Solution Manual Answer Key Accounting Cycle of a Service Business

PROBLEM 9: MULTIPLE CHOICE 1. C 2. C 3. C 4. B 5. A 6. C 7. D 8. A 9. C 10. A Accounting Cycle of a Service Business PROBLEM 1: FOR CLASSROOM DISCUSSION Solutions: Requirement (a): Journal entries (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Cash Owner’s equity Cash Notes payable Equipment Cash Office supplies/ Prepaid supplies Cash Cash Service fees Accounts receivable Service fees Cash Accounts receivable Utilities expense Cash Salaries expense Cash Owner’s drawings Cash 200,000 200,000 300,000 300,000 360,000 360,000 80,000 80,000 180,000 180,000 420,000 420,000 370,000 370,000 16,000 16,000 140,000 140,000 100,000 100,000 Page |2 Requirement (b): Posting ASSETS Cash (1) (2) (5) (7) 200,000 300,000 Bal. 354,000 Accounts receivable 420,000 (6) 360,000 180,000 370,000 80,000 16,000 140,000 100,000 370,000 (3) (4) (8) (9) (10) Bal. 50,000 Office supplies Equipment (4) 80,000 (3) 360,000 Bal. 80,000 Bal. 360,000 LIABILITIES Notes payable 300,000 300,000 (2) Bal. EQUITY Owner’s equity 200,000 (1) 200,000 Bal. Owner’s drawings (10) Bal. 100,000 100,000 (7) Page |3 INCOME Service fees EXPENSES Utilities expense 180,000 420,000 600,000 (5) (6) Bal. (8) Bal. 16,000 16,000 Salaries expense (9) Bal. 140,000 140,000 Requirement (c): Unadjusted trial balance Entity A Unadjusted Trial Balance December 31, 20x1 Accounts Debits Cash ₱354,000 Accounts receivable Office supplies Equipment 50,000 80,000 360,000 Notes payable Owner's equity ₱300,000 200,000 Owner's drawings Service fees 100,000 Utilities expense 16,000 140,000 Salaries expense Totals Credits 600,000 ₱1,100,000 ₱1,100,000 Page |4 Requirement (d): Adjusting entries AJE #1: Interest expense Interest expense (300,000 x 12% x 3/12) Interest payable 9,000 AJE #2: Depreciation expense Depreciation expense [(360K ÷ 5) x 2/12] Accumulated depreciation 12,000 AJE #3: Bad debt expense Bad debt expense (50,000 x 6%) Allowance for bad debts 3,000 AJE #4: Supplies expense Supplies expense (80,000 – 5,000 unused) Office supplies/Prepaid supplies Requirement (e): Worksheet 9,000 12,000 3,000 75,000 75,000 Page |5 Page |6 Requirement (f): Closing entries CLE #1 600,000 Service fees Utilities expense Salaries expense Interest expense Depreciation expense Bad debts expense Supplies expense Income summary 16,000 140,000 9,000 12,000 3,000 75,000 345,000 CLE #2 Income summary Owner’s equity 345,000 345,000 CLE #3 Owner’s equity Owner’s drawings 100,000 100,000 Page |7 Requirement (g): Balance sheet and Income statement Entity A Balance Sheet As of December 31, 20x1 ASSETS Cash Accounts receivable Allowance for bad debts Office supplies Equipment Accumulated depreciation TOTAL ASSETS ₱354,000 50,000 (3,000) 5,000 360,000 (12,000) ₱754,000 LIABILITIES Notes payable Interest payable TOTAL LIABILITIES ₱300,000 9,000 309,000 EQUITY Owner's equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY 445,000 445,000 ₱754,000 Page |8 Entity A Income Statement For the two months ended December 31, 20x1 INCOME Service Fees ₱600,000 EXPENSES Utilities expense Salaries expense Interest expense Depreciation expense (16,000) (140,000) (9,000) (12,000) Bad debt expense (3,000) Supplies expense (75,000) TOTAL EXPENSES (255,000) PROFIT FOR THE PERIOD ₱345,000 Page |9 PROBLEM 2: WORKSHEET Solutions: Requirement (a): Journal entries (1) (2) (3) (4) (5) (6) (7) Cash Owner’s equity Cash Notes payable Equipment Cash Prepaid rent Cash Cash Service fees Utilities expense Cash Owner’s drawings Cash 320,000 320,000 200,000 200,000 240,000 240,000 108,000 108,000 260,000 260,000 15,000 15,000 50,000 50,000 Requirement (b): Posting ASSETS Cash (1) (2) (5) 320,000 200,000 260,000 240,000 108,000 15,000 50,000 Bal. 367,000 Prepaid rent (4) 108,000 Bal. 108,000 (3) (4) (6) (7) P a g e | 10 Equipment (3) 240,000 Bal. 240,000 LIABILITIES Notes payable 200,000 200,000 (2) Bal. EQUITY Owner’s equity Owner’s drawings 320,000 (1) 320,000 Bal. (7) Bal. INCOME Service fees 260,000 260,000 50,000 50,000 EXPENSES Utilities expense (5) Bal. (6) Bal. 15,000 15,000 P a g e | 11 Requirement (c): Unadjusted trial balance Entity B Unadjusted Trial Balance December 31, 20x1 Accounts Debits Cash Prepaid rent ₱367,000 108,000 Equipment 240,000 Notes payable Owner's equity Owner's drawings Service fees Utilities expense Totals Credits ₱200,000 320,000 50,000 260,000 15,000 ₱780,000 ₱780,000 Requirement (d): Adjusting entries AJE #1: Salaries expense Salaries expense Salaries payable 8,000 AJE #2: Interest expense Interest expense (200,000 x 12% x 1/12) Interest payable 2,000 AJE #3: Depreciation expense Depreciation expense [(240K ÷ 4) x 1/12] Accumulated depreciation 5,000 8,000 2,000 5,000 P a g e | 12 AJE #4: Rent expense Rent expense (108,000 x 1/6) Prepaid rent Requirement (e): Worksheet 18,000 18,000 P a g e | 13 Requirement (f): Closing entries CLE #1 Service fees 260,000 Utilities expense Salaries expense Interest expense Depreciation expense Rent expense Income summary 15,000 8,000 2,000 5,000 18,000 212,000 CLE #2 Income summary Owner’s equity 212,000 212,000 CLE #3 Owner’s equity Owner’s drawings 50,000 50,000 Requirement (g): Balance sheet and Income statement Entity B Balance Sheet As of December 31, 20x1 ASSETS Cash Prepaid rent Equipment Accumulated depreciation TOTAL ASSETS ₱367,000 90,000 240,000 (5,000) ₱692,000 LIABILITIES Notes payable Salaries payable Interest payable TOTAL LIABILITIES ₱200,000 8,000 2,000 210,000 EQUITY Owner's equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY 482,000 482,000 ₱692,000 Entity B Income Statement For the two months ended December 31, 20x1 INCOME Service Fees ₱260,000 EXPENSES Utilities expense Salaries expense (15,000) (8,000) Interest expense (2,000) Depreciation expense (5,000) Rent expense (18,000) TOTAL EXPENSES (48,000) PROFIT FOR THE PERIOD ₱212,000 PROBLEM 3: WORKSHEET Solutions: Requirement (a): Journal entries (1) (2) (3) (4) (5) (6) Cash Owner’s equity Supplies expense Cash Accounts receivable Service fees Cash Accounts receivable Owner’s drawings Cash Salaries expense Cash 100,000 100,000 60,000 60,000 400,000 400,000 270,000 270,000 60,000 60,000 180,000 180,000 Requirement (b): Posting ASSETS Cash (1) (4) 100,000 270,000 Bal. 70,000 Accounts receivable (3) 60,000 60,000 180,000 270,000 Bal. EQUITY