Libby 4ce Solutions Manual - Appendix B

Appendix B
The Formal Recordkeeping System

Revised: February 10, 2011
ANSWERS TO QUESTIONS
1. (a) The book of original entry is the journal. It is where the effects of transactions are
first recorded.
(b) The book of final entry is the ledger. It is where these effects are accumulated by
account.
2. The journal contains a chronological record of the results of transaction analysis of

each transaction. The dual economic effect of each transaction is entered in the journal
using the debit-credit format. The journal serves three purposes:
(1) to provide for initial entry of each transaction into the accounting system,
(2) to provide for recording all of the economic impacts of each transaction in a single
place, and
(3) to facilitate verification of the economic impacts of each transaction as well as
tracing of errors (by date), if any.
3. The ledger contains a separate account for each revenue, expense, asset, liability, and
shareholders' equity. It is created by posting the economic effects of each transaction
from the journal. Its primary purpose is to provide for accumulating the economic
effects of all of the transactions, in individual accounts, in terms of the fundamental
accounting model, Assets = Liabilities + Shareholders' Equity.
4. The term "audit trail'' means that the accounting process should be designed so that it
is easy to (a) examine the way in which past transactions were recorded, (b) locate
errors, and (c) simplify subsequent accounting. The audit trail is the referencing
system with sufficiently detailed explanations to trace an entry back to its source
documents.
5. The primary purpose of the accounting worksheet is to facilitate, in an orderly way, the
remaining steps in the accounting cycle at the end of the accounting period -- adjusting
entries, preparing the financial statements, and closing entries.
6. Adjusting entries are entered on the worksheet because they provide the transition
from the unadjusted trial balance to the adjusted trial balance. The adjusting entries
record events that have not been recorded. The latter amounts are necessary to
develop the income statement and statement of financial position.
Financial Accounting, 4ce, Libby, Libby, Short, Kanaan, Gowing © 2011 McGraw-Hill Ryerson Limited. All rights reserved.
B-1
7. Adjusting entries are recorded in the journal and posted to the ledger because they are
accounting entries in every respect even though they are recorded only at the end of
each accounting period. Therefore, they must follow the regular sequence in the
accounting process (journalize and post). The results of the adjusting entries are
included in the data in the accounting system and their effects are reflected in the
financial statements. Recording adjusting entries on the worksheet, which is a "scratch
pad,'' does not, in itself, enter the data into the accounting system. To do this, such
entries must be recorded in the journal and posted to the ledger.
8. Each reversing entry is made on the first day of the new period and reverses an
adjusting entry that was made at the end of the preceding period. The only purpose of
reversing entries is to facilitate subsequent entries. They are optional and are made
only when subsequent accounting is simplified.
9. Adjusting entries classified as accruals may be reversed. For example, an adjusting

entry that usually should be reversed is one that recorded accrued or unpaid wages at
the end of the period. Assume that unpaid wages at the end of the period were $1,000.
The adjusting entry would have been a debit to Wages Expense and a credit to Wages
Payable. A reversing entry would be made on the following day as a debit to Wages
Payable and a credit to Wages Expense for $1,000. Having made the reversing entry,
when the wages are paid later in the month, it would not be necessary to separate the
payment between wage expense for the new period and wages payable carried over
from the prior period.
Some deferrals may also be reversed if the adjusting entry created an asset or a
liability. An example would be an adjusting entry that reduced Rent Revenue and
recorded Deferred Rent Revenue (L). To reverse this would result in eliminating the
liability and recording rent revenue for the period which is the desired effect.
However, there are other deferrals which should not be reversed. For example, the
adjusting entry to record depreciation expense for the period reduces an asset. To
reverse the entry would indicate that the asset had not been used for the period, which
is incorrect.
B-2
Authors' Recommended Solution Time
(Time in minutes)
Exercises Problems
No. Time No. Time
1 40 1 60
2 25 2 50
3 20 3 60
4 40 4 20
5 30
6 10
EXERCISES
E-1
Req. 1
2011 GENERAL JOURNAL P. 1
Posted
Date Account Titles and Explanation Ref. Debit Credit
Jan. 1 Cash (+A) 101 70,000
Share capital (+SE) 301 70,000
Investment of cash by organizers; 4,000
shares to Hamilton and 3,000 shares to
Dyson.
Jan. 3 Rent expense (+E  –SE) 605 2,000

