Chapter 7 In Financial Reporting, What Information Is Conveyed about Receivables? In Chapter 5, Leon Jackson started Webworks, a Web site design and maintenance firm. At that time, an adjusted trial balance was prepared for June. Here are Webworks financial statements as of June 30. Webworks Income Statement as of June 30 Revenue $ 1,050 380 670 Expenses Earning before Tax Tax Expense Net Income 200 $ 470 Webworks Statement of Retained Earnings as of June 30 Retained Earnings, June 1 $ 0 Net Income 470 Retained Earnings, June 30 $ 470 Webworks Balance Sheet as of June 30 Liabilities Assets Current Cash Accounts Receivable $ $ 280 Current 9,800 Accounts Payable 450 Salaries Payable 100 Unearned Revenue 10,350 Total Current Liabilities 100 500 Supplies Inventory Total Current Assets 880 Noncurrent Equipment Noncurrent 3,000 Notes Payable 10,000 2,000 Owners' Equity Capital Stock Retained Earnings Total Owners' Equity 470 2,470 Total Assets $ 13,350 $ 13,350 Total Liabilities & Owners' Equity The following events occur during July: a. Webworks purchases additional equipment for $4,000 cash. b. Webworks purchases supplies worth $90 on account. c. Webworks pays off accounts payable and salaries payable from June. d. Webworks starts and completes four more sites and bills clients for $1,800. e. In June, Webworks received $500 in advance to design a restaurant Web site. Webworks completes this site during July. f. Webworks collects $1,200 in accounts receivable. g. Webworks pays Nancy Po (the company employee hired in June) $500 for her work during the first three weeks of July. h. Webworks receives $200 in advance to work on a Web site for a local dry cleaner and $300 in advance to work on a Web site for a local animal hospital. Work will not begin on these Web sites until August. i. Leon's parents decide to charge rent after seeing how successful the business is and how much space it is taking up in their house. They all agree that rent will be $200 per month. Webworks pays $600 for July, August, and September. 1. Webworks pays taxes of $300 in cash. Required: A. Prepare journal entries for the previous events. B. Post the journal entries to T-accounts. C. Prepare an unadjusted trial balance for Webworks for July. D. Prepare adjusting entries for the following and post them to T-accounts. a. Webworks owes Nancy Po $200 for her work during the last week of July. b. Leon's parents let him know that Webworks owes $150 toward the electricity bill. Web- works will pay them in August. c. Webworks determines that it has $50 worth of supplies remaining at the end of July. d. Prepaid rent should be adjusted for July's rent. e. Leon now believes that the company may not be able to collect all of its accounts receiv- able. A local CPA helps Leon determine that similar businesses report an allowance for bad debt at an average of 10 percent of their accounts receivable. Webworks will use this same approach. E. Prepare an adjusted trial balance. F. Prepare financial statements for July
