Question

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	$	38,364
106	Accounts receivable		13,318
126	Computer supplies		2,645
128	Prepaid insurance		1,980
131	Prepaid rent		3,080
163	Office equipment		8,600
164	Accumulated depreciation—Office equipment				$	0
167	Computer equipment		24,000
168	Accumulated depreciation—Computer equipment					0
201	Accounts payable					0
210	Wages payable					0
236	Unearned computer services revenue					0
307	Common stock					72,000
318	Retained earnings					0
319	Dividends		6,600
403	Computer services revenue					32,419
612	Depreciation expense—Office equipment		0
613	Depreciation expense—Computer equipment		0
623	Wages expense		2,525
637	Insurance expense		0
640	Rent expense		0
652	Computer supplies expense		0
655	Advertising expense		1,708
676	Mileage expense		644
677	Miscellaneous expenses		160
684	Repairs expense—Computer		795
	Totals	$	104,419		$	104,419

Business Solutions had the following transactions and events in December 2017.   

Dec.	2		Paid $945 cash to Hillside Mall for Business Solutions’ share of mall advertising costs.
	3		Paid $490 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 $120 per day.
	14		Notified by Alex’s Engineering Co. that Business Solutions’ bid of $7,500 on a proposed project has been accepted. Alex’s paid a $1,600 cash advance to Business Solutions.
	15		Purchased $2,000 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 $6,525 cash.
	22–26		Took the week off for the holidays.
	28		Received $3,100 cash from Gomez Co. on its receivable.
	29		Reimbursed S. Rey for business automobile mileage (500 miles at $0.24 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 $590 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 $120 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. In the books of Business Solutions:

Date	Account Titles	Debit	Credit
		$	$
Dec 2	Advertising Expense	945
	Cash		945
Dec 3	Repairs Expense: Computer	490
	Cash		490
Dec 4	Cash	3,950
	Accounts Receivable		3,950
Dec 10	Wages Expense	720
	Cash		720
Dec 14	Cash	1,600
	Unearned Computer Services Revenue		1,600
Dec 15	Computer Supplies	2,000
	Accounts Payable		2,000
Dec 16	No journal entry required
Dec 20	Cash	6,525
	Computer Service Revenue		6,525
Dec 28	Cash	3,100
	Accounts Receivable		3,100
Dec 29	Mileage Expense	120
	Cash		120
Dec 31	Dividends	1,500
	Cash		1,500

2-a. Adjusting Entries:

Adjustment #	Account Titles	Debit	Credit
December 31		$	$
a.	Computer Supplies Expense	4,055
	Computer Supplies		4,055
b.	Insurance Expense	495
	Prepaid Insurance		495
c.	Wages Expense	480
	Wages Payable		480
d.	Depreciation Expense : Computer Equipment	1,500
	Accumulated Depreciation : Computer Equipment		1,500
e.	Depreciation Expense: Office Equipment	430
	Accumulated Depreciation : Office Equipment		430
f.	Rent Expense	2,310
	Prepaid Rent		2,310

3. Business Solutions

Adjusted Trial Balance

December 31 2017

Account Title	Debit	Credit
	$	$
Cash	49,764
Accounts Receivable	6,268
Computer Supplies	590
Prepaid Insurance	1,485
Prepaid Rent	770
Office Equipment	8,600
Accumulated Depreciation : Office Equipment		430
Computer Equipment	24,000
Accumulated Depreciation : Computer Equipment		1,500
Accounts Payable		2,000
Wages Payable		480
Unearned Computer Service Revenue		1,600
Common Stock		72,000
Retained Earnings		0
Dividends	8,100
Computer Service Revenue		38,944
Depreciation Expense: Office Equipment	430
Depreciation Expense: Computer Equipment	1,500
Wages Expense	3,725
Insurance Expense	495
Rent Expense	2,310
Computer Supplies Expense	4,055
Advertising Expense	2,653
Mileage Expense	764
Miscellaneous Expense	160
Repairs Expense: Computer	1,285
Totals	116,954	116,954

4. Business Solutions

Income Statement

For the Three Months Ending December 31, 2017

	$	$
Computer Service Revenue		38,944
Operating Expenses:
Wages Expense	3,725
Advertising Expense	2,653
Computer Supplies Expense	4,055
Rent Expense	2,310
Insurance Expense	495
Repairs Expense : Computer	1,285
Mileage Expense	764
Depreciation Expense: Office Equipment	430
Depreciation Expense : Computer Equipment	1,500
Miscellaneous Expense	160
Total Operating Expenses		17,377
Income from Operations		21,567

5. Business Solutions

Statement of Retained Earnings

For the three months ended December 31, 2017

Income earned during the period	$ 21,567
Less : Dividends declared and paid	8,100
Retained Earnings, December 31, 2017	$ 13,467

6. Business Solutions

Balance Sheet

December 31, 2017

Assets	$	$	Liabilities and Equity	$	$
Cash	49,764		Accounts Payable	2,000
Accounts Receivable	6,268		Wages Payable	480
Computer Supplies	590		Unearned Computer Service Revenue	1,600
Prepaid Insurance	1,485		Total Current Liabilities		4,080
Prepaid Rent	770		Common Stock	72,000
Total Current Assets		58,877	Retained Earnings	13,467
Property Plant and Equipment			Total Stockholders' Equity		85,467
Office Equipment	8,600
Accumulated Depreciation	(430)
Computer Equipment	24,000
Accumulated Depreciation	(1,500)
Property, Plant and Equipment, net		30,670
Total Assets		89,547	Total Liabilities and Equity		89,547

7. Closing Entries:

	Account Titles	Debit	Credit
December 31, 2017		$	$
a.	Computer Service Revenue	38,944
	Income Summary		38,944
	To close the revenue accounts
b.	Income Summary	17,377
	Wages Expense		3,725
	Advertising Expense		2,653
	Computer Supplies Expense		4,055
	Rent Expense		2,310
	Insurance Expense		495
	Repairs Expense : Computer		1,285
	Mileage Expense		764
	Depreciation Expense: Office Equipment		430
	Depreciation Expense: Computer Equipment		1,500
	Miscellaneous Expense		160
	To close the expense accounts
c.	Income Summary	21,567
	Retained Earnings		21,567
	To close income summary
d.	Retained Earnings	8,100
	Dividends		8,100
	To close dividends

8. Business Solutions

Post Closing Trial Balance

December 31 2017

Account Titles	Debit	Credit
	$	$
Cash	49,764
Accounts Receivable	6,268
Computer Supplies	590
Prepaid Insurance	1,485
Prepaid Rent	770
Office Equipment	8,600
Accumulated Depreciation : Office Equipment		430
Computer Equipment	24,000
Accumulated Depreciation : Computer Equipment		1,500
Accounts Payable		2,000
Wages Payable		480
Unearned Computer Service Revenue		1,600
Common Stock		72,000
Retained Earnings		13,467
Totals	91,477	91,477