70 SOLID FOOTING Chapter 7 - Adjusting Entries Now that all of January's transactions have been entered, it is time to prepare adjusting entries, Step 3 in the Accounting Cycle. By reviewing the ending account balances, you determine that the only adjusting entry required at the end of January is for depreciation. The following is a discussion about depreciation and the required depreciation adjusting entry. > PROPERTY, PLANT, & EQUIPMENT and THE DEPRECIATION ADJUSTING ENTRY The Accumulated Depreciation account is one of the accounts that will require an adjusting entry at the end of each accounting period. Before discussing the Accumulated Depreciation account, let's first discuss the long-term asset accounts that are related to Accumulated Depreciation. Companies buy many types of long-term assets. Long-term assets are assets a company will keep and use for more than one year. Most long-term assets purchased by a company are of the Property, Plant, & Equipment type. Lenny's lawn mowing equipment is an example of a Property, Plant, & Equipment asset. Property, Plant, & Equipment assets are also called Fixed Assets. Observe on the screen that Lenny's has a $48,000 balance in its Equipment account. This equipment was purchased over a year ago, on January 2, 2018, when Lenny's started in business. At that time, Lenny's estimated: The lawn mowing equipment would last for four years (48 months). At the end of the four years, the equipment would have no future value and would be scrapped. Therefore, for each month that Lenny's uses the lawn mowing equipment, 1/48th of the equipment's service life is used up. If the balance in the Equipment account is reduced by 1/48th of its original cost each month; then by the end of four years, the balance in the Equipment account will be zero. The calculation of the monthly reduction amount is: Equipment Cost Monthly reduction in Equipment account Months of Useful Life $48,000 $1,000 per month 48 months The $1,000 is called the monthly depreciation. Depreciation is the process of allocating the cost of Property, Plant, & Equipment to the accounting periods in which these assets are used. There are many different ways to calculate the amount of depreciation. The above method is called the straight-line depreciation method because the amount of depreciation is the same each accounting period. Only the straight-line depreciation method will be used in this book. SOLID FOOTING 95 Chapter 8 Adjusting Entries Continued Unearned Revenue Liabilities - Accrued Assets > LENNY'S APRIL TRANSACTIONS In this chapter, you will continue to use the workbook that you used in the last chapter entitled 03-Lenny's Lawn Service. If this workbook is not open on your computer, do the following: Open the workbook 03-Lenny's Lawn Service -> Enable Macros Click the April tab. You should see Screen 8 A in the upper left corner of the screen. > RECEIVE ADVANCE PAYMENT TRANSACTION On April 1, Lenny's signs a contract to perform lawn services for a new customer. The new customer is a university in the Tampa area. The contract Lenny's signs with the university stipulates that Lenny's will be paid an $8,000 monthly fee for the lawn services. As part of the contract agreement, the university agrees to pay the first four months of services in advance; thus Lenny's receives $32,000 cash from the university on April 1. Click Advance Pmt. The $32,000 debit to the Cash account records the increase in cash that results from the advance payment. The credit portion of this entry is to the Unearned Revenue liability account. The Unearned Revenue account records the university's $32,000 claim to Lenny's assets. A liability account is increased because Lenny's has a future obligation to perform $32,000 of services for the university, and as of April 1, Lenny's has not earned any of the $32,000. The Unearned Revenue liability account is just like any other liability account. It records the claim to assets of someone (in this case, the university) who is not an owner of the business. The one thing that does make the Unearned Revenue account different from most other liability accounts is that the Unearned Revenue liability will be "paid-off" by Lenny's providing services to the universitynot by Lenny's paying cash to the university. 98 SOLID FOOTING Chapter 8 - Adjusting Entries Continued -> APRIL's UNEARNED REVENUE ADJUSTING ENTRY On April 1, when Lenny's signed the contract with the university, Lenny's was paid $32,000 in advance for the first four months of services. During the month of April, Lenny's performed the lawn services for the university. The timeline below shows the period of service covered by the $32,000 Lenny's received on April 1. You can see from the timeline that on April 1, Lenny's owed the university $32,000 of services. The original $32,000 entry into the Unearned Liability account reflected Lenny's $32,000 liability for future services to the university. The timeline also shows the period of time and the dollar amount of services the university is still due as of the end of April. As of April 30, Lenny's owes the university three months of service. Each month of service has a value of $8,000; thus Lenny's owes the university $24,000 of future services as of April 30. Because the balance in the Unearned Revenue account tracks Lenny's liability for future services to the university, the April 30 balance in the Unearned Revenue account should be $24,000. Unearned Revenue Timeline $32,000 April 1 April 30 May 31 June 30 July 31 1 2 3 | $24,000 "T" Account Analysis for Asset and Liability Accounts Account Name Unearned Revenue Debit Credit (1) What is the current balance? 32,000 (3) What adjustment is required to adjust from the current balance to the should be balance? 8,000 (2) What should be the balance? 