750 2,750 34,850 34,850 3,150 6,700 31,700 28,150
Net Income 3,550 3,550
Totals 6,700 6,700 31,700 31,700
Exercise 4.4B – Prepare closing entries

Use May 31 fiscal year-end information from the following ledger accounts (assume that all
accounts have normal balances) to (a) prepare closing journal entries and (b) post those entries to
ledger accounts.

Solutions

a. Closing entries
(1) Services Revenue ....................................................................... 403 76,000
Income Summary ........................................................... 901 76,000
Close revenue account.
(2) Income Summary....................................................................... 901 47,800
Depreciation Expense .................................................. 603 15,000
Salaries Expense ............................................................. 622 20,000
Insurance Expense......................................................... 637 4,400
Rent Expense .................................................................... 640 8,400
Close expense accounts.
(3) Income Summary....................................................................... 901 28,200
M. Muncel, Capital .......................................................... 301 28,200
 Close income summary.
(4) M. Muncel, Capital ..................................................................... 301 22,000
M. Muncel, Withdrawals ............................................. 302 22,000
Close withdrawals account.

b. Entries posted to ledger accounts

M. Muncel, Capital No. 301 Salaries Expense No. 622

Date PR Debit Credit Balance Date PR Debit Credit Balance

May3 40,000 May3 20,000
1 1
(3) 28,200 68,200 (2) 20,000 0
(4) 22,000 46,200

M. Muncel, Withdrawals No. 302 Insurance Expense No. 637

Date PR Debit Credit Balance Date PR Debit Credit Balance

May3 22,000 May3 4,400
1 1
(4) 22,000 0 (2) 4,400 0

Services Revenue No. 403 Rent Expense No. 640

Date PR Debit Credit Balance Date PR Debit Credit Balance

May3 76,000 May3 8,400
1 1
(1) 76,000 0 (2) 8,400 0

Depreciation Expense No. 603 Income Summary No. 901

Date PR Debit Credit Balance Date PR Debit Credit Balance

May3 15,000 (1) 76,000 76,000
1
(2) 15,000 0 (2) 47,800 28,200
(3) 28,200 0
Exercise 4.5B – Prepare adjusting entries and closing entries

The trial balances of Orton Company follow with the accounts arranged in alphabetic order.
Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Orton
Company.

Trial Balances
Unadjusted Adjusted Post-Closing
Accounts Payable $10,000 $10,000 $10,000
Accounts Receivable 2,200 3,200 3,200
Accumulated Depreciation—Equipment 13,000 17,000 17,000
Advertising Expense 0 16,300 0
Cash 60,000 60,000 60,000
Depreciation Expense 0 4,000 0
Equipment 75,000 75,000 75,000
Owner’s Capital 82,200 82,200 102,400
Owner’s Drawings 11,000 11,000 0
Prepaid Advertising 17,800 1,500 1,500
Prepaid Rent 15,000 11,000 11,000
Rent Expense 0 4,000 0
Service Revenue 96,000 105,000 0
Supplies 3,200 700 700
Supplies Expense 2,000 4,500 0
Unearned Service Revenue 23,000 15,000 15,000
Salaries and Wages Expense 38,000 45,000 0
Salaries and Wages Payable 0 7,000 7,000

Solution

(a) Adjusting Entries

Depreciation Expense .................................................................................... 4,000
Accumulated Depreciation—Equipment .................................. 4,000

Advertising Expense....................................................................................... 16,300

Prepaid Advertising............................................................................. 16,300

Unearned Service Revenue ......................................................................... 8,000

Service Revenue .................................................................................... 8,000

Accounts Receivable....................................................................................... 1,000

Service Revenue .................................................................................... 1,000
 Rent Expense ..................................................................................................... 4,000
Prepaid Rent ........................................................................................... 4,000

Supplies Expense ............................................................................................. 2,500

Supplies ..................................................................................................... 2,500

Salaries and Wages Expense ...................................................................... 7,000

Salaries and Wages Payable ............................................................ 7,000

(b) Closing Entries

Service Revenue ............................................................................................... 105,000

