Chapter 4 Exercise: Recording transactions with journal entries

College Caps, Inc. operates a small retail store in the mall that sells baseball caps.
The following transactions occurred during June 2004.

• June 1 Paid $700 cash for insurancepolicy through December 31, 2004.
• June 1 Purchased store equipment for $5,000 and paid cash. The company
estimates annual depreciation of $1,200.
• June 5 Purchased supplies worth $500 with cash.
• June 15 Loaned $10,000 to the manager ofthe store (as a personal loan) for one
year. The annual rate of interest on the loan is 12%. The loan is supported by a
note and interest is due upon repayment.
• June 28 Earned revenue of $1,400 with delivery of custom cap order for SMU
football team. SMU must pay the bill by July 31. Cost of the caps sold was $500.
• June 30 Amount of supplies on hand is$300. The balance in the Supplies
account was $150 on June 1.

Record all journal entries and the adjusting entries that must be made at
June 30 before the company prepare its financial statements.

Transactional Journal Entries

Debits Credits
June 1 Prepaid Insurance $700
Cash $700

June 1 Equipment $5,000

Cash $5,000

June 5 Supplies $500

Cash $500

June 15 Notes receivable $10,000

Cash $10,000

June 28 Accounts receivable $1,400

Sales revenue $1,400
Cost of goods sold $500
Inventory $500

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 Adjusting Journal Entries

Debits Credits
June 30 Supplies expense $350
Supplies $350

June 30 Insurance expense $100

Prepaid insurance $100

June 30 Depreciation expense $100

Accumulated depreciation $100

June 30 Interest receivable $50

Interest revenue $50

Chapter 4 Exercise: Complete the accounting cycle

College Caps, Inc.
Trial Balance – unadjusted
as of June 30, 2004

Account DR CR
Cash 8,150
Accounts Receivable 7,500
Supplies 650
Inventory 5,500
Prepaid Insurance 700
Notes Receivable 10,000
Equipment 5,000
Accounts Payable 6,050
Contributed Capital 30,000
Retained Earnings 550
Sales Revenue 1,400
Cost of Sales 500
TOTALS 38,000 38,000

The above trial balance is made before adjusting entries were posted. Based on
information from last exercise, post the adjusting entries for the period ended June 30,
2004 and prepare an adjusted trial balance. Income tax expense should be recorded at
30% of pretax net income. Prepare the income statement, statement of retained
earnings, and balance sheet. 4

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 College Caps, Inc.
Adjusted Trial Balance
as of June 30, 2004

Account DR CR
Cash 8,150
Accounts Receivable 7,500
Supplies 300
Inventory 5,500
Prepaid Insurance 600
Interest Receivable 50
Notes Receivable 10,000
Equipment 5,000
Accumulated Depreciation 100
Accounts Payable 6,050
Income tax payable 120*
Contributed Capital 30,000
Retained Earnings 550
Sales Revenue 1,400
Cost of Sales 500
Depreciate expense 100
Supplies expense 350
Insurance expense 100
Income tax expense 120*
Interest revenue 50
TOTALS 38,270 38,270
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*Additional adjustment is made for income tax expense.

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College Caps, Inc.

The Income Statement
For the month ended June 30, 2004

Sales Revenue 1,400

Cost of Sales ( 500)
Gross Profit 900
Depreciate expense (100)
Supplies expense ( 350)
Insurance expense (100)
Operating Income 350
Other revenues (expenses):
Interest revenue 50
Pre-tax Income 400
Income tax expense (120)
Net Income 280

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 College Caps, Inc.
Statement of Retained Earnings
For the month ended June 30, 2004

Retained Earnings (06/01/2004) 550

Net Income 280
Dividend (0)
Retained Earnings (06/01/2004) 830

College Caps, Inc.

Balance Sheet
as of June 30, 2004
Assets
Cash 8,150
Accounts Receivable 7,500
Supplies 300
Inventory 5,500
Prepaid Insurance 600
Interest Receivable 50
Notes Receivable 10,000
Current Assets 32,100
Equipment 5,000
Accumulated Depreciation (100)
Total Assets 37,000
Liabilities
Accounts Payable 6,050
Income Tax Payable 120
Total Liabilities 6,170
Stockholders’ Equity
Contributed Capital 30,000
Retained Earnings 830
Total stockholders’ equity 30,830
Total liabilities and stockholders’ equity 37,000