24,000 Lenny's July 31, 2019 Post-Closing Trial Balance Account # Account Name Debit Credit 100 105 110 150 155 200 205 210 215 220 250 Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Common Stock Retained Earnings Service Revenue Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense Totals 300 305 400 500 505 510 515 520 550 0.00 0.00 Lenny's Lawn Service, Inc. Balance Sheet as of July 31, 2019 CAUTION Enter amounts into the Balance Sheet by typing in the amounts. Do NOT copy cells from the General Ledger or Pre-Closing Trial Balance. Assets Current Assets: Cash Accounts Receivable Supplies Note the following three new sub-totals appearing on Lenny's Balance Sheet: Total Current Assets 0.00 Property & Equipment: Equipment Accumulated Depreciation Property & Equipment, net Total Assets Total Current Assets is a total of those assets, which will turn-into cash during the next 12 months or be consumed during the next 12 months. The comparison of Total Current Assets to Total Current Liabilities gives some indication of Lenny's liquidity -- that is, its ability to pay its bills in the short-term. 0.00 $0.00 = Property & Equipment, net is the amount of Fixed Asset cost, which remains to be depreciated in future accounting periods. Liabilities & Stockholders' Equity Current Liabilities: Accounts Payable Wages Payable Interest Payable Unearned Revenue Total Current Liabilities Long-Term Liabilities: Note Payable Total Liabilities Total Current Liabilities is a total of those liabilities that will require payment in the next 12 months. In the case of Unearned Revenue, this current liability will be "paid-off" by Lenny's delivering mowing services to the university. 0.00 0.00 Stockholders' Equity: Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity 0.00 $0.00 Lenny's Lawn Service, Inc. Income Statement for the Month Ended July 31, 2019 CAUTION Enter amounts into the Financial Statements by typing in the amounts. Do NOT copy cells from the General Ledger or Pre-Closing Trial Balance. Service Revenue Operating Expenses: Supplies Mower Repair Wages Truck Rental Depreciation Total Operating Expenses Income from Operations Interest Expense Net Income Note the new line item on Lenny's Income Statement Income from Operations. This is Lenny's income from the normal operations of the lawn mowing business. Interest Expense, which is not a cost of operating the business but rather a cost of financing the business, is shown below Income from Operations. Interest Expense is subtracted from Income from Operations to arrive at Net Income. 0.00 0.00 $0.00 Lenny's Lawn Service, Inc. Statement of Stockholders' Equity for the Month Ended July 31, 2019 This is the first time you have prepared a formal Statement of Stockholders' Equity for Lenny's. This statement shows what caused the change in Common Stock and in Retained Eamings from July 1, 2019 to July 31, 2019. Note that the Retained Earnings column on the statement looks different than the calculation you have been doing each month to determine the Retained Earnings amount needed for the Balance Sheet. Beginning Balance is starting amount. In previous Retained Earings calculations, you used Current Balance as the starting amount. Beginning Balance is the starting point for this Iculat because lends is shown as a line item (a deduction) in the Retained Eamings column. Common Stock Retained Eamings Beginning Balance July 1, 2019 Issue Common Stock Net Income Dividends Ending Balance July 31, 2019 Total $0.00 0.00 0.00 0.00 $0.00 The Ending Balance in the Retained Earnings column is the balance needed for the Balance Sheet. $0.00 $0.00 = Lenny's - July 31, 2019 Pre-Closing Trial Balance Account # Account Name Debit Credit 100 105 110 150 155 200 205 210 215 220 250 Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Common Stock Retained Earnings Service Revenue Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense Totals 300 305 400 500 505 510 515 520 550 0.00 0.00 Account # 510 Wages Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 515 Truck Rental Expens Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Page 2 Account # 520 Depreciation Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 550 Interest Expense Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 0.00 0.00 Dr Lenny's Lawn Service, Inc. General Ledger Account # 400 Service Revenue Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 500 Supplies Expense Journal Page # Debit Credit Balance 2019 Month-Day 7-1 Beginning Balance 0.00 0.00 Dr Account # 505 Mower Repair Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 220 Dividends Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 250 Note Payable Journal Page # Debit Credit Balance 2019 Month-Day 7-1 7-1 Beginning Balance 0.00 35,000.00 0.00 Cr 35,000.00 Cr 1 Page 2 Account # 300 Common Stock Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 50,000.00 50,000.00 Cr Account # 305 Retained Earnings Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 48, 125.00 48, 125.00 Cr Lenny's Lawn Service, Inc. - General Ledger Account # 200 Accounts Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 205 Wages Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Page 1 Account # 210 Interest Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 215 Unearned Revenue Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 8,000.00 8,000.00 Cr Account # 110 Supplies Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 4,375.00 4,375.00 Dr Account # 150 Equipment Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 48,000.00 48,000.00 Dr Account # 155 Accumulated Depreciation Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 18,000.00 18,000.00 Cr Lenny's Lawn Service, Inc. General Ledger Account # 100 Cash Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 38,250.00 35,000.00 38,250.00 Dr 73,250.00 Dr 7-1 1 Page 1 Account # 105 Accounts Receivable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 33,500.00 33,500.00 Dr Lenny's Lawn Service, Inc. General Journal Page # 3 2019 Month-Day Account Number Account Name Posted Debit Credit Page 3 Lenny's Lawn Service, Inc. General Journal Page # 2 2019 Month-Day Account Name Posted Debit Credit Account Number 400 Service Revenue 3,300.00 7-27 100 Cash 3,800.00 400 3,800.00 7-27 200 1,180.00 100 1,180.00 7-28 510 5,300.00 100 5,300.00 7-31 105 19,300.00 400 Service Revenue Accounts Payable Cash Wages Expenses Cash Accounts Receivable Service Revenue Dividends Payable Cash Deprecietation Expenses Accumulated Depreciation Supplies Expenses Supplies 19,300.00 7-31 220 22,500.00 100 22,500.00 7-31 520 765.00 155 765.00 7-31 500 110 Page 2 Lenny's Lawn Service, Inc. - General Journal Page # 1 Account Number Account Name Posted Debit 2019 Month-Day 7-1 Credit 35,000.00 100 250 X 35,000.00 7-1 80,050.00 80,050.00 7-1 45,900.00 45,900.00 100 300 150 100 515 100 105 400 7-1 X X 500.00 500.00 7-3 2,695.00 2,695.00 7-5 22,500.00 22,500.00 7-7 6,000.00 6,000.00 7-10 6,500.00 