Income Summary.................................................................................. 105,000

Income Summary ............................................................................................. 73,800

Advertising Expense ........................................................................... 16,300
Depreciation Expense......................................................................... 4,000
Rent Expense .......................................................................................... 4,000
Supplies Expense .................................................................................. 4,500
Salaries and Wages Expense ........................................................... 45,000

Income Summary ............................................................................................. 31,200

Owner’s Capital ..................................................................................... 31,200

Owner’s Capital................................................................................................. 11,000

Owner’s Drawings ................................................................................ 11,000
Exercise 4.6B – Prepare adjusting entries

Calvin’s Cleaning has employed you to investigate whether any accrual entries are needed in the
business. On completion of your investigation on 31 December, you have discovered that the
following items need attention:

a. Unearned cleaning services revenue now earned, $3200.

b. Depreciation not recorded, $12 000.
c. Employee salaries owed but not recorded, $6400.
d. Prepaid insurance expired, $1200.
e. Interest revenue accrued but not recorded, $1600.

Requirements

1. Prepare the adjusting entries for items a to e at 31 Dec, the end of the accounting period.
2. Suppose the adjusting entries in requirement A were not made. Calculate the total
overstatement or understatement of profit as a result of the omission of these
adjustments.

Solutions

1.

CALVIN’S CLEANING

General Journal

Date Particulars Debit Credit

31 Dec
a. Unearned Security Services Revenue 3 200

Security Services Revenue 3 200

Revenue received in advance now

earned.

b. Depreciation Expense 12 000

 Accumulated Depreciation 12 000

Depreciation expense for the period.

c. Salary Expense 6 400

Salaries Payable 6 400

Salaries incurred but not yet paid.

d. Insurance Expense 1 200

Prepaid Insurance 1 200

Prepaid insurance expired.

e. Interest Receivable 1 600

Interest Revenue 1 600

Interest revenue accrued.

2. Profit would have been

Overstated due to expenses not being recorded

$12 000 (depreciation) + $6400 (salaries) + $1200 (insurance) = $19 600

Understated as a result of total revenues not being recorded

$3200 (Cleaning Revenue) + $1600 (Interest) = $4800

The net overstatement of profit is therefore $19 600 – $4800 = $14 800.
Exercise 4.6A – Prepare adjusting entries from a missing information

Selected worksheet data for Mannie Company are presented below.

Adjusted
Account Titles Trial Balance Trial Balance
Dr. Cr. Dr. Cr.
Accounts Receivable ? 35,000
Prepaid Insurance 26,000 18,000
Supplies 7,000 ?
Accumulated Depreciation 12,000 ?
Salaries and Wages Payable ? 8,500
Service Revenue 85,000 95,000
Insurance Expense ?
Depreciation Expense 9,600
Supplies Expense 5,800
Salaries and Wages Expense ? 49,000

Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.

Solution

(a) Accounts Receivable—$25,000 ($35,000 – $10,000).

Supplies—$1,200 ($7,000 – $5,800).
Accumulated Depreciation—$21,600 ($12,000 + $9,600).
Salaries and Wages Payable—$0 No liability recorded until adjustments are made.
Insurance Expense—$8,000 ($26,000 – $18,000).
Salaries and Wages Expense—$40,500 ($49,000 – $8,500).

(b)
 Accounts Receivable ................................................................................... 10,000
Service Revenue .................................................................................... 10,000

Insurance Expense ...................................................................................... 8,000

Prepaid Insurance ................................................................................ 8,000

Supplies Expense.......................................................................................... 5,800

Supplies ..................................................................................................... 5,800

Depreciation Expense ................................................................................ 9,600

Accumulated Depreciation............................................................... 9,600

Salaries and Wages Expense................................................................... 8,500

Salaries and Wages Payable ............................................................ 8,500

