Question

Question 1 Chan Audio Company is retailer of stereo equipment that began operation on January 1, 2019. One month later, on January 31, 2006, the company unadjusted trial balance consists of the following accounts: Chan Audio Company Unadjusted trial balance January 31, 2019 Unadjusted TB Debit Credit Cash 71,700 Account receivable 160,300 Note receivable 40,000 Inventory 250,200 Prepaid rent 15,000 Store equipment 114,900 Note payable 100,000 Account payable 117,100 Unearned rent revenue 3,000 Capital stock 400,000 Sale revenue 160,000 selling expense 100,000 Wage expense 28.000 If the company wants to prepare monthly financial statements, it has to consider the following adjustments on January 31 (end of accounting period): a. January 1, Chan paid $15,000 of rent in advance to cover the first quarter of 2019, as shown by debit balance in the prepaid rent account b. Wages earned by employees during January but not paid as of January 31 were $3,750 c. Store equipment depreciation is calculated using straight-line method of depreciation. Salvage value of store equipment is estimated to be $18,900, and expected useful life of 8 years d. Chan borrowed from the bank $100,000 on January 1, 2019 as shown in Note payable account. Chan is to pay the principle and 9% interest 1 year later (January 1, 2020). Chan has not yet made the adjustment for the January interest expense e. On January 1, 2019, Chan made loan to a local supplier, as shown by the debit balance in Note receivable account. The note stated that the loan is to be repaid 1 year later (January 1, 2020), together with interest at 12% per annum. On January 31, 2019, an adjustment is needed to recognize interest earned on the note receivable. f. On January 15, a nearby company paid $3,000 cash to Chan as an advance rental for temporary use of Chan's storage space and equipment. The rental agreement covers the 3 months from January 15 to April 15. This $3,000 is the credit balance in the Unearned rent revenue account Required: 1. Prepare adjusting entries at January 31 2. Post the T-accounts (start the T-accounts with unadjusted trial balance given) 3. Prepare the adjusted trial balance 4. Prepare financial statements; income statement statement of retained earnings and balance sheet

Answer 1

1. JOURNAL ENTRIES

a . Rent A/c Dr 5000 (15000/5000)

    To Prepaid Rent Cr   5000

    (being expenses recognized )

b. Wages A/c Dr 3750

    To Wages Outstanding A/C Cr 3750

   (being wages acknowledged)

c. Depreciation A/c Dr 1000

TO Store Equipment A/C CR 1000

(Being depreciation recognized)

Workings for depreciation

Book Value : 114900

Salvage Value 18900

Net Value    96000

Depreciation per year 96000/8 = 12000

Depreciation for 1 month = 12000/12=1000

d. Interest payable A/c Dr 750

   To Interest payable O/S A/C cr 750

( being interest payable)

Working

Calculation of Interest

Interest @ 9% = 100000*.09 = 9000

Interest for 1 month = 9000/12 = 750

e. Interest Income O/S A/c Dr 400

To Interest Income A/C CR 400

  ( being interest recieved)

Working

Calculation of Interest

Interest @ 12% = 40000*.12 = 4800

Interest for 1 month = 4800/12 = 400

f. Unearned Rent Revenue A/C DR 500

   To Rental Income A/C CR    500

(being rental Income reconized )

T ACCOUNTS

DR                   Rent                                                CR

To Prepaid Rent 5000           By balance cf 5000

DR              Prepaid   Rent                                                CR

To Balance bf 15000     By Rent 5000

   By Balance cf 10000   

DR              wages                                             CR   

To Wages o/s 3750    By balance cf 3750

DR              wages O/S                                            CR

To Balance CF 3750    By Wages 3750

DR            Depriciation                                    CR

To Store equipment 1000      By Balance cf 1000

DR         Store equipment                                   CR

To balance bf 114900      By depriciation 1000

                                         by balance cf   113900

DR                  Interest payable A/c                       CR

To   Interest payable O/S A/c 750       By balance cf 750            

DR                  Interest payable O/S A/c                     CR

To Balance cf 750         BY Interest payable A/c 750

DR                     Interest Income                     CR

To Balance cf 400            BY Interest Income O/S A/c 400

DR                     Interest Income O/S                   CR

To Interest Income   A/c 400            BY Balance cf 400

DR                     Unearned Rent Revenue                   CR

To balance cf 3000    by rental income 500

                                   by balance bf    2500

DR                     Rental Income                  CR

To Unearned Rent Revenue 500      By balance cf 500

                                                         PREPARE ADJUSTED TRAIL BALANCE

                                                                                        DR                       CR

Cash                                                                              71700

Account Recieveable                                                    160300

Note Recieveable                                                          40000

Inventory                                                                       250200

Prepaid Rent                                                                  10000

Rent                                                                                 5000

Store Equipment                                                          113900

Deprication                                                                      1000

note payable                                                                                     100000

Account Payable                                                                              117100

wages                                                                       31750

wages O/s                                                                                   3750

Interest Payable                                                        750

Interest Payable O/S                                                              750

Interest Income                                                                        400

Interest Income O/S                                              400

Unearned Rent Revenue                                                     2500

Rent Revenue                                                                      500

Capital Stock                                                                     400000

sale revenue                                                                    160000

selling expenses                                         100000

Total                                                         785000 785000

INCOME STATEMENT

Income

Sale Revenue                                              160000

Other Income

   Rent                          500

   Interest Income         400                           900

Total Income                                         160900

Expense

Selling Expenses                                100000

depreciation                                          1000

wages                                                31750

Interest                                                  750

Rent                                                 5000

Total Expenses                                  138500

PROFIT                                             22400

Statement of Retain Earning 8

PROFIT FOR CURRENT PERIOD : 22400

BALANCE SHEET

Liability

Capital Stock                          400000

Retain earning                         22400

note payable                           100000

account payable                       117100

unearned Rent Revenue         2500

wages o/s                                3750

interest payable o/s                 750

Total                                       646500

Asset

Cash                                       71700

Inventory                                 250200

Account Recieveable             160300

note recievable                       40000

Prepaid Rent                         10000

store Equipment                  113900

income interest o/s             400

Total                                      646500

(effect of inventory in trail balance means inventory is taken as part of capital already

hence no treatment in INCOME STATEMENT )