Chapter - 6 - The Accounting Cycle: Statements and Closing Entries PDF

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The Accounting Cycle: Statements and Closing Entries...

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Chapter 6 The ACCounTing CyCle: STATemenTS And CloSing enTrieS leArning oBJeCTiVeS LO 1

Prepare financial statements using the adjusted trial balance

LO 5

Analyze the financial statements using liquidity measures

LO 2

Prepare closing journal entries and post them to the general ledger

LO 6

Describe the benefits of a computerized accounting system over a manual system

LO 3

Prepare the post-closing trial balance to complete the accounting cycle

Appendix

LO 4

Prepare the classified balance sheet

LO 7

Prepare a 10-column worksheet

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Assessment Questions AS-1 LO 1 What does the income statement report? The income statement reports the revenue and expenses and shows the net income or loss for the accounting period. AS-2 LO 1 Which statement is prepared after the income statement but before the balance sheet? The statement of owner’s equity is prepared after the income statement.

AS-3 LO 1 What does the statement of owner’s equity report? The statement of owner’s equity reports the changes in equity during the reporting period.

AS-4 LO 1 What two items cause owner’s equity to increase and what two items cause owner’s equity to decrease? Owner’s equity increases if there is a net income or if the owner makes an additional investment into the company. Owner’s equity decreases if there is a net loss or if the owner makes a withdrawal for personal use.

AS-5 LO 1 Which categories of accounts are reported on the balance sheet? The balance sheet reports on assets, liabilities and owner’s equity.

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AS-6 LO 1 How does accumulated depreciation affect the value of property, plant and equipment? Accumulated depreciation is subtracted from property, plant and equipment and reduces the book value.

AS-7 LO 2 What does it mean to close the books? Closing the books updates the capital account with net income (or net loss) and new investments (or withdrawals) and starts a new income statement for the next accounting period.

AS-8 LO 2 What are the three steps to close directly to owner’s capital? The steps are as follows: 1.

Revenue is closed to owner’s capital.

2.

Expenses are closed to owner’s capital.

3.

Owner’s withdrawals are closed to owner’s capital.

AS-9 LO 2 What are the four steps to close the accounts using the income summary? The steps are as follows: 1.

Revenue is closed to the income summary account.

2.

Expenses are closed to the income summary account.

3.

The income summary account is closed to owner’s capital.

4.

The owner’s withdrawals account is closed to owner’s capital.

AS-10 LO 2 If a company has a net income for the period and closes its books using the income summary account, will the income summary account have a debit or credit balance before it is closed to the capital account? The income summary will have a credit balance.

AS-11 LO 3 Which categories of accounts appear on the post-closing trial balance? The post-closing trial balance only shows assets, liabilities and the capital account.

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The Accounting Cycle: Statements and Closing Entries

Chapter 6

AS-12 LO 4 Define operating cycle. An operating cycle is the period of time between the use of cash (e.g. to buy items for resale) and the receipt of cash (e.g. from selling products) for the business.

AS-13 LO 4 Define current assets. Current assets are assets that are likely to be converted into cash, or used up within the next 12 months or the operating cycle, whichever is longer.

AS-14 LO 4 Define long-term assets. Long-term assets are assets that are used to operate a business and are not expected to turn into cash or be used up within the next 12 months, unless they are sold for reasons other than the day-to-day operations of the business.

AS-15 LO 4 What are current liabilities? Provide two examples of current liabilities. Current liabilities are amounts due to be paid within the next 12 months. Accounts payable and interest payable are examples of current liabilities.

AS-16 LO 4 What are long-term liabilities? Provide two examples of long-term liabilities. Long-term liabilities are amounts due to be paid after 12 months. Examples of long-term liabilities include bank loans (long-term portion) and mortgages.

AS-17 LO 4 What is one difference between a non-classified balance sheet and a classified balance sheet? The classified balance sheet groups assets and liabilities into current and long-term items. A non-classified balance sheet does not have this grouping.

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AS-18 LO 5 How do you calculate the working capital? What does negative working capital mean? The working capital is equal to current assets minus current liabilities. Negative working capital means that current liabilities exceed current assets, implying that the company may have difficulty paying its short-term debt as it becomes due.

AS-19 LO 5 How do you calculate the current ratio and what does it measure? The current ratio is equal to current assets divided by current liabilities. The current ratio measures a company’s ability to pay off short-term debt.

AS-20 LO 5 How do you calculate the quick ratio and what does it measure? The quick ratio is calculated by dividing the sum of cash, short-term investments and accounts receivable by current liabilities. It measures a company’s ability to pay off short-term debt using only the most liquid assets.

AS-21 LO 6 Identify two benefits of a computerized accounting system. One benefit of a computerized accounting system is the ability to create reports automatically. Another benefit is that the system automatically posts journal entries to the general ledger.

AS-22 LO 6 Why is it important to understand a manual accounting system before using a computerized accounting system? Knowledge of traditional paper-based accounting systems provides a foundation for understanding what accounting is all about. It helps users understand how the computerized system stores the information and how to look for errors or anomalies in the data.