Page 6,500.00 7-12 3,500.00 Cash Notes Payable Borrowed on Note Payable Cash Common Stock Equipment Cash Truck Rental Expense Cash Accounts Receivable Service Revenue Dividends Dividends Payable Wages Expenses Cash Cash Serevice Revenue Cash Accounts Receivable Wages Expenses Cash Supplies Accounts Payable Cash Accounts Receivable Mower Repair Expenses Accounts Payable Supplies Cash Cash Accounts Receivable Wages Expenses Cash Cash Uneard Revenue Cash Accounts Receivable 3,500.00 X 7-14 7,500.00 7,500.00 7-15 1,180.00 1,180.00 7-15 220 510 100 100 400 100 105 510 100 110 200 100 105 505 200 110 100 100 105 510 100 100 215 100 105 2,695.00 2,695.00 7-17 645.00 645.00 7-19 21,000.00 21,000.00 X X 7-20 30,000.00 30,000.00 7-21 6,850.00 6,850.00 7-23 22,500.00 22,500.00 7-25 500.00 2,800.00 Account # Account Name 100 105 110 150 155 200 205 210 215 220 250 Assets: Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Liabilities: Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Equity: Common Stock Retained Earnings Revenues: Service Revenue Expenses: Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense 300 305 400 500 505 510 515 520 550 Additional Information Equipment: The $48,000.00 beginning balance in the Equipment account relates to the mowing equipment which was purchased on January 2, 2018. For information related to this mowing equipment see Page 70 in the Solid Footing book. This equipment continues to be used and should be depreciated for the month of July. The following information relates to the new equipment which was purchased on July 1, 2019: The new equipment was placed into service on July 1, 2019 and should be depreciated for the month of July. The estimated useful life of the new equipment is 5 years. At the end of 5 years, the new equipment will have no future value and will be scrapped. The new equipment will be depreciated using the straight-line method. Supplies: At the end of July there are $21,400.00 suppli po on-hand Mowing Service at the University: The monthly mowing service was provided to the university per the contract signed on April 1, 2019. For information on the contract with the university and the related advance payment, see Pages 95 and 98 in the Solid Footing book. Wages Due the Employees: The last wage payment was made to the employees on July 28, 2019. The employees worked on July 29, 30, and 31. For these three days of work the employees earned $2,575.00 of wages. These three days of wages will be paid to the workers during the first week of August. Bank Loan: The interest on the loan from 1st Bank will be paid every three months. The first interest payment to the bank will be made on September 30, 2019. Lenny's calls the bank on July 31 and the bank indicates that the interest on the loan for July is $785.00. Lenny's Lawn Service, Inc. - Transactions - Additional Information July 2019 Transactions Date Description of the Transaction July 1 Borrow $35,000.00 from 1st Bank by signing a 24 month note. (As an example of how to journalize and post a transaction -- this transaction has already been entered into the General Journal and posted to the General Ledger.) July 1 Receive $80,050.00 cash from new investors, and issue $80,050.00 of Common Stock to them. July 1 Purchase $45,900.00 of new mowing equipment, paying cash to the mower dealer. July 1 Pay $500.00 cash for the July truck rental. July 3 Invoice a new customer $2,695.00 for a completed mowing job -- customer will pay in 10 days. July 5 The Board of Directors declares a cash dividend. The total amount of the dividend is $22,500.00 The Date of Record is set as July 15. The Date of Payment is set as July 31. July 7 Pay the employees $6,000.00 for work performed during the 1st week of July. July 10 Complete a mowing job for a new customer -- customer pays $6,500.00 cash for the job. July 12 Collect $3,500.00 cash from the golf course for special rush mowing job completed on May 31. July 14 Pay the employees $7,500.00 for work performed during the 2nd week of July. July 15 Purchase $1,180.00 of supplies from the mower dealer. The supplies are consumed immediately. Lenny's will pay the mower dealer for the supplies in about 2 weeks. July 15 Collect $2,695.00 on account. The cash that is received is from the new customer for the job that was completed on July 3. Pacto July 17 One of the original mowers purchased in January of 2018 broke down and is repaired by the mower dealer. The cost of the Mower Repair job is $645.00. Lenny's will pay the mower dealer in 30 days. OOOOOO OOOOO ODOC July 19 Purchase for cash $21,000.00 of supplies. These supplies will be consumed over the next 12 months. July 20 Collect $30,000.00 from the property management company for work performed in June. July 21 Pay the employees $6,850.00 for work performed during the 3rd week of July. July 23 Receive a $22,500.00 advance payment from the university. The advance payment is for 6 months of work which will be performed from August 1, 2019 to January 31, 2020. July 25 Complete a special mowing job for the golf course. The total price for the mowing job is $3,300.00. The golf course pays $500.00 cash on this date and will pay the remainder on August 25. July 27 Complete a mowing job for a new customer -- customer pays $3,800.00 cash for the job. July 27 Pay $1,180.00 cash to the mower dealer for the supplies purchased on account on July 15. July 28 Pay the employees $5,300.00 for work performed during the 4th week of July. July 31 Invoice the property management company $19,300.00 for July mowing work. The property management company will pay the invoice on the 20th of next month. July 31 Pay the cash dividend which was declared on July 5. U Pg. 2 Step 3 in the Accounting Cycle Determine the required adjusting entries as of July 31, 2019. The information needed for the adjusting entries is on the page titled "Additional Information". This is the second page that printed when you printed the Trans tab. Click the Journal tab and record your adjusting entries in the General Journal. Use the printed Chart of Accounts as a reference source for the Account Numbers and Account Names that are available in Lenny's accounting system. Put your adjusting entries on Page #4 of the General Journal. Post the adjusting entries from the General Journal to the General Ledger accounts. Click the GL Assets, GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. As