Question

GREEN LAWNS, INC.
ADJUSTED TRIAL BALANCE
DECEMBER 31, CURRENT YEAR
Cash    $218,640   
Accounts receivable    10,800   
Supplies    720   
Equipment    28,800   
Accumulated depreciation: equipment        $ 12,000
Accounts payable        3,600
Income taxes payable        8,400
Capital stock        60,000
Retained earnings        108,000
Dividends    4,800   
Lawn care revenue earned        230,400
Salary expense    124,800   
Supply expense    2,880   
Advertising expense    720   
Depreciation expense: equipment    2,400   
Income taxes expense    27,840   
   $422,400    $422,400

Refer to the adjusted trial balance of Green Lawns, Inc., illustrated in Exercise 5.2 to respond to the following items. (shown above)

1. Prepare all necessary closing entries at December 31, current year.

2. Prepare an after-closing trial balance dated December 31, current year.

3. Compare the Retained Earnings balance reported in the after-closing trial balance prepared in part b to the balance reported in the adjusted trial balance. Explain why the two balances are different. (Include in your explanation why the balance reported in the after-closing trial balance has increased or decreased subsequent to the closing process.)

Answer 1

Before Preparing Closing Entries we need to prepare Income Statement and Statement of Retained Earnings:-

Closing Entries:- These entries are prepared at the end of the Accounting Period to close Temporary Accounts. These Temporary Accounts shown in Income Statement, all Temporary Accounts transferred to Income Summary which is also a Temporary Account and Income Summary Account transferred to Retained Earnings which is a Permanent Account and shows in Balance Sheet.

GREEN LAWNS, INC.

INCOME STATEMENT

DECEMBER 31, CURRENT YEAR

Accounts	Amount	Amount
Lawn Care Revenue Earned		$230,400
Less:- Expenses:-
Salary Expense	$124,800
Supply Expense	2,880
Advertising Expense	720
Depreciation Expense, Equipment	2,400
Income Taxes Expense	27,840
Total Expenses		$(158,640)
Net Income		$71,760

GREEN LAWNS, INC.

STATEMENT OF RETAINED EARNINGS

DECEMBER 31, CURRENT YEAR

Accounts	Amount
Retained Earnings, Beginning	$108,000
Add:- Net Income	71,760
	$179,760
Less:- Dividends	(4,800)
Retained Earnings, Ending	$174,960

1. Preparing Closing Entries:-

GREEN LAWNS, INC.

GENERAL JOURNAL (CLOSING ENTRIES)

DECEMBER 31, CURRENT YEAR

Date	Accounts Title and Explanation	Debit	Credit
December 31	Lawn Care Revenue Earned	$230,400
	Income Summary		$230,400
	(To close Revenue Account)
December 31	Income Summary	$158,640
	Salary Expense		$124,800
	Supply Expense		$2,880
	Advertising Expense		$720
	Depreciation Expense, Equipment		$2,400
	Income Taxes Expense		$27,840
	(To close Expenses Accounts)
December 31	Income Summary	$71,760
	Retained Earnings		$71,760
	(To close Income Summary)
December 31	Retained Earnings	$4,800
	Dividends		$4,800
	(To close Dividends Account)

2. Preparing After Closing Trial Balance:-

GREEN LAWNS, INC.

AFTER CLOSING TRIAL BALANCE

DECEMBER 31, CURRENT YEAR

Accounts	Debit	Credit
Cash	$218,640
Accounts Receivable	10,800
Supplies	720
Equipment	28,800
Accumulated Depreciation, Equipment		$12,000
Accounts Payable		3,600
Income Taxes Payable		8,400
Capital Stock		60,000
Retained Earnings, Ending		174,960
Totals	$258,960	$258,960

3. Retained Earnings balance reported in Adjusted Trial Balance is $108,000 and Retained Earnings Balance reported in After Closing Trial Balance is $174,960. These two Balances are different, this is because we added Net Income of $71,760 and Deducted Dividends of $4,800 from Retained Earnings Beginning Balance which shows in Adjusted Trial Balance . That's why Retained Earnings balance reported in After Closing Trial Balance has Increased by $66,960 ($174,960-$108,000). Calculations has been made in Statement of Retained Earnings.