Exercise 4.7A – Correcting errors in the trial balance

The trial balance of Gagne Company shown below does not balance

GAGNE COMPANY
Trial Balance
December 31, 2020

Debit Credit

Cash $2,600

Accounts receivable 7,600

Supplies 600

Equipment 8,300

Accounts Payable $9,766

Gagne, Capital 1,952

Gagne, Drawing 1,500

Service Revenue 15,200

 Wage Expense 3,800

Repair Expense 1,600

__Total $26,000 $26,918

As examination of the ledger and journal reveals the following errors:

1. Each of the above listed accounts has a normal balance per the general ledger
2. Cash of $360 received from a customer on account was debited to Cash $630 and credited to
Accounts Receivable $630
3. A withdrawal of $300 by the owner was posted as a credit to Gagne, Drawing, $300 and credited
to Cash $30
4. A debit of $300 was not posted to Wages Expense
5. The purchase of equipment on account for $700 was recorded as a debit to Repair Expense and
a credit to Accounts Payable for $700
6. Services werer performed on account for a customer, $510, for which Accounts Receivable was
debited $510 and Service Revenue was credited $51
7. A payment on account for $225 was credited to Cash for $225 and credited to Accounts Payable
for $252

Requirement:

Prepare a correct the Trial Balance (correct or adjust error).

Solutions

GAGNE COMPANY
Trial Balance
December 31, 2020

Debit Credit
 Cash $2,330 (1)

Accounts receivable 7,870 (2)

Supplies 600

Equipment 9,000 (3)

Accounts Payable $9,289 (4)

Gagne, Capital 1,952

Gagne, Drawing 2,100 (5)

Service Revenue 15,659 (6)

Wage Expense 4,100 (7)

Repair Expense 900 (8)

__Total $26,900 $26,900

Exercise 4.8A – Prepare financial statements

Salaries and wages payable $ 2,980 Notes payable (long-term) $ 3,000

Salaries and wages expense 45,700 Cash 5,200
Utilities expense 21,100 Accounts receivable 9,780
Equipment 38,000 Accumulated depreciation 6,000
Accounts payable 4,100 Owner’s Drawings 4,000
Service revenue 57,200 Depreciation expense 4,000
Rent revenue 6,500 Owner’s capital (beginning 48,000
of the year)

Instructions
(a) Prepare an income statement and an owner’s equity statement for the year ended December
2020. The owner did not make any new investments during the year.
(b) Prepare a classified balance sheet at Dec 31.
Solution

(a) RUGEN COMPANY

Income Statement
For the Year Ended December 31, 2020
——————————————————————————————————————————
—
Revenues
Service revenue ................................................................................................ $57,200
Rent revenue ...................................................................................................... 6,500
Total revenues ......................................................................................... $63,700
Expenses
Salaries and wages expense ....................................................................... 45,700
Utilities expense ............................................................................................... 21,100
Depreciation expense .................................................................................... 4,000
Total expense ........................................................................................... 70,800
Net loss............................................................................................................................. $ (7,100)

RUGEN COMPANY
Owner’s Equity Statement
For the Year Ended December 31, 2020
——————————————————————————————————————————
—
Owner’s Capital, January 1, 2020 ........................................................................ $48,000
Less: Net loss ................................................................................................................ $7,100
Drawings .............................................................................................................. 4,000 11,100
Owner’s Capital, December 31, 2020 ................................................................ $36,900

(b) RUGEN COMPANY

Balance Sheet
December 31, 2020
——————————————————————————————————————————
—
Assets
Current assets
Cash ....................................................................................................................... $5,200
Accounts receivable ........................................................................................ 9,780
Total current assets ............................................................................... $14,980
Property, plant, and equipment
Equipment........................................................................................................... 38,000
Less: Accumulated depreciation .............................................................. 6,000 32,000
Total assets ................................................................................................ $46,980

Liabilities and Owner’s Equity

Current liabilities
Accounts payable ............................................................................................. $4,100
Salaries and wages payable ........................................................................ 2,980
Total current liabilities ........................................................................... $ 7,080
Long-term liabilities
Notes payable .................................................................................................... 3,000
Total liabilities ............................................................................................ 10,080
Owner’s equity
Owner’s capital ................................................................................................. 36,900
Total liabilities and owner’s equity .................................................. $46,980