Group Example 1: JEs to Financial Statements

1
Group Example 1 JEs to Financial Statements

• For the following 9 transactions, record the JE
  using a /- system. All seven types of accounts
  are represented in this example.
• Also, prepare the income statement and balance
  sheet immediately after each transaction.
• Account category abbreviations
• A asset R revenue
• L liability E expense
• OE owners equity G gain
• LS loss

2
Continued

• Issue common stock for 40,000.
• Purchase equipment for 10,000 on account.
• Pay the account payable from the equipment
  purchase 30 days later.
• Provide services to a client who is billed
  10,000.
• In a payroll, record salaries to professional
  employees, 7,000 payable next period.

3
Continued

• Purchase investments in stock for 1,200.
• Sell investments in stock costing 400 for 700.
• A component of the equipment fails the cost to
  replace it is 2,000.
• Dividends of 300 are declared and paid at
  year-end.

4
Continued

• 1. Issue common stock for 40,000.
• Cash 40,000 (A)
• Common stock 40,000 (OE)
• Net assets (A-L OE) have increased 40,000.
• Often this is among the first transactions for a
  corporationshareholders must provide equity
  capital before lenders provide debt capital.

5
Continued

• Balance Sheet
• Assets Liabilities
• Cash 40,000 Owners Equity
• Common
  stock 40,000
• Tot assets 40,000 Total Liabs OE
  40,000
• (We have skipped the posting step normally JEs
  are first posted to the accounts in the ledger.
  Then those balances are transferred to the
  financial statements.)

6
Continued

• 2. Purchase equipment for 10,000 on account.
• Equipment 10,000 (A)
• Accounts payable 10,000 (L)
• No change in net assets (A-L).

7
Continued

• Balance Sheet
• Assets Liabilities
• Cash 40,000 Accounts pay
  10,000
• Equipment 10,000 Owners' Equity
• Common
  stock 40,000
• Total assets 50,000 Total Liabs OE 50,000

8
Continued

• 3. Pay the account payable from the equipment
  purchase 30 days later.
• Accounts payable -10,000 (L)
• Cash -10,000 (A)
• No change in net assets (A-L).

9
Continued

• Balance Sheet
• Assets Liabilities
• Cash 30,000
• Equipment 10,000 Owners' Equity
• Common
  stock 40,000
• Total assets 40,000 Total Liabs OE 40,000

10
Continued

• 4. Provide services to a client who is billed
  10,000.
• Accounts receivable 10,000 (A)
• Service revenue 10,000 (R)
• This transaction increases net assets 10,000.
• It also is the first transaction affecting
  earnings.

11
Continued

• Balance Sheet
• Assets Liabilities
• Cash 30,000
• Accounts rec 10,000 Owners' Equity
• Equipment 10,000 Common stock 40,000
• 
  Retained earns10,000
• Total assets 50,000 Total Liabs OE 50,000

12
Continued

• The balance shows the immediate effect on
  retained earnings (OE). But in practice,
  retained earnings is not updated until the
  nominal accounts are closed in the closing JE.
• Retained earnings is an OE account that houses
  total income to date less total dividends to
  date. It is the account which causes the balance
  sheet to remain in balance when income is
  recognized.

13
Continued

• Income Statement
• Service revenue 10,000
• Again note that we would not prepare an income
  statement after only one transaction.
• To this point, there are no recorded expenses.

14
Continued

• 5. In a payroll, record salaries to professional
  employees, 7,000 payable next period.
• Salaries expense 7,000 (E)
• Salaries payable 7,000 (L)
• This transaction decreases net assets 7,000.

15
Continued

• Balance Sheet
• Assets Liabilities
• Cash 30,000 Salaries payable
  7,000
• Accounts rec 10,000 Owners' Equity
• Equipment 10,000 Common stock 40,000
• Retained
  earns 3,000
• Total assets 50,000 Total Liabs OE 50,000

16
Continued

• Income Statement
• Service revenue 10,000
• Salaries expense (7,000)

17
Continued

• 6. Purchase investments in stock for 1,200
• Investments 1,200 (A)
• Cash -1,200 (A)
• No effect on net assets (A-L).

18
Continued

• Balance Sheet
• Assets Liabilities
• Cash 28,800 Salaries payable
  7,000
• Accounts rec 10,000
• Investments 1,200 Owners' Equity
• Equipment 10,000 Common stock 40,000
• Retained
  earns 3,000
• Total assets 50,000 Total Liabs OE
  50,000
• No effect on income statement.