you post an amount to an account be sure to enter the General Journal Page # into the Journal Page #column. After you post an amount to a General Ledger account, click back on the Journal tab and enter an "X" in the Posted column of the General Journal. At the end of the accounting period, before preparing the financial statements, determine if any of the General Ledger account balances need to be adjusted. Enter any required adjusting entries into the General Joumal and post the adjusting entries to the General Ledger accounts Print Lenny's General Ledger by: clicking the GL Assets tab and then clicking the Printer icon, clicking the GL Liab-Equity tab and then clicking the Printer icon, and clicking the GL Rev-Exp tab and then clicking the Printer icon. Step 4 in the Accounting Cycle Using the printed General Ledger, enter the ending account balances into the July 31, 2019 Pre-Closing Trial Balance. Click the Trial Bal tab and enter the amounts into the Pre-Closing Trial Balance. Print the July 31, 2019 Pre-Closing Trial Balance by clicking the Printer icon. Prepare a Pre-Closing Trial Balance to determine that the accounts in the General Ledger are in balance. Using the printed July 31, 2019 Pre-Closing Trial Balance, prepare the July 2019 Income Statement. Click the IS & RE tab and enter the amounts into the Income Statement Step 5 in the Accounting Cycle Prepare an Income Statement from the ending balances in the General Ledger revenue and expense accounts - Using the printed General Ledger and the Net Income amount, prepare the July 2019 Statement of Stockholders' Equity. Click the IS & RE tab and enter the amounts into the Statement of Stockholders' Equity. Step 6 in the Accounting Cycle Calculate the ending balance of the Retained Earnings account that is needed for the preparation of the Balance Sheet Using the printed July 31, 2019 Pre-Closing Trial Balance and the Retained Earnings amount from the Statement of Stockholders' Equity, prepare the July 31, 2019 Balance Sheet. Click the BalSht tab and enter the amounts into the Balance Sheet. Step 7 in the Accounting Cycle Prepare the Balance Sheet from the ending balances in the General Ledger asset accounts, liability accounts, Common Stock account, and the calculated ending balance for the Retained Earnings account. Prepare the closing entries. Click the Journal tab and enter the closing entries into the General Journal. Place your closing entries on Page #5 of the General Journal. Post the closing entries from the General Journal to the General Ledger accounts. Click the GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. As you post an amount to an account be sure to enter the General Journal Page #into the Journal Page #column. After you post an amount to a General Ledger account, click back on the Journal tab and enter an "X" in the Posted column of the General Journal. Step 8 in the Accounting Cycle Prepare and enter the revenue and expense closing entries into the General Journal, and post the closing entries to the General Ledger accounts Click the Post Close TB tab and prepare the July 31, 2019 Post-Closing Trial Balance. Step 9 in the Accounting Cycle Prepare a Post-Closing Trial Balance to determine that the accounts in the General Ledger are in balance and ready to i start a new Accounting Cvele Your project is complete! Your instructor will provide you with directions on how to submit your project. Instructions: You will be recording the July 2019 transactions for Lenny's Lawn Service, Inc. After recording the July transactions you will be preparing a Pre-Closing Trial Balance, Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Post-Closing Trial Balance. - In Save As: enter LastNameFirstNam - Format must be Excel Macro-Enable - Before clicking Save, be sure the file is on your Mac Desktop, and not to an on Click Save You are given the following: July 2019 transactions and Additional Information -- Trans tab Chart of Accounts with Account Numbers and Account Names -- Chart Accts tab General Journal pages -- Journal tab General Ledger -- GL Assets, GL Liab-Equity, GL Rev-Exp tabs Forms for the July 31, 2019: Pre-Closing Trial Balance (Trial Bal tab), Income Statement and Calculation of Retained Earnings (IS & RE tab), Balance Sheet (Balsht tab), and Post-Closing Trial Balance (Post Close TB tab) >> To Complete Your Workbook do the following: Print the July Transactions (click the Trans tab and then click the Printer Icon) Use YOUR Transaction sheets -- do not use another student's sheets Print the Chart of Accounts (click the Chart Accts tab and then click the Printer Icon) Steps 1 and 2 in the Accounting Cycle Record the July transactions in the General Journal. Click the Journal tab and record your entries directly into the General Journal. Look at the July 1 Notes Payable transaction, which has already been entered, for an example of how to make your entries. Do not put the "X" in the Posted column at this time. Use the printed Chart of Accounts as a reference source for the Account Numbers and Account Names that are available in Lenny's accounting system. Step 1 For each business transaction that occurs during the accounting period, determine the effect of the transaction on the General Ledger accounts To make posting from the General Journal to the General Ledger easier, it is recommended that you print the General Journal -- click the Journal tab and then click the Printer Icon. Post the entries from the printed General Journal to the General Ledger accounts. Click the GL Assets, GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. Record your postings directly into the General Ledger. As you post an amount to an account be sure to enter the General Journal Page # into the Journal Page #column. See the first posting to the Cash account for an example. After you post an amount to a General Ledger account, then hand write an "X" in the Posted column of the printed General Journal. This will help you keep track of which entries you have posted. Step 2 Make an entry in the General Joumal for each transaction and post the entry to the General Ledger accounts. Enter the "X"s, which you hand wrote on your General Journal pages, into the General Journal. Click the Journal tab and enter the "X"s in the Posted column 70 SOLID FOOTING Chapter 7 - Adjusting Entries Now that all of January's transactions have been entered, it is time to prepare adjusting entries, Step 3 in the Accounting Cycle. By reviewing the ending account balances, you determine that the only adjusting entry required at the end of January is for depreciation. The following is a discussion about depreciation and the required depreciation adjusting entry. > PROPERTY, PLANT, & EQUIPMENT and THE DEPRECIATION ADJUSTING ENTRY The Accumulated Depreciation account is one of the accounts that will require an adjusting entry at the end of each accounting period. Before discussing the Accumulated Depreciation account, let's first discuss the long-term asset accounts that are related to Accumulated Depreciation. Companies buy many types of long-term assets. Long-term assets are assets a company will keep and use for more than one year. Most long-term assets purchased by a company are of the Property, Plant, & Equipment type. Lenny's lawn mowing equipment is an example of a Property, Plant, & Equipment asset. Property, Plant, & Equipment assets are also called Fixed Assets. Observe on the screen that Lenny's has a $48,000 balance in its Equipment account. This equipment was purchased over a year ago, on January 2, 2018, when Lenny's started in business. At that time, Lenny's estimated: The lawn mowing equipment would last for four years (48 months). At the end of the four years, the equipment would have no future value and would be scrapped. Therefore, for each month that Lenny's uses the lawn mowing equipment, 1/48th of the equipment's service life is used up. If the balance in the Equipment account is reduced by 1/48th of its original cost each month; then by the end of four years, the balance in the Equipment account will be zero. The calculation of the monthly reduction amount is: Equipment Cost Monthly reduction in Equipment account Months of Useful Life $48,000 $1,000 per month 48 months The $1,000 is called the monthly depreciation. Depreciation is the process of allocating the cost of Property, Plant, & Equipment to the accounting periods in which these assets are used. There are many different ways to calculate the amount of depreciation. The above method is called the straight-line depreciation method because the amount of depreciation is the same each accounting period. Only the straight-line depreciation method will be used in this book. SOLID FOOTING 95 Chapter 8 Adjusting Entries Continued Unearned Revenue Liabilities - Accrued Assets > LENNY'S APRIL TRANSACTIONS In this chapter, you will continue to use the workbook that you used in the last chapter entitled 03-Lenny's Lawn Service. If this workbook is not open on your computer, do the following: Open the workbook 03-Lenny's Lawn Service -> Enable Macros Click the April tab. You should see Screen 8 A in the upper left corner of the screen. > RECEIVE ADVANCE PAYMENT TRANSACTION On April 1, Lenny's signs a contract to perform lawn services for a new customer. The new customer is a university in the Tampa area. The contract Lenny's signs with the university stipulates that Lenny's will be paid an $8,000 monthly fee for the lawn services. As part of the contract agreement, the university agrees to pay the first four months of services in advance; thus Lenny's receives $32,000 cash from the university on April 1. Click Advance Pmt. The $32,000 debit to the Cash account records the increase in cash that results from the advance payment. The credit portion of this entry is to the Unearned Revenue liability account. The Unearned Revenue account records the university's $32,000 claim to Lenny's assets. A liability account is increased because Lenny's has a future obligation to perform $32,000 of services for the university, and as of April 1, Lenny's has not earned any of the $32,000. The Unearned Revenue liability account is just like any other liability account. It records the claim to assets of someone (in this case, the university) who is not an owner of the business. The one thing that does make the Unearned Revenue account different from most other liability accounts is that the Unearned Revenue liability will be "paid-off" by Lenny's providing services to the universitynot by Lenny's paying cash to the university. 98 SOLID FOOTING Chapter 8 - Adjusting Entries Continued -> APRIL's UNEARNED REVENUE ADJUSTING ENTRY On April 1, when Lenny's signed the contract with the university, Lenny's was paid $32,000 in advance for the first four months of services. During the month of April, Lenny's performed the lawn services for the university. The timeline below shows the period of service covered by the $32,000 Lenny's received on April 1. You can see from the timeline that on April 1, Lenny's owed the university $32,000 of services. The original $32,000 entry into the Unearned Liability account reflected Lenny's $32,000 liability for future services to the university. The timeline also shows the period of time and the dollar amount of services the university is still due as of the end of April. As of April 30, Lenny's owes the university three months of service. Each month of service has a value of $8,000; thus Lenny's owes the university $24,000 of future services as of April 30. Because the balance in the Unearned Revenue account tracks Lenny's liability for future services to the university, the April 30 balance in the Unearned Revenue account should be $24,000. Unearned Revenue Timeline $32,000 April 1 April 30 May 31 June 30 July 31 1 2 3 | $24,000 "T" Account Analysis for Asset and Liability Accounts Account Name Unearned Revenue Debit Credit (1) What is the current balance? 32,000 (3) What adjustment is required to adjust from the current balance to the should be balance? 8,000 (2) What should be the balance? 24,000 Lenny's July 31, 2019 Post-Closing Trial Balance Account # Account Name Debit Credit 100 105 110 150 155 200 205 210 215 220 250 Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Common Stock Retained Earnings Service Revenue Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense Totals 300 305 400 500 505 510 515 520 550 0.00 0.00 Lenny's Lawn Service, Inc. Balance Sheet as of July 31, 2019 CAUTION Enter amounts into the Balance Sheet by typing in the amounts. Do NOT copy cells from the General Ledger or Pre-Closing Trial Balance. Assets Current Assets: Cash Accounts Receivable Supplies Note the following three new sub-totals appearing on Lenny's Balance Sheet: Total Current Assets 0.00 Property & Equipment: Equipment Accumulated Depreciation Property & Equipment, net Total Assets Total Current Assets is a total of those assets, which will turn-into cash during the next 12 months or be consumed during the next 12 months. The comparison of Total Current Assets to Total Current Liabilities gives some indication of Lenny's liquidity -- that is, its ability to pay its bills in the short-term. 0.00 $0.00 = Property & Equipment, net is the amount of Fixed Asset cost, which remains to be depreciated in future accounting periods. Liabilities & Stockholders' Equity Current Liabilities: Accounts Payable Wages Payable Interest Payable Unearned Revenue Total Current Liabilities Long-Term Liabilities: Note Payable Total Liabilities Total Current Liabilities is a total of those liabilities that will require payment in the next 12 months. In the case of Unearned Revenue, this current liability will be "paid-off" by Lenny's delivering mowing services to the university. 0.00 0.00 Stockholders' Equity: Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity 0.00 $0.00 Lenny's Lawn Service, Inc. Income Statement for the Month Ended July 31, 2019 CAUTION Enter amounts into the Financial Statements by typing in the amounts. Do NOT copy cells from the General Ledger or Pre-Closing Trial Balance. Service Revenue Operating Expenses: Supplies Mower Repair Wages Truck Rental Depreciation Total Operating Expenses Income from Operations Interest Expense Net Income Note the new line item on Lenny's Income Statement Income from Operations. This is Lenny's income from the normal operations of the lawn mowing business. Interest Expense, which is not a cost of operating the business but rather a cost of financing the business, is shown below Income from Operations. Interest Expense is subtracted from Income from Operations to arrive at Net Income. 0.00 0.00 $0.00 Lenny's Lawn Service, Inc. Statement of Stockholders' Equity for the Month Ended July 31, 2019 This is the first time you have prepared a formal Statement of Stockholders' Equity for Lenny's. This statement shows what caused the change in Common Stock and in Retained Eamings from July 1, 2019 to July 31, 2019. Note that the Retained Earnings column on the statement looks different than the calculation you have been doing each month to determine the Retained Earnings amount needed for the Balance Sheet. Beginning Balance is starting amount. In previous Retained Earings calculations, you used Current Balance as the starting amount. Beginning Balance is the starting point for this Iculat because lends is shown as a line item (a deduction) in the Retained Eamings column. Common Stock Retained Eamings Beginning Balance July 1, 2019 Issue Common Stock Net Income Dividends Ending Balance July 31, 2019 Total $0.00 0.00 0.00 0.00 $0.00 The Ending Balance in the Retained Earnings column is the balance needed for the Balance Sheet. $0.00 $0.00 = Lenny's - July 31, 2019 Pre-Closing Trial Balance Account # Account Name Debit Credit 100 105 110 150 155 200 205 210 215 220 250 Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Common Stock Retained Earnings Service Revenue Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense Totals 300 305 400 500 505 510 515 520 550 0.00 0.00 Account # 510 Wages Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 515 Truck Rental Expens Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Page 2 Account # 520 Depreciation Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 550 Interest Expense Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 0.00 0.00 Dr Lenny's Lawn Service, Inc. General Ledger Account # 400 Service Revenue Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 500 Supplies Expense Journal Page # Debit Credit Balance 2019 Month-Day 7-1 Beginning Balance 0.00 0.00 Dr Account # 505 Mower Repair Expense Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 220 Dividends Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 250 Note Payable Journal Page # Debit Credit Balance 2019 Month-Day 7-1 7-1 Beginning Balance 0.00 35,000.00 0.00 Cr 35,000.00 Cr 1 Page 2 Account # 300 Common Stock Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 50,000.00 50,000.00 Cr Account # 305 Retained Earnings Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 48, 125.00 48, 125.00 Cr Lenny's Lawn Service, Inc. - General Ledger Account # 200 Accounts Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 205 Wages Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Page 1 Account # 210 Interest Payable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 215 Unearned Revenue Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 8,000.00 8,000.00 Cr Account # 110 Supplies Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 4,375.00 4,375.00 Dr Account # 150 Equipment Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 48,000.00 48,000.00 Dr Account # 155 Accumulated Depreciation Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 18,000.00 18,000.00 Cr Lenny's Lawn Service, Inc. General Ledger Account # 100 Cash Journal Debit Credit Balance 2019 Month-Day 7-1 Page # Beginning Balance 38,250.00 35,000.00 38,250.00 Dr 73,250.00 Dr 7-1 1 Page 1 Account # 105 Accounts Receivable Journal Page # Debit Credit 2019 Month-Day 7-1 Balance Beginning Balance 33,500.00 33,500.00 Dr Lenny's Lawn Service, Inc. General Journal Page # 3 2019 Month-Day Account Number Account Name Posted Debit Credit Page 3 Lenny's Lawn Service, Inc. General Journal Page # 2 2019 Month-Day Account Name Posted Debit Credit Account Number 400 Service Revenue 3,300.00 7-27 100 Cash 3,800.00 400 3,800.00 7-27 200 1,180.00 100 1,180.00 7-28 510 5,300.00 100 5,300.00 7-31 105 19,300.00 400 Service Revenue Accounts Payable Cash Wages Expenses Cash Accounts Receivable Service Revenue Dividends Payable Cash Deprecietation Expenses Accumulated Depreciation Supplies Expenses Supplies 19,300.00 7-31 220 22,500.00 100 22,500.00 7-31 520 765.00 155 765.00 7-31 500 110 Page 2 Lenny's Lawn Service, Inc. - General Journal Page # 1 Account Number Account Name Posted Debit 2019 Month-Day 7-1 Credit 35,000.00 100 250 X 35,000.00 7-1 80,050.00 80,050.00 7-1 45,900.00 45,900.00 100 300 150 100 515 100 105 400 7-1 X X 500.00 500.00 7-3 2,695.00 2,695.00 7-5 22,500.00 22,500.00 7-7 6,000.00 6,000.00 7-10 6,500.00 Page 