Nazari Electrical Services has an August 31 fiscal year end. The company’s trial balance prior to adjustments follows:
Additional information:
1. The equipment has an expected useful life of 12 years. The vehicles’ expected useful life is eight years.
2. A physical count showed $1,500 of supplies on hand at August 31, 2017.
3. As at August 31, 2017, there was $2,500 of revenue received in advance that was still unearned.
4. Nazari Electrical Services has an investment in bonds that it intends to hold to earn interest until the bonds mature in 10 years. The bonds have an interest rate of 4% and pay interest on March 1 and September 1 each year.
5. Accrued salaries payable at August 31, 2017, were $1,850. 6. Interest on the 5% note payable is payable at the end of each month and $8,000 of the principal must be paid on December 31 each year. Interest payments are up to date as at August 31, 2017. 7. The owner, A. Nazari, invested $3,000 cash in the business on December 29, 2016. (Note: This has been correctly recorded.)
Instructions
(a) Prepare the adjusting entries and an adjusted trial balance.
(b) Calculate profit or loss for the year.
(c) Prepare a statement of owner’s equity and a classified balance sheet.
(d) Prepare the closing entries. Using T accounts, post to the Income Summary, and Owner’s Drawings and Owner’s Capital accounts. Compare the ending balance in the Owner’s Capital account with the information in the statement of owner’s equity.
Taking It Further
Why do you need to know the amount the owner invested in the business this year if it has been correctly recorded?
SOLUTION
| (a) | GENERAL JOURNAL | J2 | |
|---|---|---|---|
| Date | Account Titles | Debit | Credit |
| Aug. 31 Depreciation Expense | 21,250 | ||
| Accumulated Depreciation | |||
| —Equipment | 9,000 | ||
| ($108,000 ÷ 12 years) | |||
| Accumulated Depreciation | |||
| —Vehicles | 12,250 | ||
| ($98,000 ÷ 8 years) | |||
| 31 | Supplies Expense | 21,900 | |
| Supplies | 21,900 | ||
| ($23,400 − $1,500) | |||
| 31 | Unearned Revenue | 2,000 | |
| Service Revenue | 2,000 | ||
| ($4,500 − $2,500) | |||
| 31 | Interest Receivable | 360 | |
| Interest Revenue | 360 | ||
| ($18,000 × 4% × 6/12) | |||
| 31 | Salaries Expense | 1,850 | |
| Salaries Payable | 1,850 |
NAZARI ELECTRICAL SERVICES
Adjusted Trial Balance
August 31, 2017
Debit Credit
Cash $ 13,870
Interest receivable 360
Supplies 1,500
Debt investments 18,000
Equipment 108,000
Accumulated depreciation—equipment $ 47,250 *
Vehicles 98,000
Accumulated depreciation—vehicles 55,125 **
Accounts payable 7,115
Salaries payable 1,850
Unearned revenue ($4,500 − $2,000) 2,500
Notes payable 48,000
A. Nazari, capital 68,175
A. Nazari, drawings 32,400
Service revenue ($180,115 + $2,000) 182,115
Interest revenue ($360 + $360) 720
Depreciation expense 21,250
Fuel expense 25,235
Insurance expense 8,550
Interest expense 2,535
Rent expense 18,900
Salaries expense ($40,500 + $1,850) 42,350
Supplies expense 21,900 _______
$412,850 $412,850
* $38,250 + $9,000 = $47,250
** $42,875 + $12,250 = $55,125.
(b)
Revenues
Service revenue $182,115
Interest 720 $182,835
Expenses
Depreciation expense 21,250
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