Cash (–A) 101 2,000
Paid monthly rent for January.
Jan. 15 Equipment (+A) 105 28,000

Cash (–A) 101 4,000
Note payable, 10% (+L) 205 24,000
Purchased equipment for use in business.
Jan. 30 Operating expenses (+E  –SE) 601 31,000

Cash (–A) 101 25,000
Accounts payable (+L) 201 6,000
To record operating expenses, part on credit.
B-3
E-1 (continued)
2011 GENERAL JOURNAL P. 2

Posted
Date Account Titles and Explanation Ref. Debit Credit
Jan. 30 Cash (+A) 101 48,000
Trade receivables (+A) 102 12,000
Service fees revenue (+R  +SE) 501 60,000
To record service fees earned, including
$12,000 on credit.
Feb. 1 Cash (+A) 101 8,000

Trade receivables (–A) 102 8,000
Collected $8,000 of the service fees on credit.
Feb. 2 Accounts payable (–L) 201 2,000

Cash (–A) 101 2,000
Paid $2,000 of the operating expenses on credit.
Feb. 3 Note payable (–L) 205 550

Interest expense (+E  –SE) 610 200
Cash (–A) 101 750
Monthly payment on note.
Req. 2
GENERAL LEDGER
Account Title: Cash Account number: 101
2011 Posted
Date Explanation Ref. Debit Credit Balance
1/1 Investment by owners 1 70,000 70,000
1/3 Payment of rent 1 2,000 68,000
1/15 Purchase of equipment 1 4,000 64,000
1/30 Payment of operating expenses 1 25,000 39,000
1/30 Collection from customers 2 48,000 87,000
2/2 Payment of operating expenses 2 2,000 93,000
2/3 Payment of note and interest 2 750 92,250
B-4
E-1 (continued)
Account Title: Account Receivable Account number: 102

2011 Posted
1/30 Services fees on credit 2 12,000 12,000
Account Title: Equipment Account number: 105

2011 Posted
Account Title: Account Payable Account number: 201

2011 Posted
1/30 Operating expenses on credit 1 6,000 6,000
2/2 Payment 2 2,000 4,000
Account Title: Note payable, 10% Account number: 205

2011 Posted
2/3 Payment 2 550 23,450
Account Title: Share Capital Account number: 301

2011 Posted
1/1 Investment by owners 1 70,000 70,000
Account Title: Service Fees Revenue Account number: 501

2011 Posted
1/30 Revenue earned 2 60,000 60,000
B-5
E-1 (continued)
Account Title: Operating Expenses Account number: 601

2011 Posted
1/30 Expenses incurred 1 31,000 31,000
Account Title: Rent Expense Account number: 605

2011 Posted
1/3 Monthly rent payment 1 2,000 2,000
Account Title: Interest Expense Account number: 610

2011 Posted
2/3 Payment on note 2 200 200
Req. 3
(a) The cash balance at February 3, 2011 is indicated in the ledger as $92,250.
(b)
Tennis Company, Inc.
Partial Income Statement
For the Period January 1, 2011 to February 3, 2011
Service fee revenue $60,000

Expenses:
Operating $31,000
Rent 2,000
Interest 200 33,200
Pretax profit $26,800
B-6
E–2
Sam’s Service Company

GENERAL JOURNAL P. 1
Date Posted
(Item) Account Titles and Explanation Ref. Debit Credit
(a) Cash (+A) 60,000
Share capital (+SE) 60,000
Owners invested $60,000 in the business, and
were issued 6,000 shares.
(b) Cash (+A) 30,000

Trade receivables (+A) 4,000
Service revenue (+R  +SE) 34,000
Service revenue earned, $34,000, of which
$4,000 was on credit.
(c) Operating expenses (+E  –SE) 13,000

Cash (–A) 10,000
Accounts payable (+L) 3,000
Operating expenses incurred, $13,000, of which
$3,000 was on credit.
(d) Cash (+A) 3,000

Trade receivables (–A) 3,000
Collected $3,000 on trade receivables.
(e) Accounts payable (–L) 2,000

