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Chapter 9
Accounting Cycle of a Service Business

PROBLEM 1: FOR CLASSROOM DISCUSSION

Solutions:

Requirement (a): Journal entries

(1) Cash 200,000

Owner’s equity 200,000
(2) Cash 300,000
Notes payable 300,000
(3) Equipment 360,000
Cash 360,000
(4) Office supplies/ Prepaid supplies 80,000
Cash 80,000
(5) Cash 180,000
Service fees 180,000
(6) Accounts receivable 420,000
Service fees 420,000
(7) Cash 370,000
Accounts receivable 370,000
(8) Utilities expense 16,000
Cash 16,000
(9) Salaries expense 140,000
Cash 140,000
(10) Owner’s drawings 100,000
Cash 100,000
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Requirement (b): Posting

ASSETS
Accounts
Cash
receivable
(1) 200,000 (6) 420,000
360,00 370,00
(2) 300,000 (3) (7)
0 0
(5) 180,000 80,000 (4)
(7) 370,000 16,000 (8)
140,00
(9)
0
100,00 (10
0 )
Bal
Bal. 354,000 50,000
.

Office supplies Equipment

(4) 80,000 (3) 360,000

Bal. 80,000 Bal. 360,000

LIABILITIES
Notes payable

300,000 (2)
300,00
0 Bal.

EQUITY
Owner’s equity Owner’s drawings

200,00 (10
(1) 100,000
0 )
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200,00 Bal Bal

100,000
0 . .

INCOME EXPENSES
Service fees Utilities expense
180,00
(5)
0
420,00
(6) 16,000
0 (8)
600,00
Bal. 16,000
0 Bal.

Salaries expense

(9) 140,000
Bal. 140,000

Requirement (c): Unadjusted trial balance

         
  Entity A  
  Unadjusted Trial Balance  
  December 31, 20x1  
   
  Accounts Debits Credits  
  Cash ₱354,000    
  Accounts receivable 50,000    
  Office supplies 80,000    
  Equipment 360,000    
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  Notes payable   ₱300,000  

200,00
  Owner's equity  
  0
  Owner's drawings 100,000    
600,00
  Service fees  
  0
  Utilities expense 16,000    
  Salaries expense 140,000    
₱1,100,00 ₱1,100,00
  Totals  
0 0
         

Requirement (d): Adjusting entries

AJE #1: Interest expense

Interest expense (300,000 x 12% x 3/12) 9,000
Interest payable 9,000

AJE #2: Depreciation expense

Depreciation expense [(360K ÷ 5) x 2/12] 12,000
Accumulated depreciation 12,000

AJE #3: Bad debt expense

Bad debt expense (50,000 x 6%) 3,000
Allowance for bad debts 3,000

AJE #4: Supplies expense

Supplies expense (80,000 – 5,000 unused) 75,000
Office supplies/Prepaid supplies 75,000

Requirement (e): Worksheet

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Requirement (f): Closing entries

CLE #1
Service fees 600,000
Utilities expense 16,000
Salaries expense 140,000
Interest expense 9,000
Depreciation expense 12,000
Bad debts expense 3,000
Supplies expense 75,000
Income summary 345,000

CLE #2
Income summary 345,000
Owner’s equity 345,000

CLE #3
Owner’s equity 100,000
Owner’s drawings 100,000
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Requirement (g): Balance sheet and Income statement

Entity A
Balance Sheet
As of December 31, 20x1

ASSETS
Cash ₱354,000
Accounts receivable 50,000
Allowance for bad debts (3,000)
Office supplies 5,000
Equipment 360,000
Accumulated depreciation (12,000)
TOTAL ASSETS ₱754,000

LIABILITIES
Notes payable ₱300,000
Interest payable 9,000
TOTAL LIABILITIES 309,000

EQUITY
Owner's equity 445,000
TOTAL EQUITY 445,000

TOTAL LIABILITIES & EQUITY ₱754,000

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Entity A
Income Statement
For the two months ended December 31, 20x1

INCOME
Service Fees ₱600,000

EXPENSES
Utilities expense (16,000)
Salaries expense (140,000)
Interest expense (9,000)
Depreciation expense (12,000)
Bad debt expense (3,000)
Supplies expense (75,000)
TOTAL EXPENSES (255,000)

PROFIT FOR THE PERIOD ₱345,000