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The Accounting Cycle: Statements and Closing Entries

Chapter 6

Application Questions group A AP-1A LO 1 Floating Speed Boat has completed all its journal entries and adjusting entries for the month of September 2019. The adjusted trial balance is shown below. Note: During the month of September, the owner of Floating Speed Boat invested $6,900 into the business. Floating Speed Boat Adjusted Trial Balance September 30, 2019 Account Title Cash Accounts Receivable Prepaid Insurance Equipment

dr $8,800

Cr

7,900 1,150 64,000

Accumulated Depreciation—Equipment

$1,260

Accounts Payable Interest Payable

9,900 150

Unearned Revenue

5,930

Bank Loan Murray, Capital

15,400 49,000

Murray, Withdrawals

1,200

Service Revenue Advertising Expense

430

Depreciation Expense

390

Insurance Expense

250

Interest Expense Rent Expense

3,970

150 1,340 $85,610

Total

$85,610

required a)

Prepare the income statement from the adjusted trial balance. Floating Speed Boat incomeStatement For the month ended September 2019 30, Service Revenue expenses Advertising Expense Depreciation Expense Insurance Expense Interest Expense Rent Expense Total expenses net income (loss)

$3,970 $430 390 250 150 1,340 2,560 $1,410

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b) Prepare the statement of owner’s equity from the adjusted trial balance. Floating Speed Boat Statement of owner’s equity For the month ended September 30, 2019 Murray, Capital at September 1, 2019 Add: Additional Investments

$6,900

Net Income

1,410

Subtotal Less: Murray, Withdrawals

8,310 50,410 1,200

Murray, Capital at September 30, 2019

c)

$42,100

$49,210

Prepare the balance sheet from the adjusted trial balance. Floating Speed Boat Balance Sheet As at September 30, 2019 Assets Cash Accounts Receivable

$8,800 7,900

Prepaid Insurance Equipment Accumulated Depreciation—Equipment Total Assets liabilities Accounts Payable Interest Payable Unearned Revenue Bank Loan Total liabilities owner’s equity Murray, Capital Total liabilities and owner’s equity

216

1,150 $64,000 (1,260)

62,740 $80,590

$9,900 150 5,930 15,400 $31,380 49,210 $80,590

The Accounting Cycle: Statements and Closing Entries

Chapter 6

AP-2A LO 1 Regina Consulting has completed all its journal entries and adjusting entries for the month of October 2019. The adjusted trial balance is shown below. regina Consulting Adjusted Trial Balance october 31, 2019 Account Title Cash Accounts Receivable Prepaid Rent Equipment Accumulated Depreciation—Equipment Accounts Payable Unearned Revenue Bank Loan Regina, Capital Service Revenue Depreciation Expense Insurance Expense Interest Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Total

dr $32,000 9,500 4,680 15,000

Cr

$1,290 27,800 4,470 1,600 9,330 31,330 340 570 150 720 6,400 360 6,100 $75,820

$75,820

required a)

Prepare the income statement from the adjusted trial balance. regina Consulting incomeStatement For the month ended october 31, 2019 Service Revenue expenses Depreciation Expense Insurance Expense Interest Expense Rent Expense Salaries Expense Supplies Expense Utilities Expense Total expenses net income (loss)

$31,330 $340 570 150 720 6,400 360 6,100 14,640 $16,690

b) Prepare the statement from the adjusted trial balance. regina Consulting equity Statement of owner’s For the month ended october 31, 2019 Regina, Capital at October 1 Add: Net Income Regina, Capital at October 31

$9,330 16,690 $26,020

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c)

The Accounting Cycle: Statements and Closing Entries

Prepare the balance sheet from the adjusted trial balance. regina Consulting BalanceSheet As at october 31,2019 Assets Cash Accounts Receivable Prepaid Rent Equipment Accumulated Depreciation—Equipment Total Assets liabilities Accounts Payable Unearned Revenue Bank Loan Total liabilities owner's equity Regina, Capital Total liabilities and owner's equity

$32,000 9,500 4,680 $15,000 (1,290)

13,710 $59,890

$27,800 4,470 1,600 $33,870 26,020 $59,890

AP-3A LO 2 Frank’s Custom Framing has journalized its adjusting entries and prepared its adjusted trial balance. Frank's Custom Framing Adjusted Trial Balance october 31, 2019 Cash

Account Title

dr $8,620

Accounts Receivable Prepaid Insurance Equipment

2,340 2,650 23,400

Accumulated Depreciation—Equipment

   



$1,640

Accounts Payable



3,540

Interest Payable Unearned Revenue

 

120 2,110

Bank Loan



5,500

 3,200

24,080 



8,750

260 185

 

120



1,840 1,200 1,650

 

Frank, Capital Frank, Withdrawals Service Revenue Depreciation Expense Insurance Expense Interest Expense Office Supplies Expense Rent Expense Salaries Expense Telephone Expense Total

218

Cr

275 $45,740

$45,740

The Accounting Cycle: Statements and Closing Entries

Chapter 6

Prepare the closing entries using the income summary account for October. date 2019 Oct 31

