1

Comprehensive Review Problem 4-1.

This session reviews Libby et al. Comprehensive Review Problem 4-1. We review
each of the steps in the problem.

Beginning Trial Balance.

The beginning Trial Balance shows the accounts (and titles) to be used.

COMP 4-1
H&H Tool, Inc.
Trial Balance, January 1, 2015
Account Titles Debit Credit
Cash 6,000
Accounts receivable 5,000
Supplies 13,000
Land
Equipment 78,000
Accumulated depreciation - equipment 8,000
Other assets (grouped together to simplify) 7,000
Accounts payable
Wages payable
Interest payable
Income taxes payable
Long-term notes payable
Common stock (8,000 shares, $0.50 par value) 4,000
Additional paid-in capital 80,000
Retained earnings 17,000
Service revenue
Depreciation expense
Supplies expense
Wages expense
Interest expense
Income tax expense
Other expenses (not detailed to simplify)
Totals 109,000 109,000
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REVIEW OR JOURNAL ENTRY MECHANICS

Assets = Liabilities + Equity

(Debit Balance) (Credit Balance) (Credit Balance)

Accounts with debit balances.

 Debit to increase
 Credit to decrease

Accounts with credit balances

 Credit to increase
 Debit to decrease

Contra-accounts (e.g. accumulated depreciation) have opposite balances

 3

Expenses affect equity but have debit balances

One of the most confusing things for students just learning journal entries is that
expenses have debit balances. Note that because revenues normally exceed
expenses, these amounts net to a credit balance: e.g., revenues of $200,000 (credit
balance combined with expenses of $140,000 (debit balance) net to $60,000 credit
balance.

Assets = Liabilities + Equity

(Debit Balance) (Credit Balance) (Credit Balance)
Revenues (credit)
Expenses (debit)
Gains (credit)
Losses (debit)
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JOURNAL ENTRIES Comprehensive Problem 4-1

The problem includes several transactions. For convenience, the authors take a
year’s worth of transactions and summarize them.

a. Borrowed $14,000 cash on a five-year, 8 percent note payable, dated

March 1, 2015. (Although not specifically stated, this assumes principal is due
in five years and interest due in one year.)

Assets = Liabilities + Equity

Cash Notes Payable
↑ 15,000 ↑ 15,000

Journal Entry

Cash 15,000
Notes payable 15,000
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b. Purchased land for a future building site; paid cash, $13,000

Effect on Financial Statements

Assets = Liabilities + Equity

Land
↑ 13,000

Cash
↓ 13,000

Journal Entry

Land 13,000
Cash 13,000
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c. Earned $215,000 in revenues for 2015, including $52,000 on credit and the
rest in cash. (Note, the authors summarize many transactions in order to
simplify the problem.)

Effect on Financial Statements

Assets = Liabilities + Equity

Cash Revenues↑ 215,000
↑ 163000

Accounts Receivable
↑ 52,000

Journal Entry

Cash 163,000
Accounts receivable 52,000
Service revenue 215,000
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d. Sold 4,000 additional shares of capital stock for cash at $1 market value
per share on January 1, 2015.

Effect on Financial Statements

Assets = Liabilities + Equity

Cash Common stock
↑ 4,000 ↑ 2,000

Contributed Capital
↑ 2,000

Journal Entry

Cash 4,000
Common stock 2,000
Additional paid in capital 2,000
 8

e. Incurred $114,000 in Remaining Expenses for 2015, including $20,000 on

credit and the rest paid in cash. (Note, the authors summarize many
transactions in order to simplify the problem.)

Effect on Financial Statements

Assets = Liabilities + Equity

Cash Accounts Payable Remaining Expenses
↓ 94,000 ↑ 20,000 ↓ 114,000

Journal Entry

Remaining Expenses (1) 114,000

Accounts Payable 20,000
Cash 94,000
(1) Account title used in textbook Normally, the account title would be “other
expense.”
 9

f. Collected accounts receivable, $34,000

Effect on Financial Statements

Assets = Liabilities + Equity

Cash
↑ 34,000

Accounts Receivable
↓ 34,000

Journal Entry

Cash 34,000
Accounts Receivable 34,000
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g. Purchased other assets, $15,000 cash. Note: the problems assume that these
are long-lived assets.