Owner’s equity 100,000 400,000 (2) (5) (6) (1) 100,000 Bal. 130,000 (4) Owner’s drawings (5) Bal. 60,000 60,000 INCOME Service fees 400,000 400,000 EXPENSES Supplies expense (3) Bal. (2) Bal. 60,000 60,000 Salaries expense (6) Bal. 180,000 180,000 Requirement (c): Unadjusted trial balance Guitar Doc Unadjusted Trial Balance December 31, 20x1 Accounts Debits Credits Cash ₱70,000 Accounts receivable Owner's equity 130,000 Owner’s drawings 100,000 60,000 Service fees Supplies expense Salaries expense Totals 400,000 60,000 180,000 ₱500,000 ₱500,000 Requirement (d): Adjusting entries AJE #1: Bad debts expense Bad debts expense Allowance for bad debts AJE #2: Supplies expense Prepaid supplies (the unused) Supplies expense AJE #3: Salaries expense Salaries expense Salaries payable Requirement (e): Worksheet 10,000 10,000 20,000 20,000 30,000 30,000 Requirement (f): Closing entries CLE #1 Service fees 400,000 Supplies expense Salaries expense Bad debts expense Income summary 40,000 210,000 10,000 140,000 CLE #2 Income summary Owner’s capital 140,000 140,000 CLE #3 Owner’s capital Owner’s drawings 60,000 60,000 Requirement (g): Balance sheet and Income statement Guitar Doc Balance Sheet As of December 31, 20x1 ASSETS Cash Accounts receivable Allowance for bad debts Prepaid supplies TOTAL ASSETS ₱70,000 130,000 (10,000) 20,000 ₱210,000 LIABILITIES Salaries payable TOTAL LIABILITIES 30,000 30,000 EQUITY Owner's equity TOTAL EQUITY 180,000 180,000 TOTAL LIABILITIES & EQUITY ₱210,000 Guitar Doc Income Statement For the year ended December 31, 20x1 INCOME Service Fees ₱400,000 EXPENSES Supplies expense (40,000) Salaries expense (210,000) Bad debts expense (10,000) TOTAL EXPENSES (260,000) PROFIT FOR THE PERIOD ₱140,000 PROBLEM 4: WORKSHEET Solutions: Requirement (a): Journal entries (1) (2) (3) (4) (5) (6) (7) (8) Cash Owner’s equity Office equipment Cash Prepaid rent Cash Accounts receivable Service fees Supplies expense Cash Utilities expense Cash Salaries expense Cash Cash Accounts receivable 2,000,000 2,000,000 800,000 800,000 720,000 720,000 2,900,000 2,900,000 190,000 190,000 260,000 260,000 1,900,000 1,900,000 2,700,000 2,700,000 Requirement (b): Posting ASSETS Cash (1) (8) 2,000,000 2,700,000 800,000 720,000 190,000 260,000 1,900,000 Bal. 830,000 Accounts receivable (4) 2,900,000 2,700,000 (2) (3) (5) (6) (7) Bal. 200,000 (8) Prepaid rent Office equipment (3) 720,000 (2) 800,000 Bal. 720,000 Bal. 800,000 EQUITY Owner’s equity 2,000,000 2,000,000 (1) Bal. INCOME Service fees 2,900,000 2,900,000 EXPENSES Supplies expense (4) Bal. (5) Bal. 190,000 190,000 Utilities expense (6) Bal. 260,000 260,000 Salaries expense (7) Bal. 1,900,000 1,900,000 Requirement (c): Unadjusted trial balance Entity C Unadjusted Trial Balance December 31, 20x1 Accounts Debits Cash ₱830,000 Credits Accounts receivable Prepaid rent 200,000 720,000 Office equipment 800,000 Owner's equity 2,000,000 Service fees Supplies expense 2,900,000 190,000 Utilities expense 260,000 Salaries expense 1,900,000 Totals ₱4,900,000 ₱4,900,000 Requirement (d): Adjusting entries AJE #1: Depreciation expense Depreciation expense (800,000 ÷ 10) Accumulated depreciation AJE #2: Rent expense Rent expense (720,000 x 1/2) Prepaid rent Requirement (e): Worksheet 80,000 80,000 360,000 360,000 P a g e | 27 Requirement (f): Closing entries CLE #1 2,900,000 Service fees Supplies expense Utilities expense Salaries expense Depreciation expense Rent expense Income summary CLE #2 Income summary Owner’s capital 190,000 260,000 1,900,000 80,000 360,000 110,000 110,000 110,000 Requirement (g): Balance sheet and Income statement Entity C Balance Sheet As of December 31, 20x1 ASSETS Cash Accounts receivable Prepaid rent Office equipment Accumulated depreciation TOTAL ASSETS LIABILITIES EQUITY Owner's equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY ₱830,000 200,000 360,000 800,000 (80,000) ₱2,110,000 2,110,000 2,110,000 ₱2,110,000 P a g e | 28 Entity C Income Statement For the year ended December 31, 20x1 INCOME Service Fees ₱2,900,000 EXPENSES Supplies expense (190,000) Utilities expense (260,000) Salaries expense (1,900,000) Depreciation expense Rent expense TOTAL EXPENSES PROFIT FOR THE PERIOD (80,000) (360,000) (2,790,000) ₱110,000 PROBLEM 5: MICROSOFT EXCEL The solution is on the text. PROBLEM 6: MULTIPLE CHOICE (REVERSING ENTRIES) 1. D 2. B 3. A 4. C 5. B P a g e | 29 PROBLEM 7: WORKSHEET & REVERSING ENTRIES Solutions: Requirement (a): Journal entries (1) (2) (3) (4) (5) (6) (7) (8) Cash Owner’s equity Computer equipment Cash Taxes and licenses Cash Insurance expense Cash Accounts receivable Service fees Utilities expense Cash Salaries expense Cash Cash Accounts receivable 1,000,000 1,000,000 700,000 700,000 200,000 200,000 42,000 42,000 3,200,000 3,200,000 420,000 420,000 2,400,000 2,400,000 2,900,000 2,900,000 Requirement (b): Posting ASSETS Cash (1) (8) 1,000,000 2,900,000 700,000 200,000 42,000 420,000 2,400,000 Bal. 138,000 Accounts receivable (5) 3,200,000 2,900,000 (2) (3) (4) (6) (7) Bal. 300,000 (8) P a g e | 30 Computer equipment (2) 700,000 Bal. 700,000 EQUITY Owner’s equity 1,000,000 1,000,000 (1) Bal. INCOME Service fees 3,200,000 3,200,000 EXPENSES Taxes & licenses (5) Bal. (3) Bal. 200,000 200,000 Insurance expense (4) Bal. 42,000 42,000 Utilities expense (6) Bal. 420,000 420,000 Salaries expense (7) Bal. 2,400,000 2,400,000 P a g e | 31 Requirement (c): Unadjusted trial balance Wellness Massage Unadjusted Trial Balance December 31, 20x1 Accounts Debits Cash Accounts receivable ₱138,000 300,000 Computer equipment 700,000 Owner's equity 1,000,000 Service fees Taxes and licenses 3,200,000 200,000 Insurance expense 42,000 Utilities expense 420,000 Salaries expense Totals Credits 2,400,000 ₱4,200,000 ₱4,200,000 Requirement (d): Adjusting entries AJE #1: Depreciation expense Depreciation expense [(700,000 ÷ 5) x 3/12] 35,000 Accumulated depreciation 35,000 AJE #2: Bad debt expense Bad debt expense (300,000 x 10%) Allowance for bad debts 30,000 30,000 AJE #3: Rent expense Rent expense Rent payable 120,000 120,000 P a g e | 32 AJE #4: Insurance expense Prepaid insurance (42,000 x 9/12) Insurance expense Requirement (e): Worksheet 31,500 31,500 P a g e | 33 P a g e | 34 Requirement (f): Closing entries CLE #1 3,200,000 Service fees 15,500 Income summary Taxes and licenses Insurance