Account Title and explanation Service Revenue

Pr

debit 8,750

Credit 



Income Summary



8,750

 

Close revenue account 

 

 

Oct 31

5,530





Depreciation Expense



260

 

Insurance Expense Interest Expense

 

185 120



Office Supplies Expense



1,840

 

Rent Expense Telephone Expense

 

1,200 275



Salaries Expense



1,650

 

Close expense accounts 

 

 

3,220



Oct 31    Oct 31  

Income Summary

Income Summary Frank, Capital Close income summary account  Frank, Capital Frank, Withdrawals Close owner's withdrawals



3,220

 

 

3,200



 

3,200 

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The Accounting Cycle: Statements and Closing Entries

AP-4A LO 2 3 Keynote Consulting has journalized its adjusting entries and prepared its adjusted trial balance. Keynote Consulting Adjusted Trial Balance August 31, 2019 Account Title Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation—Equipment Accounts Payable Interest Payable Unearned Revenue Bank Loan Nichols, Capital Nichols, Withdrawals Service Revenue Depreciation Expense Insurance Expense Interest Expense Office Supplies Expense Rent Expense Telephone Expense Total

dr $6,200 1,750 1,650 10,650       2,000  150 170 50 1,150 800 250 $24,820

Cr     $320 1,640 50 1,420 3,000 14,290  4,100      $24,820

required a)

Prepare the closing entries using the income summary account for August. date 2019 Aug 31    Aug 31         Aug 31    Aug 31  

220

Account Title and explanation Service Revenue Income Summary Close revenue account  Income Summary Depreciation Expense Insurance Expense Interest Expense Office Supplies Expense Rent Expense Telephone Expense Close expense accounts  Income Summary Nichols, Capital Close income summary account  Nichols, Capital Nichols, Withdrawals Close owner's withdrawals

Pr

debit 4,100    2,570         1,530    2,000  

Credit  4,100    150 170 50 1,150 800 250    1,530    2,000 

The Accounting Cycle: Statements and Closing Entries

Chapter 6

b) Prepare the post-closing trial balance. Keynote Consulting Post-Closing Trial Balance August 31, 2019 Account Title Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation—Equipment Accounts Payable

dr

Cr

$6,200 1,750

 

1,650



10,650  

 $320 1,640

Interest Payable



50

Unearned Revenue Bank Loan

 

1,420 3,000

Nichols, Capital

13,820 20,250

Total

20,250

AP-5A LO 2 3 Home Protector has journalized its adjusting entries and prepared its adjusted trial balance. home Protector Adjusted Trial Balance december 31, 2019 Account Title Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation—Equipment

dr $12,650 5,420

Cr  

2,820



25,600 

 $2,340

Accounts Payable



6,250

Salaries Payable Unearned Revenue

 

650 4,250

Bank Loan



7,500

 4,300 

21,645  16,875

Depreciation Expense

320



Insurance Expense Interest Expense

220 160

 

Office Supplies Expense

2,240



Rent Expense Salaries Expense

1,890 3,540



Holmes, Capital Holmes, Withdrawals Service Revenue

Telephone Expense Total

350 $59,510

$59,510

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required a)

Prepare the closing entries directly to owner’s capital for the month of December. date

Account Title and explanation

2019 Dec 31 

Service Revenue Holmes, Capital

  Dec 31

Close revenue account  Holmes, Capital

Pr

debit

Credit

16,875 

 16,875

  8,720

  

  

320 220 160

  

Depreciation Expense Insurance Expense Interest Expense



Office Supplies Expense Rent Expense



2,240 1,890

 

Telephone Expense Salaries Expense

 

350 3,540



Close expense accounts





4,300  

 4,300 

Dec 31  

Holmes, Capital Holmes, Withdrawals Close owner's withdrawals

b) Prepare the post-closing trial balance. home Protector Post-Closing Trial Balance december 31, 2019 Account Title Cash Accounts Receivable

Cr 

5,420



2,820 25,600

 

Accumulated Depreciation—Equipment



$2,340

Accounts Payable Salaries Payable

 

6,250 650

Unearned Revenue



4,250

Bank Loan Holmes, Capital



7,500 25,500

Prepaid Insurance Equipment

Total

222

dr $12,650

$46,490

$46,490

The Accounting Cycle: Statements and Closing Entries

Chapter 6

AP-6A LO 2 3 Luminary Electric has journalized its adjusting entries and prepared its adjusted trial balance. luminary electric Adjusted Trial Balance march 31, 2019 Account Title Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation—Equipment Accounts Payable Salaries Payable Unearned Revenue Bank Loan Watts, Capital Watts, Withdrawals Service Revenue Depreciation Expense Insurance Expense Interest Expense Office Supplies Expense Rent Expense Salaries Expense Telephone Expense Total

dr $10,420 6,350 2,350 32,500       5,200  410 195 210 2,530 2,150 4,360 450 $67,125

Cr     $5,480 4,870 840 5,340 9,000 23,745  17,850     

$67,125

required a)

Prepare the closing entries directly to...