Question

Serial Problem Business Solutions LO P1, P2, P3, P4, P5 After the success of the company’s first two months, Santana Rey continues to operate Business Solutions. The November 30, 2017, unadjusted trial balance of Business Solutions (reflecting its transactions for October and November of 2017) follows. No. Account Title Debit Credit 101 Cash $ 38,264 106 Accounts receivable 12,618 126 Computer supplies 2,545 128 Prepaid insurance 2,220 131 Prepaid rent 3,300 163 Office equipment 8,000 164 Accumulated depreciation—Office equipment $ 0 167 Computer equipment 20,000 168 Accumulated depreciation—Computer equipment 0 201 Accounts payable 0 210 Wages payable 0 236 Unearned computer services revenue 0 307 Common stock 73,000 318 Retained earnings 0 319 Dividends 5,600 403 Computer services revenue 25,659 612 Depreciation expense—Office equipment 0 613 Depreciation expense—Computer equipment 0 623 Wages expense 2,625 637 Insurance expense 0 640 Rent expense 0 652 Computer supplies expense 0 655 Advertising expense 1,728 676 Mileage expense 704 677 Miscellaneous expenses 250 684 Repairs expense—Computer 805 Totals $ 98,659 $ 98,659 Business Solutions had the following transactions and events in December 2017. Dec. 2 Paid $1,025 cash to Hillside Mall for Business Solutions’ share of mall advertising costs. 3 Paid $500 cash for minor repairs to the company’s computer. 4 Received $3,950 cash from Alex’s Engineering Co. for the receivable from November. 10 Paid cash to Lyn Addie for six days of work at the rate of $125 per day. 14 Notified by Alex’s Engineering Co. that Business Solutions’ bid of $7,000 on a proposed project has been accepted. Alex’s paid a $1,500 cash advance to Business Solutions. 15 Purchased $1,100 of computer supplies on credit from Harris Office Products. 16 Sent a reminder to Gomez Co. to pay the fee for services recorded on November 8. 20 Completed a project for Liu Corporation and received $5,625 cash. 22–26 Took the week off for the holidays. 28 Received $3,000 cash from Gomez Co. on its receivable. 29 Reimbursed S. Rey for business automobile mileage (600 miles at $0.32 per mile). 31 The company paid $1,500 cash in dividends. The following additional facts are collected for use in making adjusting entries prior to preparing financial statements for the company’s first three months: The December 31 inventory count of computer supplies shows $580 still available. Three months have expired since the 12-month insurance premium was paid in advance. As of December 31, Lyn Addie has not been paid for four days of work at $125 per day. The computer system, acquired on October 1, is expected to have a four-year life with no salvage value. The office equipment, acquired on October 1, is expected to have a five-year life with no salvage value. Three of the four months' prepaid rent has expired. Required: 1. Prepare journal entries to record each of the December transactions and events for Business Solutions. 2-a. Prepare adjusting entries to reflect a through f. 2-b. Post the journal entries to record each of the December transactions, adjusting entries to the accounts in the ledger. 3. Prepare an adjusted trial balance as of December 31, 2017. 4. Prepare an income statement for the three months ended December 31, 2017. 5. Prepare a statement of retained earnings for the three months ended December 31, 2017. 6. Prepare a balance sheet as of December 31, 2017. 7. Record and post the necessary closing entries as of December 31, 2017. 8. Prepare a post-closing trial balance as of December 31, 2017.

Answer 1

1
Date	General Journal	Debit	Credit
02-Dec	Advertising expense	1,025
	Cash		1,025
03-Dec	Repairs expense—Computer	500
	Cash		500
04-Dec	Cash	3,950
	Accounts receivable		3,950
10-Dec	Wages expense	750
	Cash		750
14-Dec	Cash	1,500
	Unearned computer services revenue		1,500
15-Dec	Computer supplies	1,100
	Accounts payable		1,100
16-Dec	No journal entry required
20-Dec	Cash	5,625
	Computer services revenue		5,625
28-Dec	Cash	3,000
	Accounts receivable		3,000
29-Dec	Mileage expense	192
	Cash		192
31-Dec	Dividends	1,500
	Cash		1,500

