Chapter Five Questions
1. What does it mean to close an account?
An account is closed when its balance is brought to
zero at the end of an accounting period. Revenues, expenses, dividends, and the
income summary account are closed each period.
2. What are the two purposes of the closing process?
The closing process (1) keeps the results of
different time periods separate from one another and (2) puts into stockholders’
equity owners’ rights to management-generated resources retained in the
company.
3. What is the name of the account to which revenues are closed?
Income summary.
4. Why are revenue accounts closed by debits?
Revenue accounts normally have credit balances.
Therefore, they are closed with debits.
5. What is the name of the account to which expenses are closed?
Income summary.
6. Why are expense accounts closed by credits?
Expense accounts normally have debit balances.
Therefore, they are closed with credits.
7. Why does the name income summary seem appropriate for that account?
Net income is the difference between revenues and
expenses. Before it is closed to retained earnings, the income summary account
balance is equal to net income because revenues and expenses are closed into
income summary.
8. What does a credit balance in the income summary account before it is closed represent?
A credit balance in income summary means revenues
exceeded expenses or, in other words, the company had net income.
9. What is the name of the account to which income summary is closed?
Retained earnings.
10. What is the name of the account to which dividends are closed?
Retained earnings.
11. What effect do closing entries have on total resources?
Closing entries do not affect total resources because
only some stockholders’ equity accounts are involved in the closing
process.
12. After the closing entries, what are the balances in revenues, expenses, and dividends accounts?
After closing is complete, all revenues, expenses,
and dividends accounts have $0 balances.
13. After the closing process, the balance in the retained earnings account agrees with retained earnings reported on which two financial statements?
Statement of retained earnings and the balance
sheet.
Chapter Five Exercises
Exercise 5.1: Income Statement Without Closing Entries
The DiNatale Corporation's March 31 general ledger included the three
accounts shown below.
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Fees Revenue |
|
Supplies Expense |
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Salary Expense |
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3,000 (2/4) |
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(2/15) 450 |
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(2/28) 2,500 |
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5,000 (2/12) |
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(2/28) 300 |
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(3/28) 2,500 |
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2,000 (2/21) |
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(3/13) 500 |
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(3/31) 125 |
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7,000 (2/27) |
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(3/25) 200 |
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5,125 |
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4,000 (3/4) |
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(3/31) 250 |
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6,000 (3/9) |
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1,700 |
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5,000 (3/16) |
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3,000 (3/24) |
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7,000 (3/31) |
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42,000 |
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1. Determine the company's fees revenue for March.
$25,000: $4,000 (3/4) + $6,000 (3/9) + $5,000 (3/16)
+ $3,000 (3/24) + $7,000 (3/31).
2. Determine the company's supplies expense for March.
$950: $500 (3/13) + $200 (3/25) + $250 (3/31).
3. Determine the company's salary expense for March.
$2,625: $2,500 (3/28) + $125 (3/31).
4. Determine the company's net income for March.
Net income = revenues - expenses.
$21,425 = $25,000 (fees revenue) - $950 (supplies
expense) - $2,625 (salary expense).
Exercise 5.2: Income Statement With Closing Entries
The Markvenas Corporation's May 31 general ledger included the three
accounts shown below.
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Fees Revenue |
|
Supplies Expense |
|
Salary Expense |
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(4/30) 1900 |
400 (4/5) |
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(4/12) 250 |
350 (4/30) |
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(4/28) 600 |
600 (4/30) |
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600 (4/14) |
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(4/26) 100 |
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(5/28) 600 |
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100 (4/23) |
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(5/11) 400 |
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(5/31) 30 |
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800 (4/30) |
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(5/27) 200 |
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630 |
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500 (5/4) |
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(5/31) 150 |
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700 (5/10) |
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750 |
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400 (5/17) |
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500 (5/24) |
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700 (5/31) |
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2,800 |
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1. Determine the company's fees revenue for May.
$2,800: fees revenue account balance.
2. Determine the company's supplies expense for May.
$750: supplies expense account balance.
3. Determine the company's salary expense for May.
$630: salary expense account balance.
4. Determine the company's net income for May.
Net income = revenues - expenses.
$1,420 = $2,800 (fees revenue) - $750 (supplies expense)
- $630 (salary expense).
