The following is the unadjusted trial balance for Rainbow Lodge Ltd. at its year end, May 31, 2015. The company adjusts its accounts monthly.
Additional information:
1. An annual insurance policy was purchased for the first time on October 1, 2014, for $10,920 cash.
2. A count of supplies shows $1,340 of supplies on hand on May 31.
3. The buildings have an estimated useful life of 20 years.
4. The furniture has an estimated useful life of five years.
5. Customers must pay a $100 deposit if they want to book a room in advance during the peak period. An analysis of these bookings indicates that 175 deposits were received and credited to Unearned Revenue. By May 31, 25 of the deposits were earned.
6. On May 25, a local business contracted with Rainbow Lodge to rent one of its housekeeping units for four months, starting June 1, at a rate of $2,800 per month. An advance payment equal to one month’s rent was paid on May 25 and credited to Rent Revenue.
7. On May 31, Rainbow Lodge has earned $1,780 of rent revenue from customers who are currently staying at the inn.
The customers will only pay the amount owing when they check out in early June.
8. Salaries of $1,590 are unpaid at May 31.
9. The mortgage interest rate is 8%. Interest has been paid to May 1; the next payment is due June 1.
10. The May utility bill of $2,240 has not yet been recorded or paid.
11. Additional income tax is estimated to be $1,000.
12. During the month of May, $4,000 of common shares were issued.
Instructions
(a) Prepare T accounts, and enter the trial balance amounts.
(b) Prepare and post the adjusting journal entries for the month.
(c) Prepare an adjusted trial balance at May 31.
(d) Prepare (1) an income statement, (2) a statement of changes in equity, and (3) a statement of financial position for the year.
(e) A friend of yours is considering investing in the company and asks you to comment on the company’s operations and financial position. Is the company performing well or not? Does the financial position look healthy or weak? Use specific information from the financial statements to support your answer.
SOLUTION
(a) and (b)
| Cash | |
|---|---|
| May 31 Bal. 6,400 | |
| Accounts Receivable | |
|---|---|
| May 31 Bal. 11,800 May 31 Adj. 1,780 | |
| May 31 Bal. 13,580 | |
| Supplies | |
|---|---|
| May 31 Bal. 4,880 | May 31 Adj. 3,540 |
| May 31 Bal. 1,340 | |
| Prepaid Insurance | |
|---|---|
| May 31 Bal. 4,550 | May 31 Adj. 910 |
| May 31 Bal. 3,640 | |
| Land | |
|---|---|
| May 31 Bal. 106,370 | |
| Buildings | |
|---|---|
| May 31 Bal. 168,000 | |
| Accumulated Depreciation—Buildings | |
|---|---|
| May 31 Bal. 16,800 May 31 Adj. 700 | |
| May 31 Bal. 17,500 | |
| Furniture | |
|---|---|
| May 31 Bal. 33,600 | |
| Accumulated Depreciation—Furniture | |
|---|---|
| May 31 Bal. 13,440 May 31 Adj. 560 | |
| May 31 Bal. 14,000 | |
| Accounts Payable | |
|---|---|
| May 31 Bal. 8,140 May 31 Adj. 2,240 | |
| May 31 Bal. 10,380 | |
| Salaries Payable | |
|---|---|
| May 31 Adj. 1,590 | |
| May 31 Bal. 1,590 | |
| Interest Payable | |
|---|---|
| May 31 Adj. 840 | |
| May 31 Bal. 840 | |
