Third Example: A Service Company started operations on January 1, 2011 and the following are

the transactions occurred in its first year of business.

Jan. 1 the company started by a cash investment of $337,000

Jan. 1 the company paid $71,000 for 2011 and part of 2012 rent.
Jan. 1 the company paid $48,000 for insurance policy covering 4-year period.
Feb. 2 the company purchased office supplies of $14,000 on account.
Mar. 1 the company received $120,000 cash in exchange for consulting services that are
going to be provided to Amman Co. in April 2011 and August 2012
Nov. 30 paid the following expenses in cash
$165,000 salaries
$700 utilities
Dec. 15 billed Irbid Co. $75,000 for consulting services provided.

The company prepares annual financial statements, and the following adjustments have been
gathered on December 31, 2011

- Office supplies on hand were $4,000

- Monthly rent is $3,000
- $60,000 worth of service revenue has been earned.
- Unpaid salaries were $15,000
- Interest earned but not recorded was $1,500
- 12-month worth of insurance has expired.

Instructions:
1- Journalize the transactions above and post them to the appropriate accounts.
2- Prepare the trial balance.
3- Prepare the adjusting entries and post them to the appropriate accounts.
4- Prepare the adjusted trial balance.
5- Prepare the statements of income, retained earnings and financial position.
6- Prepare Closing Entries.
7- Prepare Post-Closing trial balance (opening balances for the next period)

Third Example – Continued:

During 2012, the following transactions occurred:
May 1 collected the outstanding balance on Irbid Co. account.
Sep. 1 the remaining $60,000 worth of service revenue has been earned.
Oct. 8 paid $20,000 cash for new office supplies and in payment of the outstanding
balance of supplies accounts payable.
Nov. 15 paid $680 for utilities expense.
Dec. 31 paid $195,000 for 2012 salaries and 2011 accrued salaries.
At the end of 2012, the following information have been gathered on December 31, 2012,

- Office supplies on hand were $4,000.

- No rent was paid.
- The Insurance policy covers 4 years starting from 1/1/2011.

Instructions:
1- Journalize the transactions above and post them to the appropriate accounts.
2- Prepare the trial balance.
3- Prepare the adjusting entries and post them to the appropriate accounts.
4- Prepare the adjusted trial balance.
5- Prepare the statements of income, retained earnings and financial position.
6- Prepare Closing Entries.
7- Prepare Post-Closing trial balance (opening balances for the next period)
Solution – Third Example:

General Journal
Date Account Title Dr. Cr.
Jan. 1 Cash 337,000
Capital 337,000
Jan. 1 Prepaid Rent 71,000
Cash 71,000
Jan. 1 Prepaid Insurance 48,000
Cash 48,000
Feb. 2 Office Supplies 14,000
Accounts Payable 14,000
Mar. 1 Cash 120,000
Unearned Service Revenue 120,000
Nov. 30 Salaries Expense 165,000
Utilities Expense 700
Cash 165,700
Dec. 15 Accounts Receivable – Irbid Co. 75,000
Service Revenue 75,000

Trial Balance
Account Title Dr. Cr.
Cash 172,300
Capital 337,000
Prepaid Rent 71,000
Prepaid Insurance 48,000
Office Supplies 14,000
Accounts Payable 14,000
Unearned Service Revenue 120,000
Salaries Expense 165,000
Utilities Expense 700
Accounts Receivable – Irbid Co. 75,000
Service Revenue 75,000
546,000 546,000

Adjusting Entries
Date Account Title Dr. Cr.
Office Supplies Expense 10,000
Office Supplies 10,000
Rent Expense 36,000
Prepaid Rent 36,000
31/12/2011
Unearned Service Revenue 60,000
Service Revenue 60,000
Salaries Expense 15,000
Salaries Payable 15,000
 Interest Receivable 1,500
Interest Revenue 1,500
Insurance Expense 12,000
Prepaid Insurance 12,000

Adjusted Trial Balance

Account Title Dr. Cr.
Cash 172,300
Capital 337,000
Prepaid Rent (71,000 – 36,000) 35,000
Rent Expense 36,000
Prepaid Insurance (48,000 – 12,000) 36,000
Insurance Expense 12,000
Office Supplies 4,000
Office Supplies Expense 10,000
Accounts Payable 14,000
Unearned Service Revenue 60,000
Salaries Expense (165,000 + 15,000) 180,000
Salaries Payable 15,000
Utilities Expense 700
Interest Receivable 1,500
Interest Revenue 1,500
Accounts Receivable – Irbid Co. 75,000
Service Revenue (75,000 + 60,000) 135,000
562,500 562,500

Income Statement
For 2011

Revenues
Service Revenue 135,000
Interest Revenue 1,500 136,500

Operating Expenses
Rent Expense 36,000
Salaries Expense 180,000
Insurance Expense 12,000
Office Supplies Expense 10,000
Utilities Expense 700 238,700

Net Income (Loss) (102,200)

 Retained Earnings Statement
For 2011

Retained Earnings, January 1, 2011 0

Net Income (Loss) (102,200)

Dividends 0
Retained Earnings (Deficit), December 31, 2011 (102,200)