19
Continued

• 7. Sell investments in stock costing 400 for
  700
• Cash 700 (A)
• Investments -400 (A)
• Gain on investments 300 (G)
• This transaction increased net assets 300.
• The sum of () amounts is not equal to the sum of
  (-) amountsthis is a hint for why we need a
  better recording system.

20
Continued

• Balance Sheet
• Assets Liabilities
• Cash 29,500 Salaries payable
  7,000
• Accounts rec 10,000
• Investments 800 Owners' Equity
• Equipment 10,000 Common stock 40,000
• 
  Retained earns 3,300
• Total assets 50,300 Total Liabs OE
  50,300

21
Continued

• Income Statement
• Service revenue 10,000
• Salaries expense (7,000)
• Gain on investments 300
• Although GAAP often requires reporting an item as
  a gain or loss rather than a revenue or expense,
  the rules are not complete with respect to this
  classification issue.

22
Continued

• This leads to firms often acting on their
  reporting preferences, which are the following
• report a large negative item as a loss rather
  than expense so that users will not consider the
  item as being representative of future results.
• report a large positive item as a revenue rather
  than a gain, for just the opposite reason.

23
Continued

• 8. A component of the equipment fails the cost
  to replace it is 2,000.
• Loss on equipment 2,000 (LS)
• Cash -2,000 (A)
• This transaction reduces net assets 2,000.
• Losses are distinguished from expenses in that
  the former have no benefit.

24
Continued

• Why isnt the equipment account increased, rather
  than recording the loss?
• Recall the definitions of asset, and loss.

25
Continued

• Balance Sheet
• Assets Liabilities
• Cash 27,500 Salaries payable
  7,000
• Accounts rec 10,000
• Investments 800 Owners' Equity
• Equipment 10,000 Common stock 40,000
• 
  Retained earns 1,300
• Total assets 48,300 Total Liabs OE
  48,300

26
Continued

• Income Statement (Final)
• Service revenue 10,000
• Salaries expense (7,000)
• Operating income 3,000
• Gain on investments 300
• Loss on equipment (2,000)
• Net income 1,300
• Many firms provide this subtotal but it is not
  required and GAAP does not define operating
  income.

27
Continued

• 9. (Last transaction) Dividends of 300 were
  declared and paid at year-end.
• Retained earnings -300 (OE)
• Cash -300 (A)
• Dividends are a distribution of earnings, not an
  expense.
• This transaction reduces net assets 300.

28
Continued

• Balance Sheet (Final)
• Assets Liabilities
• Cash 27,200 Salaries payable
  7,000
• Accounts rec 10,000
• Investments 800 Owners' Equity
• Equipment 10,000 Common stock 40,000
• 
  Retained earns 1,000
• Total assets 48,000 Total Liabs OE
  48,000
• No effect on income statement.

29
Group Example 2

• On 4/1/x1, a publishing firm received 60,000
  from various customers for subscriptions to
  magazines covering the year beginning 4/1/x1.
• TJE 4/1/x1 Cash 60,000
• Unearned revenue
  60,000
• AJE 12/31/x1 Unearned revenue 45,000
• Subscriptions revenue
  45,000
• Unearned revenue is a liability end balance
  15,000
• 45,000 60,000(9/12)

30
Group Example 3

• On 9/1/x1 a firm prepaid rent for the year
  beginning on that date by paying 24,000.
• TJE 9/1/x1 Prepaid rent 24,000
• Cash
  24,000
• AJE 12/31/x1 Rent expense 8,000
• Prepaid rent
  8,000
• 8,000 24,000(4/12)
• Ending prepaid rent (asset) balance is 16,000

31
Group Example 4

• A firm incurs 4 million of R D cost during the
  current year. If the project is successful, it
  is expected to provide benefits for 10 years.
• Provide the JEs for the two alternative
  accounting approaches discussed (expense
  capitalize and amortize).

32
Group Example 4

• Current yearexpense immediately
• R D expense 4 million
• Cash, materials etc 4 million
• Current yearcapitalize and amortize
• Deferred R D (asset) 4 million
• Cash, materials etc 4 million

33
Continued

• Each year for 10 years
• R D expense .4 million
• Deferred R D .4 million