| Income Tax Payable | |
|---|---|
| May 31 Adj. 1,000 | |
| May 31 Bal. 1,000 | |
| Unearned Revenue | |
|---|---|
| May 31 Adj. 2,500 | May 31 Bal. 17,500 May 31 Adj. 2,800 |
| May 31 Bal. 17,800 | |
| Mortgage Payable | |
|---|---|
| May 31 Bal. 126,000 | |
| Common Shares | |
|---|---|
| May 31 Bal. 60,000 | |
| Retained Earnings | |
|---|---|
| May 31 Bal. 41,580 | |
| Dividends | |
| May 31 Bal. 2,000 | |
| Rent Revenue | |
|---|---|
| May 31 Adj. 2,800 | May 31 Bal. 200,320 May 31 Adj. 2,500 May 31 Adj. 1,780 |
| May 31 Bal. 201,800 | |
| Salaries Expense | |
|---|---|
| May 31 Bal. 98,700 May 31 Adj. 1,590 | |
| May 31 Bal. 100,290 | |
| Utilities Expense | |
|---|---|
| May 31 Bal. 23,870 May 31 Adj. 2,240 | |
| May 31 Bal. 26,110 | |
| Interest Expense | |
|---|---|
| May 31 Bal. 9,240 May 31Adj. 840 | |
| May 31 Bal. 10,080 | |
| Insurance Expense | |
|---|---|
| May 31 Bal. 6,370 May 31 Adj. 910 | |
| May 31 Bal. 7,280 | |
| Advertising Expense | |
|---|---|
| May 31 Bal. 1,000 | |
| Supplies Expense | |
|---|---|
| May 31 Adj. 3,540 | |
| Depreciation Expense | |
|---|---|
| May 31 Adj. 700 May 31 Adj. 560 | |
| May 31 Bal. 1,260 | |
| Income Tax Expense | |
|---|---|
| May 31 Bal. 7,000 May 31 Adj. 1,000 | |
| May 31 Bal. 8,000 | |
| (b) | 2015 |
| 1. May 31 Insurance Expense | 910 |
| Prepaid Insurance | 910 |
| ($10,920 ÷ 12 months) | |
| 2. 31 Supplies Expense | 3,540 |
| Supplies ($4,880 – $1,340) | 3,540 |
| 3. 31 Depreciation Expense | 700 |
| ($168,000 ÷ 20 years × 1/12 months) | |
| Accumulated Depreciation—Buildings | 700 |
| 4. 31 Depreciation Expense | 560 |
| ($33,600 ÷ 5 years × 1/12 months) | |
| Accumulated Depreciation—Furniture | 560 |
| 5. 31 Unearned Revenue (25 × $100) | 2,500 |
| Rent Revenue | 2,500 |
| 6. 31 Rent Revenue | 2,800 |
| Unearned Revenue | 2,800 |
| 7. 31 Accounts Receivable | 1,780 |
| Rent Revenue | 1,780 |
| 8. 31 Salaries Expense | 1,590 |
| Salaries Payable | 1,590 |
| 9. 31 Interest Expense | 840 |
| Interest Payable | 840 |
| [($126,000 × 8%) × 1/12 months] | |
| 10. 31 Utilities Expense | 2,240 |
| Accounts Payable | 2,240 |
| 11. 31 Income Tax Expense | 1,000 |
| Income Tax Payable | 1,000 |
(c)
RAINBOW LODGE LTD.
Adjusted Trial Balance
May 31, 2015
| Debit | Credit | |||
|---|---|---|---|---|
| Cash Accounts receivable Supplies Prepaid insurance Land Buildings Accumulated depreciation—buildings Furniture Accumulated depreciation—furniture Accounts payable Salaries payable Interest payable Income tax payable Unearned revenue Mortgage payable Common shares Retained earnings Dividends Rent revenue Salaries expense Utilities expense Interest expense Insurance expense Advertising expense Supplies expense Depreciation expense Income tax expense Totals | $ 6,400 13,580 1,340 3,640 106,370 168,000 33,600 2,000 100,290 26,110 10,080 7,280 1,000 3,540 1,260 8,000 $492,490 | $ 17,500 14,000 10,380 1,590 840 1,000 17,800 126,000 60,000 41,580 201,800 000000 0 $492,490 | ||
| (d) (1) |
RAINBOW LODGE LTD.
Income Statement
Year Ended May 31, 2015
Revenues
Rent revenue $201,800
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