Cash (–A) 2,000
Paid $2,000 on accounts payable.
(f) Equipment (+A) 25,000

Cash (–A) 7,000
Note payable (+L) 18,000
Purchased equipment for $25,000; paid $7,000
cash and signed a note payable for the balance.
B-7
E-3
Date Nally Company

(Item) GENERAL JOURNAL Page 1
December 31, 2009 Adjusting Entries
(1) Trade receivables (+A) 500
Service revenue (+R  +SE) 500
To record service fees earned, but not collected.
(2) Insurance expense (+E  –SE) 650

Prepaid insurance (–A) 650
To record insurance expired as an expense.
(3) Depreciation expense (+E  –SE) 3,000

Accumulated depreciation (+XA  –A) 3,000
To record depreciation expense.
(4) Income tax expense (+E  –SE) 4,100

Income taxes payable (+L) 4,100
To record income taxes for 2012.
B-8
E-4
SANTOS COMPANY
Worksheet for the Year Ended December 31, 2011
Financial Statements
Unadjusted Adjusting Adjusted Income Retained Statement of
Trial Balance Entries Trial Balance Statement Earnings Financial Position
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 28 28 28
Trade receivables 40 40 40
Inventory 21 21 21
Prepaid insurance 4 (a) 2 2 2
Equipment (10-year life, no residual value) 80 80 80
Accumulated depreciation, equipment 8 (b) 8 16 16
Trade payables 12 12 12
Wages payable (c) 1 1 1
Income taxes payable (e) 6 6 6
Deferred revenue (d) 4 4 4
Note payable, long-term (10% ) 25 25 25
Share capital 77 77 77
Retained earnings 12 12 12
Revenues 108 (d) 4 104 104
Expenses 69 (a) 2 80 80
(b) 8
(c) 1
Income tax expense (e) 6 6 6
$242 $242 21 21 $257 $257 86 104
Profit 18 18
$104 $104
Retained earnings, December 31, 2011 30 30
(a) Insurance used for the period, $2 (d) Revenue collected, not earned, $4 $30 $30
(b) Annual depreciation - equipment, $8 (e) Income tax, 25% x $24 pretax profit $171 $171
(c) Accrued wages, $1
B-9
E-5
RICCI CORPORATION
Unadjusted Adjusting Entries Adjusted Income Retained Statement of
Trial Balance Trial Balance Statement Earnings Financial Position
Cash 16,000 16,000 16,000
Trade receivables 8,000 8,000 8,000
Equipment 20,000 20,000 20,000
Accumulated depreciation 5,000 (a) 3,000 8,000 8,000
Other assets 38,000 38,000 38,000
Trade payables 7,000 7,000 7,000
Note payable, long-term 8,000 8,000 8,000
Share capital 36,000 36,000 36,000
Retained earnings 10,000 10,000 10,000
Revenues 50,000 50,000 50,000
Expenses 34,000 (a) 3,000 37,000 37,000
116,000 116,000
Income tax expense (b) 3,900 3,900 3,900
Income taxes payable (b) 3,900 3,900 3,900
6,900 6,900 122,900 122,900
40,900 50,000
Profit 9,100 9,100
50,000 50,000
Retained earnings Dec. 31, 2011 19,100 19,100
(a) Annual depreciation on (b) Income tax expense, 30% of pretax 19,100 19,100
equipment, $3,000. profit. 82,000 82,000
B-10
E-6
(a) A reversing entry to Prepaid Insurance would not facilitate the next related entry
because the related entry is not a "payment'' entry. A reversing entry in this case
would introduce an error into the accounts.
(b) A reversing entry to Accrued Wages Payable would facilitate the next related entry
because it is a "payment'' entry. A reversing entry in this case avoids the necessity
to identify separately the liability and the expense portions of the subsequent entry.
B-11
PROBLEMS
P–1
Step 1: Transaction Analysis
Assets = Liabilities + Shareholders’ Equity

a. Cash +80,000 Share capital +80,000
b. Equipment +50,000
Cash 50,000
c. Cash +40,000 Note payable +40,000
d. Cash +94,000 Revenues +102,000
Trade
receivables +8,000
e. Cash 62,000 Trade payables +8,000 Expenses 70,000
f. Cash 7,000 Retained earnings 7,000
g. Accumulated Expenses 5,000
depreciation 5,000
After each of these transactions, the accounting equation remains in balance.
Step 2: Journalize Each Transaction
FOUR SEASONS COMPANY

