Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 1
The adjusted trial balance for Banez Industries, owned by Kristen Banez, is as follows:

BANEZ INDUSTRIES
Adjusted Trial Balance
December 31, 2024

Account no. Account Titles Debit Credit

101 Cash $ 8,800

110 Accounts receivable 10,500

120 Supplies 1,200

130 Prepaid insurance 2,700

155 Equipment 24,000

156 Accumulated depreciation—equipment $ 4,300

201 Accounts payable 9,100

210 Salaries payable 2,400

215 Interest payable 850

225 Unearned revenue 1,700

250 Notes payable 5,200

301 K. Banez, capital 29,680

305 K. Banez, drawings 12,700

400 Service revenue 65,900

705 Depreciation expense 2,800

715 Insurance expense 1,600

725 Salaries expense 30,200

 BANEZ INDUSTRIES
Adjusted Trial Balance
December 31, 2024

735 Supplies expense 630

745 Utilities expense 4,600

755 Rent expense 18,000

905 Interest expense 1,400

$119,130 $119,130

Instructions
A. Prepare the closing entries. Use account number 350 for Income Summary.
B. Create T accounts for Income Summary and K. Banez, Capital and post the closing entries to these
accounts.
C. Prepare a post-closing trial balance.

Action Plan

Debit each individual “Revenue” account for its balance and credit the total to “Income Summary.”
Credit each individual “Expense” account for its balance and debit the total to “Income Summary.”
Debit the total balance in the “Income Summary” account and credit the Owner’s Capital account by
the same amount if the company had a profit.
Credit the total balance in the “Income Summary” account and debit the Owner’s Capital account by
the same amount if the company had a loss.
Credit the balance in the “Drawings” account to the Owner’s Capital account. Drawings are closed
separately from the expenses.
Post the entries to the T accounts provided.
Prepare a post-closing trial balance.
Ensure all temporary accounts have a zero balance.
Ensure all permanent accounts (except the Owner’s Capital account) have the same balance as the
“Adjusted Trial Balance.”

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Demonstration Problem

Chapter 4

Problem 1: Solution
A.

J1

Dec. 31 400 Service Revenue 65,900

350 Income Summary 65,900

To close revenue account.

31 350 Income Summary 59,230

705 Depreciation Expense 2,800

715 Insurance Expense 1,600

725 Salaries Expense 30,200

735 Supplies Expense 630

745 Utilities Expense 4,600

755 Rent Expense 18,000

905 Interest Expense 1,400

To close expense accounts.

31 350 Income Summary 6,670

301 K. Banez, Capital 6,670

To close Income Summary account.

31 301 K. Banez, Capital 12,700

305 K. Banez, Drawings 12,700

To close drawings account.

B.
 350 Income Summary

Clos. 59,230 Clos. 65,900

Balance 6,670

Clos. 6,670

Balance 0

301 K. Banez, Capital

Balance 29,680

Clos. 12,700 Clos. 6,670

Balance 23,650

C.

BANEZ INDUSTRIES
December 31,2024

Account no. Account Titles Debit Credit

101 Cash $ 8,800

110 Accounts receivable 10,500

120 Supplies 1,200

130 Prepaid insurance 2,700

155 Equipment 24,000

156 Accumulated depreciation—equipment $ 4,300

201 Accounts payable 9,100

210 Salaries payable 2,400

215 Interest payable 850

225 Unearned revenue 1,700

250 Notes payable 5,200

301 K. Banez, capital 23,650

$47,200 $47,200

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Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 2
Sharon Ghebreyesus, CPA, was retained by Lee Resources to audit their trial balance prior to preparing the
financial statements for April 30, 2024. The following account balances were listed:

LEE RESOURCES
Trial Balance
April 30, 2024

Account Titles Debit Credit

Cash $ 4,100

Accounts receivable 3,200

Supplies 800

Prepaid insurance 0

Equipment 10,800

Accumulated depreciation—equipment $ 1,350

Accounts payable 2,100

Salaries payable 700

Unearned service revenue 890

S. Lee, capital 14,900

S. Lee, drawings 0

Service revenue 5,650

Advertising expense 600

Depreciation expense 500

Insurance expense 1,200

Miscellaneous expense 290

Salaries expense 4,100

 LEE RESOURCES
Trial Balance
April 30, 2024

Account Titles Debit Credit

$25,590 $25,590

Sharon then reviewed the records and found the following errors:

