The Unionville Gift Store Case Solution

No.

Debit

Credit

Description

Amount ($)

Description

Amount ($)

Cash

25,000

Capital (Owner’s Equity)

25,000

2

Cash

40,000

Long term Liability

40,000

3

Long-term Liability

31,027

Cash

31,027

4

Fixtures
Freight expenses

30,000
3,000

Cash

33,000

5

Rent Expense

20,000

Cash

20,000

6

Wages & Salaries expense
Drawings

23,580
10,000

Cash
Wages & Salaries Payable

33,400
180

7

Insurance Expense
Prepaid Insurance

300
300

Cash

600

8

Advertising Expense
Prepaid Advertising

2,300
500

Cash

2,800

9

Miscellaneous Expenses

6,596

Cash

6,596

10

Cash Register Service

2,748

Cash

2,748

Office Supplies Expense
Office supplies asset

2,200
500

Cash

2,700

12

Accounts Payable

108,067

Cash

108,067

Purchases

121,950

Purchases Returns
Accounts Payables

3,775
118,175

Cash
Accounts Receivable

139,200
41,000

Sales

180,200

Sales Returns

6,200

300
2,060
3,840

Interest Expense

3,183

Interest Payable

3,183

No.

Narration

Burns brought $25,000 as his investment in the business. This increased the cash account and the Owner’s Capital.

Burns also took a loan from a bank. Since he did not pay the entire amount in one year, it will be considered as a long-term liability. Because the liabilities have a credit nature, they will be credited when they increase. Cash account also increased. Therefore, they are debited by $40,000.

During the year, Burns paid part of his Long term Loan amounting to $31,027 by cash, so it will be debited, and cash account will be credited with the same amount.

Fixtures were bought during the year by cash for $30,000. Freight charges were also paid to bring in those assets. The cash account was credited with a total sum of $30,000,

During the year, Rent was paid by cash. Since Rent expense has a debit balance, it was debited, and because cash balance was decreasing, the cash account was credited by $20,000.

Wages and Salaries expense for the year were $23,580. $180 of this balance was still outstanding at the year-end and therefore, was considered as a current liability (Wages payable). Cash paid for Wages during the year amounted to $23,400. Personal drawings by Burns were also mistakenly added in the Wages and Salaries Amount. An adjusting entry was then recorded to account for the drawings that had been paid for by cash.

During July 2012, Burns paid an insurance premium for a policy that would cover the period from 1^st August 2012 to 31^st July 2013. This period is not in the current year. Therefore, $300 would be considered as an expense that has been paid for in advance. It would appear on the Balance Sheet as an asset. The Insurance expense for the year would be the cash paid i.e. $600 less the prepaid amount $300, which would also turn out to be $300. This amount would be charged in the Income Statement under the head of expenses.

Similarly, $500 of the advertising expenses that have been paid during the year are for an event that would occur after the year-end date. Therefore, only $2300 will be charged as Advertising Expense for the year. $500 will be considered as a prepaid expense, and cash account will be credited by $2800.