Effect on Financial Statements

Assets = Liabilities + Equity

Other Assets
↑ 15,000

Cash
↓ 15,000

Journal Entry

Other Assets 15,000

Cash 15,000
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h. Purchased supplies on account for future use, $27,000. (Note: the use of
the supplies account indicates that this is being used as an asset account.)

Effect on Financial Statements

Assets = Liabilities + Equity

Supplies Accounts Payable
↑ 27,000 ↑ 27,000

Journal Entry

Supplies 27,000
Accounts Payable 27,000

i. Paid accounts payable, $26,000

Effect on Financial Statements

Assets = Liabilities + Equity

Cash Accounts Payable
↓ 26,000 ↓ 26,000

Journal Entry

Accounts Payable 26,000

Cash 26,000
 12

j. Signed a three-year $33,000 service contract to start February 1, 2016

Effect on Financial Statements

No effect on Financial Statements on a Signing Date.

Journal Entry
No journal entry on Signing Date.

k. Declared and paid cash dividends $25,000

Effect on Financial Statements

A dividend is a direct transaction with an owner. IT IS NOT AN EXPENSE.

The dividend is charged directly to owners’ equity.

Assets = Liabilities + Equity

Cash Retained Earnings
↓ 25,000 ↓ 25,000

Journal Entry

Retained Earnings 25,000

Cash 25,000
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ADJUSTING JOURNAL ENTRIES

At the end of the year (end of the period), accountants make adjusting journal
entries to ensure that the financial statements are correct.

l. Supplies counted on December 31, 2015, $18,000.

Reconciliation

Supplies on January , 2015 (see beginning trial balance) 13,000

Supplies purchased during the year (item i) 27,000
Supplies on December 31, 2015 (18,000)
Adjustment needed 22,000
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Supplies T-Account:

Supplies
BB 13,000
i 27,000
l 22,000
EB 18,000

Effect on Financial Statements

Assets = Liabilities + Equity

Supplies Supplies expense
↓ 22,000 ↓ 22,000

Journal Entry

Supplies Expense 22,000

Supplies 22,000
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m. Depreciation for the year on the equipment, $10,000.

Effect on Financial Statements

Assets = Liabilities + Equity

Equipment Depreciation expense
↓ 10,000 ↓ 10,000

Journal Entry

Depreciation Expense 10,000

Accumulated Depreciation 10,000

Note: accumulated depreciation is a contra-asset account. Therefore, it has a

credit balance, and by crediting the account the balance is increased.

Accumulated Depreciation -
Equipment
8,000
10,000
18,000
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n. Interest accrued on notes payable (to be computed).

Mar 1 Dec 31

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Computation: Interest Accrued on Notes Payable:

 Principal X Rate X Time (expressed as portion of year)
 15,000 x 10/12 x 8% = 1,000

Effect on Financial Statements

Assets = Liabilities + Equity

Interest payable Interest expense
↑ 1,000 ↓ 1,000

Journal Entry

Interest Expense 1,000

Interest Payable 1,000
 17

o. Wages earned by employees since the December 24 payroll but not yet
paid, $16,000.

Effect on Financial Statements

Assets = Liabilities + Equity

Wages payable Wages expense
↑ 16,000 ↓ 16,000

Journal Entry

Wages Expense 16,000

Wages Payable 16,000
 18

p. Income tax expense, $11,000, payable in 2016.