expense Utilities expense Salaries expense Depreciation expense Bad debt expense Rent expense CLE #2 Owner’s equity Income summary 200,000 10,500 420,000 2,400,000 35,000 30,000 120,000 15,500 15,500 P a g e | 35 Requirement (g): Balance sheet and Income statement Wellness Massage Balance Sheet As of December 31, 20x1 ASSETS Cash Accounts receivable Allowance for bad debts Prepaid insurance Computer equipment Accumulated depreciation TOTAL ASSETS ₱138,000 300,000 (30,000) 31,500 700,000 (35,000) ₱1,104,500 LIABILITIES Rent payable TOTAL LIABILITIES 120,000 120,000 EQUITY Owner's equity TOTAL EQUITY 984,500 984,500 TOTAL LIABILITIES & EQUITY ₱1,104,500 P a g e | 36 Wellness Massage Income Statement For the three months ended December 31, 20x1 INCOME Service Fees ₱3,200,000 EXPENSES Taxes and licenses Insurance expense (200,000) (10,500) Utilities expense (420,000) Salaries expense (2,400,000) Depreciation expense Bad debt expense Rent expense TOTAL EXPENSES LOSS FOR THE PERIOD (35,000) (30,000) (120,000) (3,215,500) (₱15,500) Requirement (h): Reversing entries Rev.E #1: Rent expense (Accrual of expense) Rent payable 120,000 Rent expense 120,000 Rev.E #2: Insurance expense (Expense method) Insurance expense 31,500 Prepaid insurance 31,500 P a g e | 37 PROBLEM 8: PRACTICE SET Requirement (a): Analyzing and Recording JOURNAL Date Dec. 1 Account titles Debit Rent expense Credit 100,000 Cash 100,000 to record the payment for the December 20x1 rent Dec. 2 Cash 262,000 Service fees 262,000 to record the collection of service fees Dec. 3 Office supplies expense 20,000 Cash 20,000 to record the purchase of office supplies Dec. 12 Cash 60,000 Service fees 60,000 to record the collection of service fees Dec. 15 Salaries expense 45,000 Cash 45,000 to record the salaries for the payroll period Dec. 1 to Dec. 15, 20x1 Dec. 17 Computer equipment Cash to record the acquisition of computer equipment 150,000 150,000 P a g e | 38 Dec. 17 Utilities expense 15,000 Cash 15,000 to record the payment for utility bills for Nov. 15 to Dec. 15 Dec. 23 Cash 37,000 Service fees 37,000 to record the collection of service fees Dec. 23 Salaries expense 75,000 Cash 75,000 to record payment for 13th month pay of employees Dec. 28 Prepaid insurance 5,000 Cash 5,000 to record the payment for insurance covering the year 20x2 Dec. 30 Cash 350,000 Service fees 350,000 to record the collection of service fees Dec. 30 Salaries expense Cash 45,000 45,000 to record the salaries for the payroll period Dec. 15 to Dec. 31, 20x1 P a g e | 39 Requirement (b): Posting in the ledger GENERAL LEDGER ASSETS Cash BEG. Accounts receivable 396,000 100,000 - Bal. - 12/1 12/2 262,000 20,000 12/3 12/12 60,000 45,000 12/15 12/23 37,000 150,000 12/17 12/30 350,000 15,000 12/17 75,000 12/23 5,000 12/28 45,000 12/30 Bal. BEG. 650,000 Prepaid insurance Computer equipment BEG. - BEG. 1,400,000 12/28 5,000 12/17 150,000 Bal. 5,000 Bal. 1,550,000 Accum. Depreciation 240,000 BEG. 240,000 Bal. P a g e | 40 LIABILITIES Loans payable 1,000,000 BEG. 1,000,000 Bal. EQUITY Owner’s equity Owner’s drawings 1,254,000 BEG. 1,254,000 Bal. 3,300,000 Bal. INCOME 3,300,000 EXPENSES Service