Demonstration Problems for Chapter 4

Demonstration Problem 4-1

The following events apply to Braxton Personnel Advisory Services Company (BPASC).

1. Acquired a $5,000 cash contribution of capital from the owners on January 1, 20X1.

2. Paid $1,800 cash for rental of office space. The amount paid covered a one-year contract beginning on February 1, 20X1.

3. Received a $2,400 cash advance as a retainer for services to be provided on a one-year contract. Services were to be provided evenly throughout the year beginning on March 1, 20X1.

4. Paid a $200 distribution to the owners on December 1, 20X1.

Required:

a. Record the events in ledger T-accounts and prepare an unadjusted trial balance.

b. Record the adjusting entries in ledger T-accounts and prepare an adjusted trial balance.

c. Use the adjusted trial balance to prepare an income statement, a statement of retained earnings, a balance sheet, and a statement of cash flows.

d. Record the closing entries in ledger T-accounts and prepare a post-closing trial balance.

Demonstration Problem 4-2

Required:

Record the following transactions in general journal entry format. Record the event number in the date column.

1. Acquired a $5,000 cash contribution of capital from the owners.

2. Borrowed $4,000 cash from a local bank.

3. Purchased $500 of supplies on account.

4. Recognized revenue for $8,000 of services provided on account.

5. Paid $3,900 cash for salaries expense.

6. Paid $2,400 cash in advance for a one-year rental lease of office space.

7. Purchased $3,500 of office furniture on account.

8. Received $1,800 cash for services to be performed in the future.

9. Collected $3,000 cash from accounts receivable.

10. Paid $1,200 cash for utilities.

11. Made a $1,000 cash distribution to owners.

12. Invested $2,000 cash in a certificate of deposit.

13. Repaid $1,600 of the bank loan described in Event No. 2.

14. Purchased land that cost $2,700 cash.

15. Recognized $400 of accrued interest expense.

16. Recognized $1,200 of depreciation expense.

17. Completed work on $1,800 contract described in Event No. 8.

18. Counted supplies on hand at the end of the accounting period and determined that $400 of supplies were used during the accounting period.

19. Recognized accrued salary expense of $2,300.

20. Recognized $150 of accrued interest revenue.

Demonstration Problem 4-1 ─ Solution ─ T-Account Entries

Panel 1 Recording Scheme Provided for Your Convenience
ASSETS		LIABILITIES		EQUITY
Debit	Credit	Debit	Credit	Debit	Credit
+			+		+

Panel 2 Ledger T-Accounts
Cash		Unearned Revenue		Contributed Capital
(1) 5,000	1,800 (2)		2,400 (3)		5,000 (1)
(3) 2,400	200 (4)
Bal. 5,400

Prepaid Rent			.	Distribution
(2) 1,800				(4) 200

Unadjusted Trial Balance


Account Title	Debit	Credit
Cash	$5,400
Prepaid Rent	1,800
Unearned Revenue		$2,400
Contributed Capital		5,000
Distribution	200
Totals	$7,400	$7,400

Demonstration Problem 4-1 ─ Solution ─ T-Account Adjusting Entries

Panel 1 Recording Scheme Provided for Your Convenience
ASSETS		LIABILITIES		EQUITY
Debit	Credit	Debit	Credit	Debit	Credit
+			+		+

Panel 2 Ledger T-Accounts
Cash		Unearned Revenue		Contributed Capital
(1) 5,000	1,800 (2)	(adj2) 2,000	2,400 (3)		5,000 (1)
(3) 2,400	200 (4)		400 Bal.
Bal. 5,400

Prepaid Rent			.	Revenue
(2) 1,800	1,650 (adj1)				2,000 (adj2)
Bal. 150


				Rent Expense
				(adj1) 1,650



				Distribution
				(4) 200

Adjusted Trial Balance


Account Title	Debit	Credit
Cash	$5,400
Prepaid Rent	150
Unearned Revenue		$ 400
Contributed Capital		5,000
Revenue		2,000
Rent Expense	1,650
Distribution	200
Totals	$7,400	$7,400