2
Transaction	General Journal	Debit	Credit
a.	Computer supplies expense	3,065
	Computer supplies		3,065
b.	Insurance expense	555
	Prepaid insurance		555
c.	Wages expense	500
	Wages payable		500
d.	Depreciation expense—Computer equipment	1,250
	Accumulated depreciation—Computer equipment		1,250
e.	Depreciation expense—Office equipment	400
	Accumulated depreciation—Office equipment		400
f.	Rent expense	2,475
	Prepaid rent		2,475

BUSINESS SOLUTIONS
Adjusted Trial Balance
31-Dec-17
Account Title	Debit	Credit
Cash	48,372
Accounts receivable	5,668
Computer supplies	580
Prepaid insurance	1,665
Prepaid rent	825
Office equipment	8,000
Accumulated depreciation—Office equipment		400
Computer equipment	20,000
Accumulated depreciation—Computer equipment		1,250
Accounts payable		1,100
Wages payable		500
Unearned computer services revenue		1,500
Common stock		73,000
Retained earnings		0
Dividends	7,100
Computer services revenue		31,284
Depreciation expense—Office equipment	400
Depreciation expense—Computer equipment	1,250
Wages expense	3,875
Insurance expense	555
Rent expense	2,475
Computer supplies expense	3,065
Advertising expense	2,753
Mileage expense	896
Miscellaneous expenses	250
Repairs expense—Computer	1,305
Totals	109034	109034

BUSINESS SOLUTIONS
Income Statement
For Three Months Ended December 31, 2017
Revenue
Computer services revenue		$31,284
Expenses
Depreciation expense—Office equipment	$400
Depreciation expense—Computer equipment	1,250
Wages expense	3,875
Insurance expense	555
Rent expense	2,475
Computer supplies expense	3,065
Advertising expense	2,753
Mileage expense	896
Miscellaneous expenses	250
Repairs expense—Computer	1,305
Total expenses		16824
Net income		$14,460

BUSINESS SOLUTIONS
Statement of Retained Earnings
For Three Months Ended December 31, 2017
Retained earnings, October 1, 2017	$0
Add: Net income	14,460
	14460
Less: Dividends	7,100
Retained earnings, December 31, 2015	7,360

BUSINESS SOLUTIONS
Balance Sheet
31-Dec-17
Assets
Cash		$48,372
Accounts receivable		5,668
Computer supplies		580
Prepaid insurance		1,665
Prepaid rent		825
Office equipment	$8,000
Accumulated depreciation—Office equipment	-400	7600
Computer equipment	20,000
Accumulated depreciation—Computer equipment	-1,250	18750
Total Assets		83460
Liabilities
Accounts payable		$1,100
Wages payable		500
Unearned computer services revenue		1,500
Total Liabilities		3100
Equity
Common stock		73,000
Retained earnings		7,360
Total equity		80360
Total Liabilities and Equity		83460

Date	General Journal	Debit	Credit
31-Dec	Computer services revenue	31,284
	Income summary		31,284
31-Dec	Income summary	16,824
	Depreciation expense—Office equipment		400
	Depreciation expense—Computer equipment		1,250
	Wages expense		3,875
	Insurance expense		555
	Rent expense		2,475
	Computer supplies expense		3,065
	Advertising expense		2,753
	Mileage expense		896
	Miscellaneous expenses		250
	Repairs expense—Computer		1,305
31-Dec	Income summary	14,460
	Retained earnings		14,460
31-Dec	Retained earnings	7,100
	Dividends		7,100

BUSINESS SOLUTIONS
Post-Closing Trial Balance
31-Dec-17
Account Title	Debit	Credit
Cash	48,372
Accounts receivable	5,668
Computer supplies	580
Prepaid insurance	1,665
Prepaid rent	825
Office equipment	8,000
Accumulated depreciation—Office equipment		400
Computer equipment	20,000
Accumulated depreciation—Computer equipment		1,250
Accounts payable		1,100
Wages payable		500
Unearned computer services revenue		1,500
Common stock		73,000
Retained earnings		7,360
Totals	85110	85110

Explanation

Dec. 31 Insurance expense = (1/4 of $2,220 original prepaid amount) = $555

Depreciation expense–Computer equipment = $1,250         Cost $ 20,000 Predicted life 4 years Annual depreciation (cost/life) $ 5,000 Expense for three months $ 1,250

Depreciation expense–Office equipment = $400        Cost $ 8,000 Predicted life 5 years Annual depreciation (cost/life) $ 1,600 Expense for three months $ 400

Rent expense = (3/4 of $3,300 original prepaid amount) = $2,475