One year ago, Allan Thorpe founded Alcazar Sales Company, and the business has prospered. Allan comes to you for advice. He wishes to know how much net income the business earned during the past year. The accounting records consist of the T-accounts in the ledger, which were prepared by an accountant who has resigned from the company. The accounts at December 31, are as follows:

Cash		Accounts receivable
Dec 31 Bal	5,800				Dec 31 Bal	12,300
Prepaid rent		Supplies
2-Jan	2,800				2-Jan	2,600
Equipment		Accumulated depreciation- equipment
2-Jan	52,000
Accounts payable		Salary payable
		Dec 31 Bal	18,500
Unearned service revenue		Allan Thorpe, capital
		Dec 31 Bal	4,100				2-Jan	40,000
Allan Thorpe, drawing		Service revenue
Dec 31 Bal	50,000						Dec 31 Bal	80,700
Salary expense		Depreciation expense
Dec 31 Bal	17,000
Advertising expense		Utilities expense
					Dec 31 Bal	800
Supplies expense		Rent expense

Apply Your Knowledge

Allan indicates that, at year-end, customers owe him $1,000 accrued service revenue, which he expects to collect early next year. These revenues have not been recorded. During the year, he collected $4,100 service revenue in advance from customers, but the business has earned only $800 of that amount. During the year he has incurred $2,400 of advertising expense, but he has not yet paid for it. In addition, he has used up $2,100 of the supplies. Allan determines that depreciation on equipment was $7,000 for the year. At December 31, he owes his employee $1,200 accrued salary. The rent paid in advance on Jan 2 for $2,800 relates to the period January 2019 through to February 2020. The owner made no capital investments during the year.

Allan expresses concern that drawing during the year might have exceeded the business’s net income. To get a loan to expand the business, Allan must show the bank that the business’s owner’s equity has grown from its original $40,000 balance. You and Allan agree that you will meet again in one week.

Requirement:

Prepare the journal entries for the transactions that were not previously recorded, prepare and update the T-accounts and determine the ending balance on all accounts used by the company.

Prepare the adjusted trial balance for the company.

Prepare the 2019 company’s financial statements for presentation to the bank and to help address the first issue concerning Allan.

Has the owner’s equity grown from its original $40,000 balance.? Can Mr. Thorpe expect to get the loan? Give your reason(s).

Answer rating: 100% (QA)

1 Journal entries Date Details Dr Cr 1 Accounts receivables 1000 Service revenue 1000 2 Unearned service revenue 800 Service revenue 800 3 Advertising expenses 2400 Advertising payable 2400 4 Supplies ... View the full answer