6,500.00 7-12 3,500.00 Cash Notes Payable Borrowed on Note Payable Cash Common Stock Equipment Cash Truck Rental Expense Cash Accounts Receivable Service Revenue Dividends Dividends Payable Wages Expenses Cash Cash Serevice Revenue Cash Accounts Receivable Wages Expenses Cash Supplies Accounts Payable Cash Accounts Receivable Mower Repair Expenses Accounts Payable Supplies Cash Cash Accounts Receivable Wages Expenses Cash Cash Uneard Revenue Cash Accounts Receivable 3,500.00 X 7-14 7,500.00 7,500.00 7-15 1,180.00 1,180.00 7-15 220 510 100 100 400 100 105 510 100 110 200 100 105 505 200 110 100 100 105 510 100 100 215 100 105 2,695.00 2,695.00 7-17 645.00 645.00 7-19 21,000.00 21,000.00 X X 7-20 30,000.00 30,000.00 7-21 6,850.00 6,850.00 7-23 22,500.00 22,500.00 7-25 500.00 2,800.00 Account # Account Name 100 105 110 150 155 200 205 210 215 220 250 Assets: Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Liabilities: Accounts Payable Wages Payable Interest Payable Unearned Revenue Dividends Payable Note Payable Equity: Common Stock Retained Earnings Revenues: Service Revenue Expenses: Supplies Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Interest Expense 300 305 400 500 505 510 515 520 550 Additional Information Equipment: The $48,000.00 beginning balance in the Equipment account relates to the mowing equipment which was purchased on January 2, 2018. For information related to this mowing equipment see Page 70 in the Solid Footing book. This equipment continues to be used and should be depreciated for the month of July. The following information relates to the new equipment which was purchased on July 1, 2019: The new equipment was placed into service on July 1, 2019 and should be depreciated for the month of July. The estimated useful life of the new equipment is 5 years. At the end of 5 years, the new equipment will have no future value and will be scrapped. The new equipment will be depreciated using the straight-line method. Supplies: At the end of July there are $21,400.00 suppli po on-hand Mowing Service at the University: The monthly mowing service was provided to the university per the contract signed on April 1, 2019. For information on the contract with the university and the related advance payment, see Pages 95 and 98 in the Solid Footing book. Wages Due the Employees: The last wage payment was made to the employees on July 28, 2019. The employees worked on July 29, 30, and 31. For these three days of work the employees earned $2,575.00 of wages. These three days of wages will be paid to the workers during the first week of August. Bank Loan: The interest on the loan from 1st Bank will be paid every three months. The first interest payment to the bank will be made on September 30, 2019. Lenny's calls the bank on July 31 and the bank indicates that the interest on the loan for July is $785.00. Lenny's Lawn Service, Inc. - Transactions - Additional Information July 2019 Transactions Date Description of the Transaction July 1 Borrow $35,000.00 from 1st Bank by signing a 24 month note. (As an example of how to journalize and post a transaction -- this transaction has already been entered into the General Journal and posted to the General Ledger.) July 1 Receive $80,050.00 cash from new investors, and issue $80,050.00 of Common Stock to them. July 1 Purchase $45,900.00 of new mowing equipment, paying cash to the mower dealer. July 1 Pay $500.00 cash for the July truck rental. July 3 Invoice a new customer $2,695.00 for a completed mowing job -- customer will pay in 10 days. July 5 The Board of Directors declares a cash dividend. The total amount of the dividend is $22,500.00 The Date of Record is set as July 15. The Date of Payment is set as July 31. July 7 Pay the employees $6,000.00 for work performed during the 1st week of July. July 10 Complete a mowing job for a new customer -- customer pays $6,500.00 cash for the job. July 12 Collect $3,500.00 cash from the golf course for special rush mowing job completed on May 31. July 14 Pay the employees $7,500.00 for work performed during the 2nd week of July. July 15 Purchase $1,180.00 of supplies from the mower dealer. The supplies are consumed immediately. Lenny's will pay the mower dealer for the supplies in about 2 weeks. July 15 Collect $2,695.00 on account. The cash that is received is from the new customer for the job that was completed on July 3. Pacto July 17 One of the original mowers purchased in January of 2018 broke down and is repaired by the mower dealer. The cost of the Mower Repair job is $645.00. Lenny's will pay the mower dealer in 30 days. OOOOOO OOOOO ODOC July 19 Purchase for cash $21,000.00 of supplies. These supplies will be consumed over the next 12 months. July 20 Collect $30,000.00 from the property management company for work performed in June. July 21 Pay the employees $6,850.00 for work performed during the 3rd week of July. July 23 Receive a $22,500.00 advance payment from the university. The advance payment is for 6 months of work which will be performed from August 1, 2019 to January 31, 2020. July 25 Complete a special mowing job for the golf course. The total price for the mowing job is $3,300.00. The golf course pays $500.00 cash on this date and will pay the remainder on August 25. July 27 Complete a mowing job for a new customer -- customer pays $3,800.00 cash for the job. July 27 Pay $1,180.00 cash to the mower dealer for the supplies purchased on account on July 15. July 28 Pay the employees $5,300.00 for work performed during the 4th week of July. July 31 Invoice the property management company $19,300.00 for July mowing work. The property management company will pay the invoice on the 20th of next month. July 31 Pay the cash dividend which was declared on July 5. U Pg. 2 Step 3 in the Accounting Cycle Determine the required adjusting entries as of July 31, 2019. The information needed for the adjusting entries is on the page titled "Additional Information". This is the second page that printed when you printed the Trans tab. Click the Journal tab and record your adjusting entries in the General Journal. Use the printed Chart of Accounts as a reference source for the Account Numbers and Account Names that are available in Lenny's accounting system. Put your adjusting entries on Page #4 of the General Journal. Post the adjusting entries from the General Journal to the General Ledger