Demonstration Problem 4-1 ─ Solution ─ Financial Statements

Braxton Personnel Advisory Services Company Financial Statements
Income Statement
For the Period Ended		20X1

Revenue		$2,000
Expense		1,650
Net Income		$ 350

Statement of Retained Earnings
Beginning Retained Earnings		$ -0-
Net Income		350
Distributions		(200)
Ending Retained Earnings		$ 150

Balance Sheet
Assets
Cash		$5,400
Prepaid Rent		150
Total Assets		$5,550

Liabilities
Unearned Revenue		$ 400

Equity
Contributed Capital		$5,000
Retained Earnings		150
Total Equity		$5,150
Total Liabilities and Equity		$5,550

Statement of Cash Flows
Net Cash Flow from Operating Activities¹		$ 600

Net Cash Flow from Investing Activities		-0-

Net Cash Flow from Financing Activities²		4,800
Net Change in Cash		$5,400
Beginning Cash Balance		-0-
Ending Cash Balance		$5,400

¹Net cash flow from operating activities consists of the $24,000 inflow form revenue and the $1,800 outflow for prepaid insurance (i.e., $24,000 ─ $1,800 = $600).

²Net cash flow from financing activities consists of the $5,000 inflow from Capital Acquisitions and the $200 outflow for distributions to owners. (i.e., $5,000 ─ $200 = $4,800).

Demonstration Problem 4-1 ─ Solution ─ T-Account Closing Entries

Panel 1 Recording Scheme Provided for Your Convenience
ASSETS		LIABILITIES		EQUITY
Debit	Credit	Debit	Credit	Debit	Credit
+			+		+

Panel 2 Ledger T-Accounts
Cash		Unearned Revenue		Contributed Capital
(1) 5,000	1,800 (2)	(adj2) 2,000	2,400 (3)		5,000 (1)
(3) 2,400	200 (4)		400 Bal.		5,000 Bal.
Bal. 5,400

Prepaid Rent			.	Retained Earnings
(2) 1,800	1,650 (adj1)			(cl2) 200	350 (cl1)
Bal. 150					150 Bal.

				Revenue
				(cl1) 2,000	2,000 (adj2)


				Rent Expense
				(adj1) 1,650	1,650 (cl1)


				Distribution
				(4) 200	200 (cl2)

Post-Closing Trial Balance


Account Title	Debit	Credit
Cash	$5,400
Prepaid Rent	150
Unearned Revenue		$ 400
Contributed Capital		5,000
Retained Earnings		150
Totals	$5,550	$5,550

Demonstration Problem 4-2 ─ Solution

Date		Account Titles	Debit	Credit
Event No.	1	Cash	5,000
		Contributed Capital		5,000
Event No.	2	Cash	4,000
		Notes Payable		4,000
Event No.	3	Supplies	500
		Accounts Payable		500
Event No.	4	Accounts Receivable	8,000
		Service Revenue		8,000
Event No.	5	Salaries Expense	3,900
		Cash		3,900
Event No.	6	Prepaid Rent	2,400
		Cash		2,400
Event No.	7	Office Furniture	3,500
		Accounts Payable		3,500
Event No.	8	Cash	1,800
		Unearned Revenue		1,800
Event No.	9	Cash	3,000
		Accounts Receivable		3,000
Event No.	10	Utilities Expense	1,200
		Cash		1,200
Event No.	11	Distribution	1,000
		Cash		1,000
Event No.	12	Certificate of Deposit	2,000
		Cash		2,000
Event No.	13	Notes Payable	1,600
		Cash		1,600
Event No.	14	Land	2,700
		Cash		2,700
Event No.	15	Interest Expense	400
		Interest Payable		400
Event No.	16	Depreciation Expense	1,200
		Accumulated Depreciation		1,200
Event No.	17	Unearned Revenue	1,800
		Revenue		1,800
Event No.	18	Supplies Expense	400
		Supplies		400
Event No.	19	Salaries Expense	2,300
		Salaries Payable		2,300
Event No.	20	Interest Receivable	150
		Interest Revenue		150