Effect on Financial Statements

Assets = Liabilities + Equity

Income taxes payable Income tax expense
↑ 11,000 ↓ 11,000

Journal Entry

Income Tax Expense 11,000

Income Tax Payable 11,000
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Accountants will accumulate the information by account, and use that information
to prepare financial statements. T Accounts are the pictorial representation. The
final balances in each account are as follows, and these amounts are used to
produce financial statements.

T Accounts

Cash Accounts Receivable

BB 6,000 BB 5,000
a 15,000 c 52,000
b 13,000 f 34,000
c 163,000 EB 23,000
d 4,000
e 94,000 Supplies
f 34,000 BB 13,000
g 15,000 h 27,000
i 26,000 l 22,000
k 25,000 EB 18,000
EB 49,000
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Land Equipment
0 BB 78,000
BB 13,000 0
b 13,000 EB 78,000
EB
Other Assets Acc Depreciation - Equip
7,000 BB 8,000
BB 15,000 m 10,000
g 22,000 EB 18,000
EB
Accounts Payable Wages Payable
0 BB 0
BB 20,000 o 16,000
e 26,000 EB 16,000
h 27,000
i 21,000
EB Interest Payable Income Taxes Payable
0 BB 0
BB 1,000 p 11,000
n 1,000 EB 11,000
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Notes Payable Common stock

0 BB 4,000
BB 15,000 d 2,000
a 15,000 EB 6,000
EB
Additional paid in
capital Retained Earnings
80,000 BB 17,000
BB 2,000 k 25,000
d 82,000 EB (1) 5000
EB (1) Before closing

Service Revenue Depreciation expense

BB 0 BB 0
l 215,000 m 10,000
EB 215,000 EB 10,000

Supplies Expense Wages expense

BB 0 BB 0
n 22,000 o 16,000
EB 22,000 EB 16,000

Interest Expense Income Tax Expense

BB 0 BB 0
e 1,000 p 11,000
EB 1,000 EB 11,000

Other Expense
0
e 114,000
114,000
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COMP 4-1
H&H Tool, Inc.
ADJUSTED Trial Balance December 31, 2015
January 1, 2015 December 31, 2015
Adjusted Trial
Trial Balance Transactions Adjustments Balance
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit
Cash 6,000 a 15,000
b 13,000
c 163,000
d 4,000
e 94,000
f 34,000
g 15,000
i 26,000
k 25,000 49,000
Accounts receivable 5,000 c 52,000
f 34,000 23,000
Supplies 13,000 h 27,000 l 22,000 18,000
Land b 13,000 13,000
Equipment 78,000 78,000
Accumulated depreciation - equipment 8,000 m 10,000 18,000
Other assets (grouped together to simplify) 7,000 g 15,000 22,000
Accounts payable e 20,000
h 27000
i 26,000 21,000
Wages payable o 16,000 16,000
Interest payable n 1,000 1,000
Income taxes payable p 11,000 11,000
Notes payable (long-term) a 15,000 15,000
 23

Common stock 4,000 d 2,000 6,000

Contributed Capital) 80,000 d 2000 82,000
Retained earnings (1) 17,000 k 25,000 (2) 8000
Service revenue c 215,000 215,000
Depreciation expense m 10,000 10,000
Supplies expense l 22,000 22,000
Wages expense o 16,000 16,000
Interest expense n 1,000 1,000
Income tax expense p 11,000 11,000
Other expenses (not detailed to simplify) e 114,000 114,000
Totals 109,000 109,000 488,000 488,000 60,000 60,000 377,000 385,000

(1) Beginning retained earnings 17,000

Dividends (25,000)
(2) Balance before closing net income (8,000)
Net Income 41,000
Ending retained earnings 25,000
 24

H & H Tool, Inc

Income Statement (1)
For the Year Ended December 31, 2015

Operating Revenues
Service revenue $215,000
Operating Expenses
Depreciation Expense 10,000
Supplies expense 22,000
Wages expense 16,000
Other expenses 114,000
Total Operating expenses 162,000
Operating Income 53,000
Other Income (Expense)
Interest expense (1,000)
Income before income taxes 52,000
Income tax expense 11,000
Net Income $41,000