2012 GENERAL JOURNAL Page 1
Posted
Date Explanation Ref. Debit Credit
a. Cash (+A) 101 80,000
Share capital (+SE) 301 80,000
Issued 30,000 shares.
b. Equipment (+A) 105 50,000

Cash (–A) 101 50,000
Purchased equipment (useful life, 10 years).
c. Cash (+A) 101 40,000

Note payable (+L) 205 40,000
Signed a long-term note at 10% interest.
B-12
P–1 (continued)

Posted
Date Explanation Ref. Debit Credit
d. Cash (+A) 101 94,000

Trade receivables (+A) 102 8,000
Revenue (+R  +SE) 310 102,000
Earned revenues, part not yet collected.
e. Expenses (+E  –SE) 315 70,000

Cash (–A) 101 62,000
Trade payables (+L) 201 8,000
Incurred expenses, part not yet paid.
f. Retained earnings (–SE) 303 7,000

Cash (–A) 101 7,000
Paid cash dividend.
g. Expenses (+E  –SE) 315 5,000

Accumulated depreciation (+XA  –A) 106 5,000
To record depreciation on the equipment:
$50,000 ÷ 10 years = $5,000 per year.
Each of these journal entries has debits equal to credits.
Step 3: Post to the Ledger
GENERAL LEDGER
Account Title: Cash Account Number: 101
Posted
Explanation Ref. Debit Credit Balance
a Issuance of shares 1 80,000 80,000
b Purchased equipment 1 50,000 30,000
c Borrowed on a note from a local bank 1 40,000 70,000
d Received cash from customers 2 94,000 164,000
e Paid expenses 2 62,000 102,000
f Paid cash dividend 2 7,000 95,000
B-13
P-1 (continued)
Account Title: Trade Receivables Account Number: 102

Posted
d Revenues not yet collected 2 8,000 8,000
Account Title: Equipment Account Number: 105

Posted
b Purchased for cash 1 50,000 50,000
Account Title: Accumulated Depreciation Account Number: 106

Posted
g Recorded adjustment for the year 2 5,000 5,000
Account Title: Trade Payables Account Number: 201

Posted
e Expenses not yet paid 2 8,000 8,000
Account Title: Note Payable, Long-term Account Number: 205

Posted
c Borrowed cash from local bank at 10% 1 40,000 40,000
Account Title: Share Capital Account Number: 301

Posted
a Issued 30,000 shares of stock 1 80,000 80,000
Account Title: Retained Earnings Account Number: 303

Posted
f Paid cash dividends 2 7,000 7,000
B-14
P-1 (continued)
Account Title: Revenues Account Number: 310

Posted
d Earned during the year 2 102,000 102,000
Account Title: Expenses Account Number: 315

Posted
e Incurred during the year 2 70,000 70,000
g Recorded depreciation 2 5,000 75,000
Step 4: Trial Balance

Trial Balance
At December 31, 2012
No. Account Debit Credit

101 Cash $ 95,000
102 Trade receivables 8,000
105 Equipment 50,000
106 Accumulated depreciation $ 5,000
201 Trade payables 8,000
205 Note payable, long-term 40,000
301 Share capital 80,000
303 Retained earnings 7,000
310 Revenues 102,000
315 Expenses 75,000
$235,000 $235,000
B-15
P–2 Req. 1
ANDERSON CORPORATION
Unadjusted Adjusted Income Retained Statement of
Trial Balance Adjusting Entries Trial Balance Statement Earnings Financial Position
Cash 33,000 33,000 33,000
Supplies inventory 1,200 (a) 600 600 600
Interest receivable (b) 300 300 300
Long-term note receivable (10%) 9,000 9,000 9,000
Equipment (8-year life, no residual value) 80,000 80,000 80,000
Accumulated depreciation 35,000 (c) 10,000 45,000 45,000
Trade payables 10,000 10,000 10,000
Note payable, short-term (12% ) 12,000 12,000 12,000
Interest payable (d) 720 720 720
Income taxes payable (e) 3,620 3,620 3,620
Share capital 35,000 35,000 35,000
Service revenue 72,000 72,000 72,000
Interest revenue (b) 300 300 300
Expenses (not detailed) 38,800 (a) 600 39,400 39,400
Depreciation expense (c) 10,000 10,000 10,000
Interest expense (d) 720 720 720
Income tax expense (e) 3,620 3,620 3,620
184,000 184,000 15,240 15,240 198,640 198,640 53,740 72,300
Profit 18,560 18,560
72,300 72,300
Retained earnings, December 31, 2011 38,560 38,560
(a) Supplies used during the year (d) Accrued interest ($12,000 x 12% x 6/12) 38,560 38,560
(b) Interest accrual ($9,000 x 10% x 4/12) (e) Income tax due. 144,900 144,900
(c) Annual depreciation ($80,000  8 yrs)
B-16
P-2 (continued)
Req. 2
(a) Supplies used during the year: $1,200 – inventory count, $600 = $600.
(b) Interest receivable: $9,000 x 10% x 4/12 = $300.
(c) Annual depreciation: $80,000 (cost) ÷ 8 years (estimated life) = $10,000.
(d) Interest payable: $12,000 x 12% x 6/12 = $720.
Req. 3
Closing entries:
Service revenue............................................................................................. 72,000
Interest revenue............................................................................................ 300
Income Summary................................................................................ 72,300
Income Summary......................................................................................... 53,740

