DEMONSTRATION PROBLEM

This Demonstration Problem is based on the same facts as the Demonstration Problem at the end
of Chapter 1 except for two additional items: (b) August 1 and (k) August 18. The following activities
occurred during the first month of Joanne Cardinal's new haircutting business called The Cutlery:
a. On August 1, Cardinal put $16,000 cash into a chequing account in the name of The Cutlery. She
also invested $10,000 of equipment that she already owned.
b. On August 1, Cardinal paid $2,400 for six months of insurance effective immediately.
c. On August 2, she paid $2,000 cash for furniture for the shop.
d. On August 3, she paid $3,200 cash to rent space in a strip mall for August.
e. On August 4, she furnished the shop by installing the old equipment and some new equipment
that she bought on credit for $21,000. This amount is to be repaid in three equal payments at the
end of August, September, and October.
f. On August 5, The Cutlery opened for business. Cash receipts from haircutting services provided
in the first week and a half of business (ended August 15) were $1,100.
g. On August 15, Cardinal provided haircutting services on account for $750.
h. On August 17, Cardinal received a $750 cheque in the mail for services previously rendered on
account.
i. On August 17, Cardinal paid $250 to an assistant for working during the grand opening.
j. On August 18, Cardinal interviewed a job applicant. The applicant was successful in getting the
position and will receive $750 per week for part-time work starting in September.
k. On August 18, a regular customer paid $500 for services to be provided over the next three
months.
l. Cash receipts from haircutting services provided during the second half of August were $1,950.
m. On August 31, Cardinal paid an instalment on the account payable created in (e) above.
n. On August 31, the August hydro bill for $450 was received. It will be paid on September 14.
o. On August 31, she withdrew $500 cash for her personal use.
Required
1. Prepare general journal entries for the preceding transactions.
2. Open the following accounts: Cash, 101; Accounts Receivable, 106; Prepaid Insurance, 128;
Furniture, 161; Store Equipment, 165; Accounts Payable, 201; Unearned Haircutting Services
Revenue, 236; Joanne Cardinal, Capital, 301; Joanne Cardinal, Withdrawals, 302; Haircutting
Services Revenue, 403; Wages Expense, 623; Rent Expense, 640; and Hydro Expense, 690.
3. Post the journal entries to the ledger accounts.
4. Prepare a trial balance as of August 31, 2017.
5. Prepare a income statement and a statement of changes in equity for the month ended August
31, 2017, and a balance sheet at August 31, 2017.
Page 108
JOURNAL ENTRIES 3 WITH ADJUSTMENTS

The following information continues with The Cutlery, featured in the Chapter 1 and 2Demonstration
Problems. After the first month of business, The Cutlery's August 31, 2017, unadjusted trial balance
appeared as follows:

The following additional information is available for the month just ended:

a. Depreciation of $100 per month will be taken on the furniture.
b. It is estimated that the store equipment will have a $1,000 value at the end of its estimated five-
year (or 60-month) useful life. Joanne Cardinal will record a full month of depreciation for August.
Page 178
 c. It was determined that the balance in unearned haircutting services revenue at August 31 should
be $420.
d. The prepaid insurance represents six months of insurance beginning August 1.
e. On August 31, The Cutlery provided $130 of services to a client who will pay in September.
f. On August 31, Joanne Cardinal received the business's August cell phone bill totalling $50. It will
be paid in September.
Required
1. Prepare the adjusting entries needed on August 31, 2017, to record the previously unrecorded
items.
2. Prepare T-accounts for accounts affected by the adjusting entries. Post the adjusting entries to
the T-accounts.
3. Prepare an adjusted trial balance.
4. Prepare an income statement, a statement of changes in equity, and a balance sheet.
Analysis Component: