Lenny's Lawn Service, Inc. - Transactions - Additional Information July 2021 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 joumalize and post a transaction -- this transaction has already been entered into the General Joumal and posted to the General Ledger.) July 1 Receive $78,700.00 cash from new investors, and issue $78,700.00 of Common Stock to them. July 1 Purchase $60,000.00 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 $6,785.00 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 $30,000.00 The Date of Record is set as July 15. The Date of Payment is set as July 31. July 7 Pay the employees $5,900.00 for work performed during the 1st week of July. July 10 Complete a mowing job for a new customer -- customer pays $4,250.00 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 $7,100.00 for work performed during the 2nd week of July. July 15 Purchase $1,825.00 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 $6,785.00 on account. The cash that is received is from the new customer for the job that was completed on July 3. July 17 One of the original mowers purchased in January of 2020 broke down and is repaired by the mower dealer. The cost of the Mower Repair job is $880.00. Lenny's will pay the mower dealer in 30 days. July 19 Purchase for cash $26,950.00 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 $7,500.00 for work performed during the 3rd week of July. July 23 Receive a $27,525.00 advance payment from the university. The advance payment is for 6 months of work which will be performed from August 1, 2021 to January 31, 2022. July 25 Complete a special mowing job for the golf course. The total price for the mowing job is $6,300.00. The golf course pays $1,000.00 cash on this date and will pay the remainder on August 25. July 27 Complete a mowing job for a new customer -- customer pays $3,725.00 cash for the job. July 27 Pay $1,825.00 cash to the mower dealer for the supplies purchased on account on July 15. July 28 Pay the employees $6,890.00 for work performed during the 4th week of July. July 31 Invoice the property management company $24,250.00 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. Additional Information Equipment: The $48,000.00 beginning balance in the Equipment account relates to the mowing equipment which was purchased on January 2, 2020. For information related to this mowing equipment see Page 70 in the Solid Footing text (PDF 07 - Intro to Adjusting Entries). 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, 2021: The new equipment was placed into service on July 1, 2021 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 $28,030.00 supplies on-hand. Mowing Service at the University: The monthly mowing service was provided to the university per the contract signed on April 1, 2021. For information on the contract with the university and the related advance payment, see Pages 95 and 98 in the Solid Footing text (PDF 08 - Adjusting Entries Continued). Wages Due the Employees: The last wage payment was made to the employees on July 28, 2021. The employees worked on July 29, 30, and 31. For these three days of work the employees earned $2,345.00 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, 2021. Lenny's calls the bank on July 31 and the bank indicates that the interest on the loan for July is $825.00. Lenny's Lawn Service, Inc. - Chart of Accounts 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 Lenny's Lawn Service, Inc. - General Journal Page # 1 Account Account Name Posted Debit Credit 2021 Month-Day 7-1 Number 100 250 Cash Notes Payable Borrowed on Note Payable X 35,000.00 35,000.00 Lenny's Lawn Service, Inc. - General Ledger Account # 100 Cash 2021 Month-Day Journal Page # Debit Credit Balance 7-1 Beginning Balance 38,250.00 35,000.00 38,250.00 Dr 73,250.00 Dr 7-1 1 Account # 105 Accounts Receivable Journal Debit Credit Balance 2021 Month-Day 7-1 Page # Beginning Balance 33,500.00 33,500.00 Dr Account # 110 Supplies Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 4,375.00 4,375.00 Dr Account # 150 Equipment Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 48,000.00 48,000.00 Dr Account # 155 Accumulated Depreciation Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 18,000.00 18,000.00 Cr Lenny's Lawn Service, Inc. - General Ledger Account # 200 Accounts Payable Journal Debit Credit Balance 2021 Month-Day 7-1 Page # Beginning Balance 0.00 0.00 Cr Account # 205 Wages Payable 2021 Month-Day 7-1 Journal Page # Debit Credit Balance Beginning Balance 0.00 0.00 Cr Account # 210 Interest Payable Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 215 Unearned Revenue 2021 Month-Day Journal Page # Debit Credit Balance 7-1 Beginning Balance 8,000.00 8,000.00 Cr Account # 220 Dividends Payable Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Cr Account # 250 Note Payable Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 35,000.00 0.00 Cr 35,000.00 Cr 7-1 1 Lenny's Lawn Service, Inc. - General Ledger Account # 400 Service Revenue Journal Debit Credit Balance 2021 Month-Day 7-1 Page # Beginning Balance 0.00 0.00 Cr Account # 500 Supplies Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 250 Note Payable Journal Debit Credit Balance 2021 Month-Day 7-1 Page # Beginning Balance 0.001 35,000.00 0.00 Cr 35,000.00 Cr 7-1 1 Account # 300 Common Stock Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 50,000.00 50,000.00 Cr Account # 305 Retained Earnings Journal Debit Credit Balance 2021 Month-Day 7-1 Page # Beginning Balance 48,125.00 48,125.00 Cr Account # 505 Mower Repair Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.001 0.00 Dr Account # 510 Wages Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 515 Truck Rental Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 520 Depreciation Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Account # 550 Interest Expense Journal Page # Debit Credit 2021 Month-Day 7-1 Balance Beginning Balance 0.00 0.00 Dr Lenny's - July 31, 2021 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 300 305 400 500 505 510 515 520 550 Totals 0.00 0.00 Lenny's Lawn Service, Inc. Income Statement for the Month Ended July 31, 2021 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 Expense Mower Repair Expense Wages Expense Truck Rental Expense Depreciation Expense Total Operating Expenses Income from Operations Interest Expense Net Income (Loss) 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, 2021 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 Earnings from July 1, 2021 to July 31, 2021. 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 the starting amount. In previous Retained Earnings calculations, you used Current Balance as the starting amount. Beginning Balance is the starting point for this calculation, because Dividends is shown as a line item (a deduction) in the Retained Earnings column. Common Stock Retained Earnings Tota! Beginning Balance July 1, 2021 Issue Common Stock Net Income (Loss) Dividends Ending Balance July 31, 2021 $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 Lawn Service, Inc. Balance Sheet as of July 31, 2021 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 July 31, 2021 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 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 Excel workbook that you used in Chapter 7 entitled Chapter 07 b - LENNY'S LAWN SERVICE (used in Chp 7 to 10). If this workbook is not open on your computer, do the following: - Open the workbook Chapter 07 b - LENNY'S LAWN SERVICE (used in Chp 7 to 10) -> Enable Macros 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. 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. 96 SOLID FOOTING Chapter 8 - Adeling Fat Canned Chapter 8 - Adjusting Entries Continued SOLID FOOTING 97 APRIL'S DEPRECIATION ADJUSTING ENTRY Let's now past the advance payment entry to the General Ledger accounts Post to Ledger The adjusting entry for April's depreciation follows the same logic as the three previous months' depreciation adjusting entries Observe that this entry increases the Cash account and increases the Uneared Revenue ability account. This entry does not increase the owners' claim to assets because Leriny's tas not performed any of the services; thus none of the $32,000 has been eamed as of April 1. Depreciation Poat to Ledger > PAY LAST MONTH'S WAGES TRANSACTION Observe the depreciation entry and the effect that entry has on the Accumulated Depreciation and Depreciation Expense accounts. At the end of March, an adjusting entry was recorded for the wages cue Lenny's employees for their last two days of work in March. Look on the screen and observe the $1,625 credit balance in the Wages Payable account. This balance is the amount due the employees. On April 3, the epkiyees are paid the S1,825. v Pay Mar Wages APRIL'S SUPPLIES ADJUSTING ENTRY Lenny's determines that $7,600 of supplies remain in stock as of April 30. Post to Ledger Complete the following 'T' account analysis for the Supplies account as of the end of April. "T" Account Analysis for Asset and Liability Accounts Account Name Supplies (asset account Debit Credit Observe the following about this entry: >> The current balance in the Wages Payable liability account is now zero because Lenny's no longer owes the employees for the March wagos. The debit in this entry is to the Wages Payable account This entry is clifferent than prior wage payment transactions. Previously when wages were paid, the detail was to the Wage Expense account. The desilo the Wage Expense account, for these two days of work, was made as part of the adjusting entry at the end of March. 1. Whal is the current balanc? 3. What adjustment is required to adjust from the current balance to the should be balance? 2. What should be the balance? Lenny's Normal Monthly Transactions Let's now enter the rest of Lenny's April transactions Record below the April suppliers adjusting journal entry. Enter Other April Transactions into Journal and Post to the Ledger General Journal Review these transactions and observe that they are Lenny's normal monthly transactions Account Debit Credit Date Apr 30 Adjust Supplies to Aprix on hand halanga Al of April's transactions have been entered. By reviewing the ending account balaroes, you determine that the balances in three accounts need to be adjusted at the end of April. The three accounts that need to be adjusted are the > Accumulated Depreciation account Supplies asset account > Uneared Revenue liability account Supplies Adj. Post to Ledger Besed on your T account analysis, did you prepare the correct supplies adjusting entry? 98 SOLID FOOTING Chapter 8 - Adeling Fat Canned Chapter 8 - Austing Entries Continued SOLID FOOTING 99 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 Observe the amounts in the 'T' account analysis and how this analysis was prepared based on the following process: 1. In the LENNY'S LAWN SERVICE workbook, look at the current balance in the Uneamed Revenue account. That amount is put into the 'T' account analysis for Step 1. 2. The should be balance in the Unearned Revenue account is determined from the timeline analysis. From the timeline analysis, you can determine that the should be balance in the Uneamed Revenue account is $24,000; thus $24,000 is put in the 'T account analysis for Step 2. 3. Determine the Debitor Credit amount that is required to adjust the Uneamed Revenue liability account from its current balance to its should be balance. The $8,000 debit amount is put in the 'T account analysis for Step 3, because this is the amount required to take the Unearned Revenue liability account from a current balance of $32,000 credit to a should be balance of $24,000 credit. The amount for Step 3 in the T account analysis is the required adjustment to the Unearried Revenue atsilily account. The other portion of the Uneamed Revenue adjusting entry will be lo the Service Revenue account. The timeline also shows the period of time and the dollar amount of services the university is still que as of the end of April. As of April 30, Leriny's Cyes the universily 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 Uneamed Revenue account should be $24,000 Unearned Revenue Timeline $32.000 Record below the April Ungarned Revenue adjusting journal entry. April 1 April 30 May 31 June 30 July 31 General Journal Account Debit Credit 1 2 2 3 Date Apr 30 $24,000 Adjust Uncamed Revenue to Aarl 30 amount Uneamed Adj. "T" Account Analysis for Asset and Liability Accounts Account Name Unearned Revenue (licability accoun) Debit Credit Post to Ledger 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 In the LENNY'S LAWN SERVICE workbook, look at the Unearned Revenue adjusting entry in the General Journal and at the posting of that entry to both the Unearned Revenue and the Service Revenue accounts in the General Ledger. Did you prepare the correct adjusting entry? Observe the following about this adjusting entry: > The entry does not affect any assot account. The amount of Total Assets is not changed by this adjusting entry The entry reduces the credit balance in the Uneamed Revenue liability account, thus reducing the university's claims to Lenny's assets. > The entry increases the Service Revenue account by S8,000. This properly reflects the $8,000 Lenny's eamed by providing the April lawn services lo the university >> The $8,000 increase in Service Revenue increases the owners' daim to assets by $4.000; thus the effect of this adjusting entry is to increase the owners' clair to assets and reduce the university's claim to assets. 70 SOLID FOOTING Chapter 7 - Musing Fretries Chapter 7 - Austing Entries SOLID FOOTING 71 Now that all of January's transactions have been entered, it is time to prepare adjusting entries, Step 3 in the Accxxunting Cycke. 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 Each month, the $1,000 could be entered as a credit into the Equipment account to reduce the balance in that account. But rather than putting the $1,000 credit directly into the Equipment account, the credit will be put into an account that is related to the Equipment account. The acount where the credit will be placed is the Accumulated Depreciation account. By putting the $1,000 credit into the Accumulated Deprecation account, rather than directly into the Equipment account, Lenny's will easily be able to see the original cost of the lawn mowing equipment by looking at the Equipment account. By looking at the Accumulated Depreciation account. Lenny's will be able to see how much of the original cost has been written coff by the monthly depreciation entries. Otsserve on the January tab that the balance in the Equipment account is a $48,000 ciebit; thus you can easily see that the amount paid for the lawn mowing equipment was $48.000. Also observe on the January tab that the balance in the accumulated Depreciation account is a $12,000 credit: thus Lenny's knows that $12,000 of the cost of the equipment has been written off hry prior depreciation entries The Accumulated Depreciation account will always have a credit balance. The Accumulated Depreciation account is a negative asset account. This type of asset account is called a contra- asset account. Its credit balance partially offsete the debit balance in the Equipment socount. Let's make Lenny's depreciation adjusting entry for January 2021, 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 January tab that Lonny's has a $48.000 balance in its Equipment account. This buipment was purchased over a year ago, on January 2, 2020, 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, 1/48 of the equipment's service life is used up. If the balance in the Equipment account is reduced by 1/48 of its original cost cach 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 Depreciation The $1,000 credit to the Accumulated Depreciation account is what you would expect based on the previous discussion of depreciation. This credit to the contra-asset account, Accumulated Depreciation, causes Lenny's total assets to be reduced; thus there must be a reduction to somebody's claim to assets. It is the owners' claim to assets that must be reduced. The $1,000 dobit to the Depreciation Expense account reduces the owners' claim to assets. Post to Ledger Equipment Cost = Monthly reduction in Equipment account Months of Useful Life $48,000 Observe the $1,000 debit in the Depreciation Expense account. The Depreciation Expense account is located under the Retained Earings account along with all of the other expense accounts. This is the case because the Depreciation Expense account is just another expense account. Just like all other expense accounts, the Depreciation Expense account will appear on the Income Statement and will be closed into the Retained Earnings account at the end of each accounting period Observe the $1,000 credit to the Accumulated Depreciation account. This credit changes the balance in the Accumulated Depreciation account from a beginning balance of $12,000 credit to an ending balance of $13,000 credit By looking at the ending balance in the Accumulated Depreciation account, you can see that a total of $13,000 of the cost of the lawn mowing equipment has been writton-off as of the end of January 2021. The $13,000 ending balance is what you would expect; since $1,000 is the monthly depreciation for the moving equipment and the mowing equipment has been used for 13 months = $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. Lenny's January Income Statement and Balance Sheet Let's prepare the Income Statement for January and see how the Depreciation Expense account appears on the Income Statement. To Save space, Step 4 in the Accounting Cycle, Prepare e Pro- Closing Trial Balance, is not shown on the January tab. Preparing the Income Statement is Step 5 in the Accounting Cycle. Prepare the income Statement