Earnings Per Share (2) $3.42

(1) Alternatively, Statement of Earnings, Statement of Income

(2) $41,000 / 12,000 shares = $3.42
8,000 shares beginning + 4,000 shares issued on January 1 means
12,000 shares were outstanding all year

RATIOS
c. Net Profit Margin
Net income / total revenues 0.1907
$41,000 / $215,000 = 0.1907 or 19.07%
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H & H Tool, Inc

Balance Sheet (2)
December 31, 2015

ASSETS
Current Assets
Cash $49,000
Accounts receivable 23,000
Supplies 18,000
Total current assets 90,000
Land 13,000
Equipment, net of accumulated
depreciation 60,000
Other Assets 22,000
Total Assets $185,000

Continued
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LIABILITIES & STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable $21,000
Interest payable 1,000
Wages payable 16,000
Income taxes payable 11,000
Total current liabilities 49,000
Notes payable 15,000
Total liabilities 64,000
Stockholders' Equity
Common stock 6,000
Additional paid-in-capital 82,000
Retained earnings 33,000
Total stockholders' equity 121,000
Total Liabilities and Stockholders' Equity $185,000

(2) Alternatively, Statement of Financial Position

RATIOS
a. Current ratio
Current assets / current liabilities (90,000 / 49,000) 1.837

b. Total asset turnover

Total sales / average total assets 1.503
(Use total revenues if total sales not provided)
215,000 (service revenue) / (185,000 + 101,000)/2
 27

H & H Tool, Inc

Statement of Stockholders' Equity
For the Year Ended December 31, 2015
Total
Common Contributed Retained Stockholders'
Stock Capital Earnings Equity
Balance, January 1, 2015 $4,000 $80,000 $17,000 $101,000
Net income 41,000 41,000
Dividends (25,000) (25,000)
Issue stock 2,000 2,000 4,000
Ending Balance, December 31, 2015 $6,000 $82,000 $33,000 $121,000
 28

Review the Cash T Account

By the cash amount is indicated whether the cash if from operating,

investing, or financing activities.

Cash
BB 6,000
a Fin (issue note payable) 15,000
b Inv (purchase land) 13,000
c Op (revenue) 163,000
d Fin (issue stock) 4,000
e Op (expenses) 94,000
f Op (collect A/R) 34,000
g Inv (purchase other assets) 15,000
i Op (pay A/P) 26,000
k Fin (pay dividends) 25,000
EB 49,000

Operating Activities = 77,000

Inflows: 163,000 + 34,000 = 197,000
Outflows: 94,000 + 26,000 = 120,000

Investing: (13,000) + (15,000) = (28,000)

Financing: 15,000 + 4,000 + (25,000) = (6,000)
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H & H Tool, Inc

Statement of Cash Flows
For the Year Ended December 31, 2015

Cash Flows From Operating Activities

Cash collected from customers $197,000
Cash paid to suppliers (120,000)
Net cash flow from Operating Activities 77,000

Cash Flows From Investing Activities

Purchase land (13,000)
Purchase other assets (15,000)
Net cash flow from Investing Activities (28,000)

Cash Flows from Financing Activities

Bank borrowing 15,000
Issue stock 4,000
Pay dividends (25,000)
Net cash flow from Financing Activities (6,000)
Increase (Decrease) in Cash** 43,000
Beginning Cash, January 1, 2015 6,000
Ending Cash, December 31, 2015 $49,000
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At the end of the period, accountants make a journal entry to close (zero
out) the balances in the revenues and expense accounts and transfer the
balance to retained earnings

CLOSING JOURNAL ENTRY

(Take all temporary accounts to zero balance)

Service Revenue 215,000

Depreciation expense 10,000
Supplies expense 22,000
Wages expense 16,000
Interest expense 1,000
Income tax expense 11,000
Other expenses 114,000
Retained earnings 41,000