1. Cash received from a customer on account was recorded as $950 instead of $590.
2. A payment of $75 for advertising was entered as a debit to Miscellaneous Expense $75 and a credit to
Cash $75.
3. The first salary payment in April was for $1,900, which included $700 of salaries payable on March 31. The
payment was recorded as a debit to Salaries Expense $1,900 and a credit to Cash $1,900. (No reversing
entries were made on April 1.)
4. The purchase on account of equipment costing $510 was recorded as a debit to Supplies and a credit to
Accounts Payable for $510.
5. A cash payment of repair expense on equipment for $96 was recorded as a debit to Equipment $69 and a
credit to Cash $69.
6. A customer was billed for $890 for services provided. Accounts Receivable was debited $890 and
Unearned Service Revenue was credited $890.
7. A $760 cash withdrawal for S. Lee's personal use was debited to Salaries Expense and credited to Cash.
8. A payment on account of $230 to a creditor was debited $320 to Accounts Payable and credited $320 to
Cash.
9. The prepayment of $1,200 for an annual insurance policy was posted as a debit to Insurance Expense for
$1,200 and a credit to Cash for $1,200. The policy began on April 30, 2024.
10. Received $260 cash from a customer on account. Cash was debited $260 and Service Revenue was
credited $260.

Instructions
For each transaction, prepare an analysis of each error showing (a) the incorrect entry that was posted, (b) the
correct entry that should have been posted, and (c) the correcting entry required without reversing the incorrect
entry. Use April 30 for the date on all correcting entries.

Action Plan

Based on the narrative relating to the transactions, determine what journal entry was posted.
Based on your knowledge of accounting principles, determine the correct entry that should have been
made.
Compare the incorrect entry to the correct entry and make the required correction. Your correcting
entry will adjust all the individual accounts to the proper balance in a single correcting entry.

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Next: View the Solution ([Link])
Demonstration Problem

Chapter 4

Problem 2: Solution
Entry 1:

(a) The incorrect entry:

Apr. 30 Cash 950

Accounts Receivable 950

(b) The correct entry:

Apr. 30 Cash 590

Accounts Receivable 590

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Accounts Receivable 360

Cash 360

Entry 2:

(a) The incorrect entry:

Apr. 30 Miscellaneous Expense 75

Cash 75

(b) The correct entry:

Apr. 30 Advertising Expense 75

Cash 75

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Advertising Expense 75

Miscellaneous Expense 75

Entry 3:

(a) The incorrect entry:

Entry 3:

Apr. 30 Salaries Expense 1,900

Cash 1,900

(b) The correct entry:

Apr. 30 Salaries Expense 1,200

Salaries Payable 700

Cash 1,900

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Salaries Payable 700

Salaries Expense 700

Entry 4:

(a) The incorrect entry:

Apr. 30 Supplies 510

Accounts Payable 540

(b) The correct entry:

Apr. 30 Equipment 510

Accounts Payable 510

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Equipment 510

Supplies 510

Entry 5:

(a) The incorrect entry:

Apr. 30 Equipment 69

Cash 69

(b) The correct entry:

Apr. 30 Repairs Expense 96

Cash 96

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Repairs Expense 96

Equipment 69
Entry 5:

Cash 27

Entry 6:

(a) The incorrect entry:

Apr. 30 Accounts Receivable 890

Unearned Service Revenue 890

(b) The correct entry:

Apr. 30 Accounts Receivable 890

Service Revenue 890

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Unearned Service Revenue 890

Service Revenue 890

Entry 7:

(a) The incorrect entry:

Apr. 30 Salaries Expense 760

Cash 760

(b) The correct entry:

Apr. 30 S. Lee, Drawings 760

Cash 760

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 S. Lee, Drawings 760

Salaries Expense 760

Entry 8:

(a) The incorrect entry:

Apr. 30 Accounts Payable 320

Cash 320

(b) The correct entry:

Apr. 30 Accounts Payable 230

Cash 230
Entry 8:

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Cash 90

Accounts Payable 90

Entry 9:

(a) The incorrect entry:

Apr. 30 Insurance Expense 1,200

Cash 1,200

(b) The correct entry:

Apr. 30 Prepaid Insurance 1,200

Cash 1,200

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Prepaid Insurance 1,200

Insurance Expense 1,200

Entry 10:

(a) The incorrect entry:

Apr. 30 Cash 260

Service Revenue 260

(b) The correct entry:

Apr. 30 Cash 260

Accounts Receivable 260

(c) The correcting entry completed without reversing the incorrect entry:

Apr. 30 Service Revenue 260

Accounts Receivable 260

Back: Problem 2 ([Link])

Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 3
An alphabetical list of the adjusted account balances (all accounts have normal balances) at year end May 31,
2024, for Hroda Company is as follows:

Accounts payable $ 5,100

Accounts receivable 22,400

Accumulated depreciation—building 12,400

Building 220,800

Cash and cash equivalents 24,500

Depreciation expense 4,200

Equity investments (long-term) 18,000

Goodwill 5,500

Interest expense 8,100

Interest payable 3,000

Land 50,000

Notes payable (due April 30, 2027) 120,000

Notes receivable 42,300

O. Hroda, capital 66,100

O. Hroda, drawings 23,000

Patent 12,700

Salaries expense 87,300

Salaries payable 3,200

Service revenue 334,200

Short-term investments 6,500

Supplies 2,900

Supplies expense 17,800

Unearned revenue 5,400

Utilities expense 3,400

Additional information:
1. Olga Hroda invested $17,000 in the business during this business year. The investment has been recorded
and is included in the capital account.
2. $20,000 of the notes payable is due within the next 12 months.
3. The notes receivable will be collected on May 31, 2027.

Instructions
Prepare an income statement, statement of owner’s equity, and a classified balance sheet for the year.

Action Plan

Review the Chapter 1 information relating to the income statement and the statement of owner’s equity
accounts.
Review the account information relating to a “classified” balance sheet, which may include the following:
Current assets include all assets that will be realized within one year.
Non-current assets are assets that are expected to be realized in more than one year. They are more
specifically categorized as Long-Term Investments; Property, Plant, and Equipment; and Intangible
Assets and Goodwill.
Long-term investments include investments in shares and bonds of other companies they plan to hold
over many years, long-term notes receivable, and assets such as land that the company is currently
not using in its operating activities, but plans to hold the property over the long term.
Property, plant, and equipment are assets with a long life that are tangible and are currently being
used in the business.
Intangible assets are long-lived assets that do not have physical substance.
Goodwill results from the acquisition of another company when the price paid for the company is
higher than the fair value of the purchased company’s net assets.
Current liabilities are obligations that are expected to be settled within one year.
Non-current liabilities are obligations that are expected to be paid after one year.

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Demonstration Problem

Chapter 4

Problem 3: Solution
Income Statement

HRODA COMPANY
Income Statement
For the Year Ended May 31, 2024

Revenues

Service revenue $334,200

Expenses

Depreciation expense $4,200

Interest expense 8,100

Salaries expense 87,300

Supplies expense 17,800

Utilities expense 3,400

Total expenses 120,800

Profit for the year $213,400

Statement of Owner's Equity

HRODA COMPANY
Statement of Owner’s Equity
For the Year Ended May 31, 2024

O. Hroda, capital, June 1, 2023 $49,100

Add: Investments $17,000

Profit for the year 213,400 230,400

279,500

Less: Drawings 23,000

 HRODA COMPANY
Statement of Owner’s Equity
For the Year Ended May 31, 2024

O. Hroda, capital, May 31, 2024 $256,500

Balance Sheet

HRODA COMPANY
Balance Sheet
May 31, 2024

Assets

Current assets

Cash and cash equivalents $ 24,500

Short-term investments 6,500

Accounts receivable 22,400

Supplies 2,900

Total current assets $ 56,300

Long-term investments

Notes receivable 42,300

Equity investments 18,000

Total long-term investments 60,300

Property, plant, and equipment

Land $50,000

Building 220,800

Less: Accumulated depreciation 12,400 208,400

Total property, plant, and equipment 258,400

Patent 12,700

Goodwill 5,500

Total assets $393,200

Liabilities and Owner’s Equity

Current liabilities

Accounts payable $ 5,100

Salaries payable 3,200

 HRODA COMPANY
Balance Sheet
May 31, 2024

Interest payable 3,000

Unearned revenue 5,400

Current portion of long-term notes payable 20,000

Total current liabilities $ 36,700

Non-current liabilities

Notes payable 100,000

Total liabilities 136,700

Owner's equity

O. Hroda, capital 256,500

Total liabilities and owner’s equity $393,200

Back: Problem 3 ([Link])

Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 4
Chantel Powers began operations as a private investigator on April 1, 2023. The trial balance columns of the work
sheet for Powers PI at June 30, 2024, the most recent year end of the proprietorship, are as follows:

POWERS PI
Adjusted Trial Balance
June 30, 2024

Debit Credit

Cash $12,400

Accounts receivable 6,200

Supplies 300

Prepaid insurance 2,760

Equipment 33,000

Accumulated depreciation - equipment $ 1,600

Current portion of notes payable 3,000

Accounts payable 8,900

Interest payable 300

Notes payable 9,000

C. Powers, capital 22,000

C. Powers, drawings 1,200

Service revenue 25,205

Depreciation expense 420

Insurance expense 680

Interest expense 300

Miscellaneous expense 315

 POWERS PI
Adjusted Trial Balance
June 30, 2024

Rent expense 3,600

Salaries expense 5,800

Supplies expense 630

Travel expense 2,400

$70,005 $70,005

Additional Information:
1. On May 21, 2024 Chantel Powers invested $2,500 cash in the proprietorship.
2. Of the note payable, $3,000 must be paid on March 31 each year.

Instructions
A. Prepare an income statement and a statement of owner's equity and a classified balance sheet at June 30,
2024.
B. Journalize the closing entries from the adjusted trial balance.
C. Post the closing entries to the Income Summary account and C. Powers, Capital account. After the
revenue and expense closing entries are recorded and posted, which amount on the financial statement(s)
should the balance in the Income Summary account agree with? After all closing entries are recorded and
posted, which amount on which financial statement(s) should the balance in the C. Powers, Capital
account agree with?
D. Calculate the working capital, current ratio, and acid-test ratio for June 30, 2024.

Action Plan

Prepare the income statement first, listing revenues then expenses. Calculate profit as revenues minus
expenses.
Determine the opening balance in owner's capital by deducting the investments made by the owner
during the year from the balance in the Owner's Capital account.
Determine the ending balance in Owner's Capital by adding profit and owners investments to the
owner's capital account and subtracting drawings.
In preparing a classified balance sheet, know the contents of each section.
Current assets are normally cash and other assets that will be converted to cash, sold, or used up
within one year from the balance sheet date. In Canada, companies generally list current assets in the
order of their liquidity. Some international companies list current assets in reverse order of liquidity.
Current liabilities are obligations that are expected to be settled within the coming year. Similar to
current assets, North American companies often list current liabilities in order of liquidity – that is, the
liabilities that will be due first are listed first.
In journalizing closing entries, remember that there are four entries – one to close revenues, one to
close expenses, one to close income summary, and one to close owner's drawings.
For liquidity analysis: (1) subtract current liabilities from current assets to calculate working capital; (2)
divide current assets by current liabilities to calculate current ratio; and (3) divide cash plus short-term
investments plus accounts receivable by current liabilities to calculate the acid-test ratio.
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Demonstration Problem

Chapter 4

Problem 4: Solution
A.

POWERS PI
Income Statement
For the Year Ended June 30, 2024

Revenue

Service revenue $25,205

Expenses

Depreciation expense $ 420

Insurance expense 680

Interest expense 300

Miscellaneous expense 315

Rent expense 3,600

Salaries expense 5,800

Supplies expense 630

Travel expense 2,400

Total expenses 14,145

Profit for the year $11,060

POWERS PI
Statement of Owner's Equity
For the Year Ended June 30, 2024

C. Powers, capital, July 1, 2023 $19,500*

Add: Investments $2,500

Profit for the year 11,060 13,560

33,060
 POWERS PI
Statement of Owner's Equity
For the Year Ended June 30, 2024

Less: Drawings 1,200

C. Powers, capital, July 1, 2024 $31,860

(* $22,000 − $2,500 = $19,500)

POWERS PI
Balance sheet
June 30, 2024

Assets

Current assets

Cash $12,400

Accounts receivable 6,200

Supplies 300

Prepaid Insurance 2,760

Total current assets $ 21,660

Property, plant, and equipment

Equipment $33,000

Less: Accumulated depreciation 1,600 31,400

Total assets $53,060

Liabilities and Owner's Equity

Current Liabilities

Accounts payable $8,900

Interest payable 300

Current portion of notes payable 3,000

Total current liabilities $ 12,200

Long-term liabilities

Notes payable 9,000

Total liabilities 21,200

Owner's Equity

C. Powers, capital 31,860

Total liabilities and owner's equity $53,060

B.