Statement of Financial Position

December 31, 2011

Assets
Prepaid Rent 35,000
Prepaid Insurance 36,000
Office Supplies 4,000
Accounts Receivable 75,000
Interest Receivable 1,500
Cash 172,300
Total Assets 323,800

Equity and liabilities

Equity
Owner’s Capital 337,000
Retained Earnings (102,200)
Total Equity 234,800

Liabilities
Unearned Service Revenue 60,000
Salaries Payable 15,000
Accounts Payable 14,000

Total Equity and Liabilities 323,800

 Closing Entries
Date Account Title Dr. Cr.
Service Revenue 135,000
Interest Revenue 1,500
Income Summary 136,500
Income Summary 238,700
Rent Expense 36,000
31/12/2011 Salaries Expense 180,000
Insurance Expense 12,000
Office Supplies Expense 10,000
Utilities Expense 700
Retained Earnings 102,200
Income Summary 102,200

Post-Closing Trial Balance

Account Title Dr. Cr.
Cash 172,300
Capital 337,000
Prepaid Rent 35,000
Prepaid Insurance 36,000
Office Supplies 4,000
Accounts Receivable 75,000
Interest Receivable 1,500
Unearned Service Revenue 60,000
Accounts Payable 14,000
Salaries Payable 15,000
Retained Earnings (Deficit) 102,200
426,000 426,000
Solutions – Third Example – Continued

Opening Balances for 2012

Account Title Dr. Cr.
Cash 172,300
Capital 337,000
Prepaid Rent 35,000
Prepaid Insurance 36,000
Office Supplies 4,000
Accounts Receivable 75,000
Interest Receivable 1,500
Unearned Service Revenue 60,000
Accounts Payable 14,000
Salaries Payable 15,000
Retained Earnings (Deficit) 102,200
426,000 426,000

General Journal
Date Account Title Dr. Cr.
May 1 Cash 75,000
Accounts Receivable – Irbid Co. 75,000
Sep. 1 Unearned Service Revenue 60,000
Service Revenue 60,000
Oct. 1 Office Supplies 6,000
Accounts Payable 14,000
Cash 20,000
Nov. 15 Utilities Expense 680
Cash 680
Dec. 31 Salaries Expense 180,000
Salaries Payable 15,000
Cash 195,000

Trial Balance
Account Title Dr. Cr.
Cash (172,300 + 75,000 – 20,000 – 680 – 195,000) 31,620
Capital 337,000
Prepaid Rent 35,000
Prepaid Insurance 36,000
Office Supplies (4,000 + 6,000) 10,000
Salaries Expense 180,000
Utilities Expense 680
Interest Receivable 1,500
Service Revenue 60,000
Retained Earnings (Deficit) 102,200
397,000 397,000
 Adjusting Entries
Date Account Title Dr. Cr.
Office Supplies Expense 6,000
Office Supplies 6,000
Rent Expense 36,000
31/12/2011 Prepaid Rent 35,000
Rent Payable 1,000
Insurance Expense 12,000
Prepaid Insurance 12,000

Adjusted Trial Balance

Account Title DR. Cr.
Cash 31,620
Capital 337,000
Prepaid Insurance (36,000 – 12,000) 24,000
Office Supplies (10,000 – 6,000) 4,000
Salaries Expense 180,000
Utilities Expense 680
Service Revenue 60,000
Interest Receivable 1,500
Retained Earnings (Deficit) 102,200
Rent Expense 36,000
Rent Payable 1,000
Insurance Expense 12,000
Office Supplies Expense 6,000
398,000 398,000

Income Statement
For 2012

Revenues
Service Revenue 60,000

Operating Expenses
Rent Expense 36,000
Salaries Expense 180,000
Insurance Expense 12,000
Office Supplies Expense 6,000
Utilities Expense 680 234,680

Net Income (Loss) (174,680)

 Retained Earnings Statement
For 2012

Retained Earnings, January 1, 2012 (102,200)

Net Income (Loss) (174,680)
(276,880)
Dividends 0
Retained Earnings (Deficit), December 31, 2012 (276,880)

Statement of Financial Position

December 31, 2012

Assets
Prepaid Insurance 24,000
Office Supplies 4,000
Interest Receivable 1,500
Cash 31,620
Total Assets 61,120

Equity and liabilities

Equity
Owner’s Capital 337,000
Retained Earnings (276,880)
Total Equity 60,120

Liabilities
Rent Payable 1,000

Total Equity and Liabilities 61,120

Closing Entries
Date Account Title Dr. Cr.
Service Revenue 60,000
Income Summary 60,000
Income Summary 234,680
Rent Expense 36,000
Salaries Expense 180,000
31/12/2011
Insurance Expense 12,000
Office Supplies Expense 6,000
Utilities Expense 680
Retained Earnings 174,680
Income Summary 174,680
 Post-Closing Trial Balance
Account Title Dr. Cr.
Cash 31,620
Capital 337,000
Prepaid Insurance 24,000
Office Supplies 4,000
Interest Receivable 1,500
Rent Payable 1,000
Retained Earnings (Deficit) 276,880
338,000 338,000