accounts. Click the GL Assets, GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. As you post an amount to an account be sure to enter the General Journal Page # into the Journal Page #column. After you post an amount to a General Ledger account, click back on the Journal tab and enter an "X" in the Posted column of the General Journal. At the end of the accounting period, before preparing the financial statements, determine if any of the General Ledger account balances need to be adjusted. Enter any required adjusting entries into the General Joumal and post the adjusting entries to the General Ledger accounts Print Lenny's General Ledger by: clicking the GL Assets tab and then clicking the Printer icon, clicking the GL Liab-Equity tab and then clicking the Printer icon, and clicking the GL Rev-Exp tab and then clicking the Printer icon. Step 4 in the Accounting Cycle Using the printed General Ledger, enter the ending account balances into the July 31, 2019 Pre-Closing Trial Balance. Click the Trial Bal tab and enter the amounts into the Pre-Closing Trial Balance. Print the July 31, 2019 Pre-Closing Trial Balance by clicking the Printer icon. Prepare a Pre-Closing Trial Balance to determine that the accounts in the General Ledger are in balance. Using the printed July 31, 2019 Pre-Closing Trial Balance, prepare the July 2019 Income Statement. Click the IS & RE tab and enter the amounts into the Income Statement Step 5 in the Accounting Cycle Prepare an Income Statement from the ending balances in the General Ledger revenue and expense accounts - Using the printed General Ledger and the Net Income amount, prepare the July 2019 Statement of Stockholders' Equity. Click the IS & RE tab and enter the amounts into the Statement of Stockholders' Equity. Step 6 in the Accounting Cycle Calculate the ending balance of the Retained Earnings account that is needed for the preparation of the Balance Sheet Using the printed July 31, 2019 Pre-Closing Trial Balance and the Retained Earnings amount from the Statement of Stockholders' Equity, prepare the July 31, 2019 Balance Sheet. Click the BalSht tab and enter the amounts into the Balance Sheet. Step 7 in the Accounting Cycle Prepare the Balance Sheet from the ending balances in the General Ledger asset accounts, liability accounts, Common Stock account, and the calculated ending balance for the Retained Earnings account. Prepare the closing entries. Click the Journal tab and enter the closing entries into the General Journal. Place your closing entries on Page #5 of the General Journal. Post the closing entries from the General Journal to the General Ledger accounts. Click the GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. As you post an amount to an account be sure to enter the General Journal Page #into the Journal Page #column. After you post an amount to a General Ledger account, click back on the Journal tab and enter an "X" in the Posted column of the General Journal. Step 8 in the Accounting Cycle Prepare and enter the revenue and expense closing entries into the General Journal, and post the closing entries to the General Ledger accounts Click the Post Close TB tab and prepare the July 31, 2019 Post-Closing Trial Balance. Step 9 in the Accounting Cycle Prepare a Post-Closing Trial Balance to determine that the accounts in the General Ledger are in balance and ready to i start a new Accounting Cvele Your project is complete! Your instructor will provide you with directions on how to submit your project. Instructions: You will be recording the July 2019 transactions for Lenny's Lawn Service, Inc. After recording the July transactions you will be preparing a Pre-Closing Trial Balance, Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Post-Closing Trial Balance. - In Save As: enter LastNameFirstNam - Format must be Excel Macro-Enable - Before clicking Save, be sure the file is on your Mac Desktop, and not to an on Click Save You are given the following: July 2019 transactions and Additional Information -- Trans tab Chart of Accounts with Account Numbers and Account Names -- Chart Accts tab General Journal pages -- Journal tab General Ledger -- GL Assets, GL Liab-Equity, GL Rev-Exp tabs Forms for the July 31, 2019: Pre-Closing Trial Balance (Trial Bal tab), Income Statement and Calculation of Retained Earnings (IS & RE tab), Balance Sheet (Balsht tab), and Post-Closing Trial Balance (Post Close TB tab) >> To Complete Your Workbook do the following: Print the July Transactions (click the Trans tab and then click the Printer Icon) Use YOUR Transaction sheets -- do not use another student's sheets Print the Chart of Accounts (click the Chart Accts tab and then click the Printer Icon) Steps 1 and 2 in the Accounting Cycle Record the July transactions in the General Journal. Click the Journal tab and record your entries directly into the General Journal. Look at the July 1 Notes Payable transaction, which has already been entered, for an example of how to make your entries. Do not put the "X" in the Posted column at this time. Use the printed Chart of Accounts as a reference source for the Account Numbers and Account Names that are available in Lenny's accounting system. Step 1 For each business transaction that occurs during the accounting period, determine the effect of the transaction on the General Ledger accounts To make posting from the General Journal to the General Ledger easier, it is recommended that you print the General Journal -- click the Journal tab and then click the Printer Icon. Post the entries from the printed General Journal to the General Ledger accounts. Click the GL Assets, GL Liab-Equity, and GL Rev-Exp tabs to find the accounts to be posted. Record your postings directly into the General Ledger. As you post an amount to an account be sure to enter the General Journal Page # into the Journal Page #column. See the first posting to the Cash account for an example. After you post an amount to a General Ledger account, then hand write an "X" in the Posted column of the printed General Journal. This will help you keep track of which entries you have posted. Step 2 Make an entry in the General Joumal for each transaction and post the entry to the General Ledger accounts. Enter the "X"s, which you hand wrote on your General Journal pages, into the General Journal. Click the Journal tab and enter the "X"s in the Posted column