General Journal

Date Account Titles Debit Credit

June 30 Service Revenue 25,205

Income Summary 25,205

30 Income Summary 14,145

Depreciation Expense 420

Insurance Expense 680

Interest Expense 300

Miscellaneous Expense 315

Rent Expense 3,600

Salaries Expense 5,800

Supplies Expense 630

Travel Expense 2,400

30 Income Summary 11,060

C. Powers, capital 11,060

30 C. Powers, capital 1,200

C. Powers, drawings 1,200

C.

Income Summary

Clos. 14,145 Clos. 25,205

Balance 11,060

Clos. 11,060

Balance 0

C. Powers, Capital

Balance 22,000

Clos. 1,200 Clos. 11,060

Balance 31,860

After the revenue and expense closing entries are recorded and posted, the Income Summary balance of $11,060
should agree with the profit on the income statement.
After all closing entries are recorded and posted, the balance in the C. Powers, Capital account should agree with
both the balance sheet amount and the ending balance on the statement of owner’s equity.

D.

Working capital = current assets − current liabilities

= $21,660 − $12,200

= $9,460

Current ratio = current assets ÷ current liabilities

= $21,660 ÷ $12,200

= 1.78

Acid-test ratio = (cash + short-term investments + receivables) ÷ current liabilities

= ($12,400 + $6,200) ÷ $12,200

= 1.52

Back: Problem 4 ([Link])

Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 5
Ketchum Company had the following information in its financial statements for the fiscal years ended December
31.

2024 2023 2022

Cash $475 $1,505 $900

Accounts receivable 2,166 2,216 2,050

Current assets 3,950 4,050 3,880

Current liabilities 2,966 3,010 3,200

Instructions
a. Calculate Ketchum’s (1) working capital, (2) current ratio, and (3) acid-test ratio for each year. Calculate the
ratios to two decimal places.
b. Determine from the results obtained in part a. if Ketchum’s
1. Working capital improved or deteriorated from 2023 to 2024
2. Current ratio improved or deteriorated from 2023 to 2024
3. Current ratio improved or deteriorated from 2022 to 2023
4. Acid-test ratio improved or deteriorated from 2023 to 2024
5. Acid-test ratio improved or deteriorated from 2022 to 2023

Action Plan

Calculate Ketchum’s working capital for three years by deducting current liabilities from current
assets.
Calculate Ketchum’s current ratio for three years by dividing current assets by current liabilities.
Add cash and accounts receivable for each year.
Take the result and calculate Ketchum’s acid-test ratio for the three years by dividing the sum of cash
and accounts receivable by current liabilities.
Compare the table of results arrived at above.
Higher working capital is better than lower working capital.
For the current and the acid-test ratios, higher ratios are preferred to lower ratios.
Determine if the working capital, the current ratio, and the acid-test ratio have improved or
deteriorated for the periods stated in the question.

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Demonstration Problem

Chapter 4

Problem 5: Solution
a.

2024

1. Working Capital $3,960 – $2,966 = $984

2. Current Ratio = $3,950/$2,966 = 1.33 :1

3. Acid-test ratio = ($475 + $2,166)/$2,966 = 0.89 :1

2023

1. Working Capital $4,050 – $3,010 = $1,040

2. Current Ratio = $4,050/$3,010 = 1.35 :1

3. Acid-test ratio = ($1,505 + $2,216)/$3,010 = 1.24 :1

2022

1. Working Capital $3,880 – $3,200 = $680

2. Current Ratio = $3,880/$3,200 = 1.21 :1

3. Acid-test ratio = ($900 + $2,050)/$3,200 = 0.92 :1

b.