Exercise 5.3: Closing Entries
The McKittrick Corporation's June 30 adjusted trial balance is shown below.
|
Account Name |
Debits |
Credits |
|
Cash |
$5,930 |
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Accounts Receivable |
6,800 |
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Supplies |
400 |
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Prepaid Rent |
600 |
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Prepaid Insurance |
750 |
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Accounts Payable |
|
590 |
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Salaries Payable |
|
70 |
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Income Taxes Payable |
|
500 |
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Common Stock |
|
8,000 |
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Retained Earnings |
|
4,700 |
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Dividends |
310 |
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Fees Revenue |
|
3,000 |
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Salaries Expense |
900 |
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Rent Expense |
300 |
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Insurance Expense |
250 |
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Supplies Expense |
120 |
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Income Taxes Expense |
500 |
____ |
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Totals |
$16,860 |
$16,860 |
1. Prepare the McKittrick Corporation's closing entries required on June 30.
|
Date |
Description |
Post. |
Debits |
Credits |
|
June 30 |
Fees Revenue |
|
3,000 |
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|
Income Summary |
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|
3,000 |
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Close revenue account |
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30 |
Income Summary |
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2,070 |
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Salaries Expense |
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900 |
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Rent Expense |
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300 |
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Insurance Expense |
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250 |
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Supplies Expense |
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120 |
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Income Taxes Expense |
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500 |
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Close expense accounts |
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30 |
Income Summary |
|
930 |
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Retained Earnings |
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930 |
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Close income summary account |
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30 |
Retained Earnings |
|
310 |
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Dividends |
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310 |
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Close dividends account |
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2. Calculate the company's net income for June.
Net income = revenues - expenses.
$930 = $3,000 revenue - $2,070 expenses.
3. Calculate the company's retained earnings balance on June 30 after closing entries are posted to the general ledger.
$5,320: $4,700 (retained earnings June 1 balance) +
$930 (net income) - $310 (dividends).
Exercise 5.4: Closing Entries
The Gravelle Corporation's February 28 general ledger included the six
accounts shown below.
|
Retained Earnings |
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Dividends |
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Income Summary |
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7,250 (2/1) |
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(2/25) 300 |
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Fees Revenue |
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Supplies Expense |
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Salary Expense |
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300 (2/3) |
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(2/11) 150 |
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(2/28) 1,400 |
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600 (2/15) |
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(2/24) 100 |
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400 (2/23) |
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900 (2/27) |
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1. Prepare the Gravelle Corporation's closing entries required on February 28.
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Date |
Description |
Post. |
Debits |
Credits |
|
Feb. 28 |
Fees Revenue |
|
2,200 |
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Income Summary |
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|
2,200 |
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Close revenue account |
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28 |
Income Summary |
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1,650 |
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Supplies Expense |
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250 |
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Salary Expense |
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1,400 |
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Close expense accounts |
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28 |
Income Summary |
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550 |
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Retained Earnings |
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550 |
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Close income summary account |
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28 |
Retained Earnings |
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300 |
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Dividends |
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300 |
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Close dividends account |
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2. Calculate the company's net income for February.
Net income = revenues - expenses.
$550 = $2,200 revenue - $1,650 expenses.
3. Calculate the company's retained earnings balance on February 28 after closing entries are posted to the general ledger.
$7,500: $7,250 (retained earnings February 1
balance) + $550 (net income) - $300 (dividends).
4. Calculate the company's dividends balance on February 28 after closing entries are posted to the general ledger.
$0: the dividends account was closed.
5. Calculate the company's fees revenue balance on February 28 after closing entries are posted to the general ledger.
$0: the fees revenue account was closed.
6. Calculate the company's salary expense balance on February 28 after closing entries are posted to the general ledger.
$0: the salary expense account was closed.
Exercise 5.5: Statement of Retained Earnings
The Ryan Corporation's March 31 general ledger included many accounts, three
of which are shown below.
|
Retained Earnings |
|
Dividends |
|
Income Summary |
|||
|
(3/31) 200 |
7,050 (3/1) |
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(3/20) 200 |
200 (3/31) |
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(3/31) 3,700 |
4,300 (3/31) |
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600 (3/31) |
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(3/31) 600 |
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1. Determine the company's net income for March.
Net income = revenues - expenses.
$600: net income is the balance in income summary
before it is closed to retained earnings. The entry to close the Ryan
Corporation's income summary account was a $600 debit to income summary and a
$600 credit to retained earnings.
2. Calculate the company's retained earnings balance on March 31.
$7,450: balance in retained earnings T account
($7,050 + $600 - $200 = $7,450).
3. Prepare the company's statement of retained earnings for the month ended
March 31.
|
Ryan Corporation |
|
|
Retained Earnings, March 1 |
$7,050 |
|
Plus: Net Income |
600 |
|
Subtotal |
$7,650 |
|
Less: Dividends |
200 |
|
Retained Earnings, March 31 |
$7,450 |