Expenses (not detailed)................................................................... 39,400
Depreciation expense....................................................................... 10,000
Interest expense.................................................................................. 720
Income tax expense............................................................................ 3,620
Income Summary.......................................................................................... 18,560

Retained earnings............................................................................... 18,560
Req. 4
The adjusting and closing entries must be journalized and posted because their effects
indicated on the worksheet must be recorded in the accounts (the ledger). To accomplish
this, they must be recorded in the same manner as the other entries (recorded
chronologically in the journal and posted to the ledger). For the adjusting entries, this is
necessary in order to record their effects into the accounting system. Closing entries
transfer the temporary accounts (revenues and expenses) to retained earnings and reduce
the temporary (i.e., income statement) account balances to zero for the next period.
B-17
P-3 Req. 1
MARINE POOL SERVICE & REPAIR, INC. – Worksheet for the Year Ended December 31, 2012
Statement of
Unadjusted Trial Balance Adjusting Entries Adjusted Trial Balance Income Statement Retained Earnings Financial Position
Cash 27,500 27,500 27,500
Office supplies inventory 170 (a) 100 70 70
Prepaid insurance 800 (b) 400 400 400
Land for future building site 5,000 5,000 5,000
Equipment 72,000 72,000 72,000
Accumulated depreciation 24,000 (c) 12,000 36,000 36,000
Other assets 22,000 22,000 22,000
Trade payables 8,000 (g) 200 8,200 8,200
Wages payable (d) 900 900 900
Interest payable (e) 600 600 600
Deferred revenue (f) 150 150 150
Income taxes payable (h) 5,680 5,680 5,680
Note payable (12%) 20,000 20,000 20,000
Share capital 25,000 25,000 25,000
Repair revenue 72,000 72,000 72,000
Cleaning revenue 38,000 (f) 150 37,850 37,850
Salary expense 60,000 60,000 60,000
Advertising expense 2,000 2,000 2,000
Utilities expense 1,400 1,400 1,400
Maintenance expense 3,200 (g) 200 3,400 3,400
Miscellaneous expenses 650 (a) 100 750 750
Insurance expense (b) 400 400 400
Wage expense (d) 900 900 900
Depreciation expense (c)12,000 12,000 12,000
Interest expense (e) 600 600 600
Income tax expense (h) 5,680 5,680 5,680
196,800 196,800 20,030 20,030 216,180 216,180 87,130 109,850

Profit 22,720 22,720
109,850 109,850 32,520
Retained earnings, December 31, 2012 32,520 32,520
(a) Supplies on hand = $70; (b) insurance used: $800 x 6/12; (c) annual depreciation: $12,000 given; (d) wage accrual; (e) interest accrual: $20,000 32,520 32,520
x 0.12 x 3/12; (f) deferred cleaning revenue; (g) unrecorded gas, oil, and fuel purchase; (h) income tax expense, 20% rate.
129,050 129,050
B-18
P-3 (continued)
Req. 2
MARINE POOL SERVICE & REPAIR, INC.