fees Salaries expense 4,946,000 BEG. BEG. 990,000 262,000 12/2 12/15 45,000 60,000 12/12 12/23 75,000 37,000 12/23 12/30 45,000 350,000 12/30 Bal. 1,155,000 5,655,000 Bal. Rent expense BEG. 1,100,000 12/1 100,000 Bal. 1,200,000 P a g e | 41 Utilities expense BEG. 165,000 12/17 15,000 Bal. 180,000 Office supplies expense BEG. 84,000 12/3 20,000 Bal. 104,000 Insurance expense BEG. 5,000 Bal. 5,000 P a g e | 42 Requirement (c): Unadjusted trial balance RAK N' KOLL Co. Worksheet December 31, 20x1 ACCOUNTS Unadjusted trial balance Dr. Cash Accounts receivable Prepaid insurance Computer equipment Cr. 650,000 5,000 1,550,000 Accumulated depreciation 240,000 Loans payable 1,000,000 Owner’s equity Owner’s drawings 1,254,000 3,300,000 Service fees 5,655,000 Salaries expense 1,155,000 Rent expense 1,200,000 Utilities expense 180,000 Office supplies expense 104,000 Insurance expense Totals 5,000 8,149,000 8,149,000 P a g e | 43 Requirement (d): Adjusting entries JOURNAL Date Dec. 31 (i) Account titles Debit Accounts receivable Credit 34,000 Service fees 34,000 to accrue service fees rendered for Hedge Fund, Inc. Dec. 31 Prepaid office supplies (ii) 9,000 Office supplies expense 9,000 to record the unused office supplies as prepaid asset Dec. 31 Depreciation expense (iii) 126,250 Accumulated depreciation 126,250 to record the depreciation expense {[(150,000 /2) x 1/12] + 120,000} Dec. 31 Interest expense (iv) 10,000 Interest payable 10,000 to accrue interest on the loan payable (1,000,000 x 12% x 1/12) Dec. 31 (v) Utilities expense Utilities payable to accrue the cost of utilities used but not yet paid Requirement (e): Worksheet 7,500 7,500 P a g e | 44 P a g e | 45 Requirement (f): Closing entries JOURNAL Date Account titles Dec. 31 Service fees (Cl. E) Debit Credit 5,689,000 Salaries expense 1,155,000 Rent expense 1,200,000 Utilities expense 187,500 Office supplies expense 95,000 Insurance expense 5,000 Depreciation expense 126,250 Interest expense 10,000 Income summary 2,910,250 to close the nominal accounts to income summary Dec. 31 (Cl. E) Income summary 2,910,250 Owner’s equity 2,910,250 to close the income summary to owner’s equity Dec. 31 Owner’s equity (Cl. E) 3,300,000 Owner’s drawings to close the owner’s drawings to owner’s equity 3,300,000 P a g e | 46 Requirement (g): Balance sheet & Income statement Rak N’ Koll Co. Balance Sheet As of December 31, 20x1 ASSETS Cash Accounts receivable Prepaid insurance Office supplies Computer equipment Accumulated depreciation TOTAL ASSETS ₱650,000 34,000 5,000 9,000 1,550,000 (366,250) ₱1,881,750 LIABILITIES Notes payable Interest payable Utilities payable TOTAL LIABILITIES ₱1,000,000 10,000 7,500 1,017,500 EQUITY Owner's equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY 864,250 864,250 ₱1,881,750 P a g e | 47 Rak N’ Koll Co. Income Statement For the year ended December 31, 20x1 INCOME Service fees ₱5,689,000 EXPENSES Salaries expense (1,155,000) Rent expense (1,200,000) Utilities expense Office supplies expense Insurance expense Depreciation expense Interest expense (187,500) (95,000) (5,000) (126,250) (10,000) TOTAL EXPENSES (2,778,750) PROFIT FOR THE PERIOD ₱2,910,250