1. Deteriorated
2. Deteriorated
3. Improved
4. Deteriorated
5. Improved

Back: Problem 5 ([Link])

Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 6
The unadjusted trial balance of Wang Delivery Services at April 30, 2024, and the adjustment data for the month
of April 2024 are as follows:

Wang Delivery Services

Trial Balance
April 30, 2024

Debit Credit

Cash $13,025

Accounts receivable 7,940

Prepaid rent 2,375

Equipment 48,000

Accumulated depreciation–equipment $12,000

Accounts payable 4,580

Notes payable 24,000

Unearned revenue 2,000

Interest payable

Y. Wang, capital 24,400

Y. Wang, drawings 7,150

Service revenue 25,600

Salaries expense 10,120

Depreciation expense 2,650

Interest expense 1,320

$ 92,580 $ 92,580
Additional Information:
1. $1,000 of unearned revenue is to be recognized because the related delivery services have been performed
by April 30, 2024.
2. The equipment has an estimated useful life of eight years.
3. Interest on the note payable is due on the first day of each month for the previous month’s interest. The
note payable has a 6% annual rate of interest.

Instructions
Prepare the work sheet for the month of April 2024.

Action Plan

Use the unadjusted balances and enter the amounts in the work sheet. Ensure that the totals
correspond to the totals in the data given.
From the information that is given, arrive at adjusting entry amounts and enter the adjustments
required on the work sheet. Enter totals and make sure that the total of the debits equals the total of
the credits.
Calculate and enter the amounts for the adjusted trial balance. Enter totals and make sure that the trial
balance balances.
Enter the balance sheet amounts to the balance sheet columns along with the drawings account.
Enter the income statement amounts to the income statement column.
Enter sub totals for all four columns of the income statement and the balance sheet.
Calculate and enter the amount of income for the month of April.
Enter totals to the all four columns of the income statement and the balance sheet.

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Next: View the Solution ([Link])

Demonstration Problem

Chapter 4

Problem 6: Solution
Wang Delivery Services
Work Sheet
Month Ended April 30, 2024

Unadjusted Adjusted Trial Income

Trial Balance Adjustments Balance Statement Balance Sheet

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 13,025 13,025 13,025

Accounts receivable 7,940 7,940 7,940

Prepaid rent 2,375 2,375 2,375

Equipment 48,000 48,000 48,000

[Link].– 12,000 (2) 500 12,500 12,500

equip.

Accounts payable 4,580 4,580 4,580

Notes payable 24,000 24,000 24,000

Unearned revenue 2,000 (1) 1,000 1,000 1,000

Interest payable (3) 120 120 120

Y. Wang, capital 24,400 24,400 24,400

Y. Wang, drawings 7,150 7,150 7,150

Service revenue 25,600 (1) 1,000 26,600 26,600

Salaries expense 10,120 10,120 10,120

Depreciation expense 2,650 (2) 500 3,150 3,150

Interest expense 1,320 (3) 120 1,440 1,440

Totals 92,580 92,580 1,620 1,620 93,200 93,200 14,710 26,600 78,490 66,600

Profit 11,890 11,890

Totals 26,600 26,600 78,490 78,490

Back: Problem 6 ([Link])
Demonstration Problem

Chapter 4
The Demonstration Problem below includes an Action Plan and electronic Working Papers (in Excel). Download
the Working Papers and complete the problem, using the Action Plan (be sure to save your work). Once you've
completed the problem, you can compare to the Solution, also available below.

Problem 7
The unadjusted trial balance for Patel Heating at its fiscal year end of October 31, 2024 is as follows:

PATEL HEATING
Trial Balance
October 31, 2024

Debit Credit

Cash $14,600

Accounts receivable 6,500

Supplies 1,500

Equipment 39,600

Accumulated depreciation—equipment $ 2,475

Accounts payable 3,500

Unearned revenue 4,500

Note payable 12,000

P. Patel, capital 40,000

P. Patel, drawings 20,000

Service revenue 83,725

Insurance expense 4,100

Interest expense 300

Rent expense 23,100

Utilities expense 8,500

Salaries expense 28,000

$146,200 $146,200
Other Data:
There was $780 of supplies on hand on October 31, 2024.
The equipment has an estimated useful life of 12 years.
Pratik Patel made an investment in the company of $13,000 cash during the year. This amount was
mistakenly credited to Service Revenue.
The note payable has a 5% annual interest rate. Interest is paid quarterly. The last day interest was paid
was September 30, 2024. The next payment is due December 31, 2024. Interest is accrued monthly.
On October 31, 2024, $1,800 of unearned revenue was still unearned.
Accrued salaries to October 31 were $1,550. The next pay is November 4. On that date, the employees will
be paid a total of $1,825.
The company has earned another $7,000 that will be collected on November 10. This amount is not
included in the current balance of Service Revenue. On November 10, the company will also collect an
additional $1,500 for new revenues earned during November.
On July 1, 2024, the company purchased furniture that cost $6,000 and recorded the amount as a debit to
P. Patel, Drawings. The furniture has an estimated useful life of 10 years.
A payment of $350 for utilities expense was entered as a debit to Rent Expense of $350 and a credit to
Cash of $350.
Rent expense of $2,100 and Utilities expense of $450 are owed but have not yet been recorded. Both
amounts will be paid on November 8.

Instructions
A. Prepare correcting and adjusting entries for the year ended October 31, 2024 as required.
B. Prepare journal entries to record the November and December 2024 cash transactions.
C. *Assume instead that the company prepares reversing entries where appropriate. Record the reversing
entries and the journal entries to record the November and December 2024 cash transactions.

Action Plan

Prepare separate correcting entries for each error. Compare the correct entry to the incorrect entry
and determine what the correcting entry should be. Make sure debits equal credits.
Prepare separate journal entries for each adjusting entry. Make sure debits equal credits.
Each adjusting entry should affect one income statement account and one balance sheet account.
Look at how the amounts are currently recorded in the accounts before trying to determine what
adjustments are necessary.
Select account titles carefully. Use existing titles whenever possible.
(*Appendix 4B) When journalizing reversing entries, remember that they are used to reverse accruals
and that they are the exact opposite of the adjusting entry made in the previous period.

Download the Working Papers (Excel Spreadsheet) (ch04_d7_worksheet_RM.xlsx)

Next: View the Solution ([Link])
Demonstration Problem

Chapter 4

Problem 7: Solution
A.

General Journal

Date Account Titles Debit Credit

Oct. 31 Supplies Expense 720

Supplies 720

($1,500 − $780 = $720)

31 Depreciation Expense 3,300

Accumulated Depreciation—Equipment 3,300

($39,600 ÷ 12)

31 Service Revenue 13,000

P. Patel, Capital 13,000

31 Interest Expense 50

Interest Payable 50

($12,000 × 5% × 1/12 = $50)

31 Unearned Revenue 2,700

Service Revenue 2,700

($4,500 − $1,800 = $2,700)

31 Salaries Expense 1,550

Salaries Payable 1,550

31 Accounts Receivable 7,000

Service Revenue 7,000

31 Furniture 6,000

P. Patel, Drawings 6,000

31 Depreciation Expense 200

 General Journal

Accumulated Depreciation—Furniture 200

($6,000 ÷ 10 × 4/12 = $200)

31 Utilities Expense 350

Rent Expense 350

31 Rent Expense 2,100

Utilities Expense 450

Accounts Payable 2,550

B.

General Journal

Date Account Titles Debit Credit

Nov. 4 Salaries Payable 1,550

Salaries Expense ($1,825 − $1,550) 275

Cash 1,825

8 Accounts Payable 2,550

Cash 2,550

10 Cash 8,500

Accounts Receivable 7,000

Service Revenue 1,500

Dec. 31 Interest Payable ($50 × 2 months) 100

Interest Expense (1 month) 50

Cash 150

This entry is based on an interest accrual at the end of October and November.

*C (*Appendix 4B)

General Journal

Date Account Titles Debit Credit

Nov. 1 Interest Payable 50

Interest Expense 50

1 Salaries Payable 1,550

Salaries Expense 1,550

1 Service Revenue 7,000

 General Journal

Accounts Receivable 7,000

1 Accounts Payable 2,550

Rent Expense 2,100

Utilities Expense 450

4 Salaries Expense 1,825

Cash 1,825

8 Rent Expense 2,100

Utilities Expense 450

Cash 2,550

10 Cash ($7,000 + $1,500) 8,500

Service Revenue 8,500

Dec. 31 Interest Expense 150

Cash 150

($12,000 × 5% × 3/12 = $150)

Back: Problem 7 ([Link])