Income Statement
For the Year Ended December 31, 2012
Revenue:
Repair revenue $ 72,000
Cleaning revenue 37,850
Total revenues $109,850
Expenses:
Salary expense 60,000
Advertising expense 2,000
Utilities expense 1,400
Maintenance expense 3,400
Miscellaneous expenses 750
Insurance expense 400
Wages expense 900
Depreciation expense 12,000
Interest expense 600
Total expenses 81,450
Pretax profit 28,400
Income tax expense ($28,400 x 20%) 5,680
Profit $ 22,720
Earnings per share, $22,720 ÷ 25,000 shares $0.91

Statement of Retained Earnings
For the Year Ended December 31, 2012
Balance, January 1, 2012 $ 12,800

Add: Profit 22,720
Subtract: Dividends declared (3,000)
Balance, December 31, 2012 $ 32,520
B-19
P-3 (continued)

Statement of Financial Position
At December 31, 2012
Assets
Cash $27,500
Trade receivables 2,080
Office supplies inventory 70
Prepaid insurance 400
Equipment $72,000
Less: Accumulated depreciation 36,000 36,000
Land for future building site 5,000
Other assets 22,000
Total assets $93,050
Liabilities
Trade payables $ 8,200
Wages payable 900
Interest payable 600
Deferred revenue 150
Income taxes payable 5,680
Note payable 20,000
Total liabilities 35,530
Shareholders' Equity
Share capital (25,000 shares) 25,000
Retained earnings 32,520
Total shareholders' equity 57,520
Total liabilities and shareholders' equity $93,050
B-20
P-3 (continued)
Req. 3

Explanation Ref. Debit Credit
December 31, 2012 Adjusting Entries
A Miscellaneous expenses (+E  –SE) 100
Office supplies inventory (–A) 100
To record supplies used ($170 – $70).
b Insurance expense (+E  –SE) 400

Prepaid insurance (–A) 400
To record expired insurance ($800 x 6/12).
c Depreciation expense (+E  –SE) 12,000

Accumulated depreciation (+XA  –A) 12,000
To record annual depreciation; given.
d Wages expense (+E  –SE) 900

Wages payable (+L) 900
To record unpaid wages for 2012; given.
e Interest expense (+E  –SE) 600

Interest payable (+L) 600
To record interest accrued (not paid) for 3
months ($20,000 x 12% x 3/12).
f Cleaning revenue (–R  –SE) 150

Deferred revenue (+L) 150
To record cleaning revenue collected in advance
at end of 2012; given.
g Maintenance expense (+E  –SE) 200

Trade payable (+L) 200
To record expense incurred but not paid; given.
h Income tax expense (+E  –SE) 5,680

Income taxes payable (+L) 5,680
To record income tax for 2012: ($109,850 –
$81,450) x 20%
B-21
P-3 (continued)
Req. 4

Date Explanation Posted Debit Credit
Ref.
December 31, 2012 Closing Entries
Repair revenue 72,000
Cleaning revenue 37,850
Income Summary 109,850
To transfer revenues to Income Summary.

Salary expense 60,000
Advertising expense 2,000
Utilities expense 1,400
Maintenance expense 3,400
Miscellaneous expenses 750
Insurance expense 400
Wages expense 900
Depreciation expense 12,000
Interest expense 600
Income tax expense 5,680
To transfer expenses to Income Summary.

Retained earnings 22,720
To transfer the balance of Income Summary
to Retained Earnings.
B-22
P-4
(a) A reversing entry should not be made because the adjusting entry reduces a prepaid
(deferred) expense to its correct balance and no future amount will be paid on this
insurance policy. The subsequent entry will be another adjusting entry when
additional insurance coverage expires. Therefore, a reversing entry would
complicate, rather than simplify, the subsequent entry.
(b) Reversing entry:

Interest revenue.................................................................................. 400
Interest receivable............................................................... 400
The adjusting entry is an accrual which usually is reversed because reversal would
simplify the subsequent entry made when the interest is collected. Subsequent
entries are simplified because the portion of the amount collected in the next period
would not have to be identified separately between interest receivable and interest
revenue. If reversed, the subsequent collection entry would be: Debit, Cash; Credit,
Interest Revenue; if not reversed the subsequent entry would be: Debit, Cash;
Credits, Interest Revenue and Interest Receivable.
(c) A reversing entry should not be made because the adjusting entry corrects the
inventory amount (asset balance). When Supplies inventory is used, the effect
should not be reversed. A later entry for the purchase of more supplies would be:
Debit, Supplies Inventory; Credit, Cash. Reversal would complicate, rather than
facilitate, the subsequent entry.
(d) A reversing entry should not be made for depreciation expense because there is no
subsequent collection or payment. A reversing entry would cause an error to be
introduced into the Accumulated Depreciation account.
(e) Reversing entry:

Wages payable...................................................................................... 700
Wages expense...................................................................... 700
The adjusting entry is an accrual of a routine expense. The adjusting entry given
usually is reversed because reversal facilitates the subsequent entry which is made
upon a cash payment. A reversing entry would simplify the subsequent entry
because the portion subsequently paid would not have to be split between Wages
Payable and Wages Expense. If reversed, the subsequent entry would be: Debit,
Wages Expense; Credit, Cash. If not reversed, the subsequent entry would be:
Debits, Wages Expense and Wages Payable; Credit, Cash.
B-23
P-4 (continued)
(f) Reversing entry:

Interest payable................................................................................... 600
Interest expense................................................................... 600
Same reason as given for (e).
(g) A reversing entry may be made, but normally most companies would not do so if the
payment of the income tax amount did not include an additional accrual in the
subsequent accounting period. This is not a routine entry (frequently occurring
throughout the year).
B-24

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Appendix B

The Formal Recordkeeping System

2. The journal contains a chronological record of the results of transaction analysis of

9. Adjusting entries classified as accruals may be reversed. For example, an adjusting

Jan. 3 Rent expense (+E  –SE) 605 2,000

Jan. 15 Equipment (+A) 105 28,000

Jan. 30 Operating expenses (+E  –SE) 601 31,000

2011 GENERAL JOURNAL P. 2

Feb. 1 Cash (+A) 101 8,000

Feb. 2 Accounts payable (–L) 201 2,000

Feb. 3 Note payable (–L) 205 550

Account Title: Account Receivable Account number: 102

Account Title: Equipment Account number: 105

Account Title: Account Payable Account number: 201

Account Title: Note payable, 10% Account number: 205

Account Title: Share Capital Account number: 301

Account Title: Service Fees Revenue Account number: 501

Account Title: Operating Expenses Account number: 601

Account Title: Rent Expense Account number: 605

Account Title: Interest Expense Account number: 610

Service fee revenue $60,000

Sam’s Service Company

(b) Cash (+A) 30,000

(c) Operating expenses (+E  –SE) 13,000

(d) Cash (+A) 3,000

(e) Accounts payable (–L) 2,000

(f) Equipment (+A) 25,000

Date Nally Company

(2) Insurance expense (+E  –SE) 650

(3) Depreciation expense (+E  –SE) 3,000

(4) Income tax expense (+E  –SE) 4,100

Step 1: Transaction Analysis

Assets = Liabilities + Shareholders’ Equity

After each of these transactions, the accounting equation remains in balance.

Step 2: Journalize Each Transaction

FOUR SEASONS COMPANY

b. Equipment (+A) 105 50,000

c. Cash (+A) 101 40,000

FOUR SEASONS COMPANY

d. Cash (+A) 101 94,000

e. Expenses (+E  –SE) 315 70,000

f. Retained earnings (–SE) 303 7,000

g. Expenses (+E  –SE) 315 5,000

Each of these journal entries has debits equal to credits.

Step 3: Post to the Ledger

Account Title: Trade Receivables Account Number: 102

Account Title: Equipment Account Number: 105

Account Title: Accumulated Depreciation Account Number: 106

Account Title: Trade Payables Account Number: 201

Account Title: Note Payable, Long-term Account Number: 205

Account Title: Share Capital Account Number: 301

Account Title: Retained Earnings Account Number: 303

Account Title: Revenues Account Number: 310

Account Title: Expenses Account Number: 315

Step 4: Trial Balance

No. Account Debit Credit

Income Summary......................................................................................... 53,740

Income Summary.......................................................................................... 18,560

196,800 196,800 20,030 20,030 216,180 216,180 87,130 109,850

MARINE POOL SERVICE & REPAIR, INC.

Earnings per share, $22,720 ÷ 25,000 shares $0.91

MARINE POOL SERVICE & REPAIR, INC.