Chapter 3

Case 1.
Jessica decides to operates “Monster Cookies” as a corporation. She then starts the process of getting the
business running. In November 2017, the following activities take place.

Nov 8 Jessica sell her investments for $520, which she deposits in her personal bank account.
Nov 8 She opens a bank account under the name “Monster Cookies” and transfer $500 from her
personal account to the new account in exchange for ordinary shares.
Nov 11 Jessica pays $65 to have advertising brochures and posters printed. She plans to distribute
these as opportunities arise.
Nov 13 She buys baking supplies, such as flour, sugar, and butter for $125 cash.
Nov 14 Jessica starts to gather some baking equipment to take with her when teaching the cookies
class. She has an excellent top-of-the-line food processor and mixer that originally cost her
$750. Jessica decides to start using it only in her new business. She estimates that the
equipment is currently worth $300. She invests the equipment in the business in exchange for
ordinary shares.
Nov 16 Jessica realizes that her initial cash investment is not enough. Her grandmother lends her
$2,000 cash, for which Jessica signs a note payable for 2 years in the name of the business.
Jessica deposits the money in the business bank account.
Nov 17 She buys more baking equipment for $900
Nov 20 She teaches her first class and collects $125 cash
Nov 25 Jessica books a second class for December 4 for $150. She receives $30 cash in advance as down
payment.
Nov 30 Jessica pays $1,320 for one-year insurance policy that will expire on December 1, 2018

Instructions
a. Prepare journal entries to record the November transactions.
b. Post the journal entries to general ledger accounts.
c. Prepare the trial balance at November 30.

Case 2.
It is the end of November and Jessica has been in touch with her grandmother. Her grandmother asked
Jessica how well things went in her first month of business. Jessica, too, would like to know if the company
has been profitable or not during November. Jessica realizes that in order to determine Monster Cookies’s
income, she must first make adjustments to the accounts.

Jessica puts together the following additional information.

1. A count reveals that $35 of baking supplies were used during November.
2. Jessica estimates that the depreciation for her baking equipment is $20
3. Jessica’s grandmother has decided to charge interest 6% on the note payable extended on
November 16. The loan plus interest is to be repaid in 24 months. (Assume that half a month of
interest accrued during November).
4. On November 30, Jessica teaches a group of first-grades students how to make holiday cookies.
The next day, Jessica prepares an invoice for $300 and leave it with school principal. The principal
says that he will pass the invoice along to the head offices, and it will be paid in December.
5. Jessica receives a utilities bill for $45. The bill is for utilities consumed by Jessica’s business during
November and is due December 15.

Instructions
a. Prepare and post the adjusting journal entries
b. Prepare an adjusted trial balance
c. Using the adjusted trial balance, calculate Monster Cookies’s net income or net loss for the month
of November.
Case 3
Jessica had a very busy December. At the end of the month, after journalizing and posting the December
transactions and adjusting entries, Jessica prepared the following adjusted trial balance.

MONSTER COOKIES
Adjusted Trial Balance
December 31, 2017
Debit Credit
Cash $1,180
Account Receivables 875
Supplies 350
Prepaid Insurance 1,210
Equipment 1,200
Accumulated Depreciation – Equipment $40
Account Payable 75
Salaries and Wages Payable 56
Unearned Service Revenue 300
Notes Payable 2,000
Interest Payable 15
Share Capital-Ordinary 800
Dividends 500
Service Revenue 4,515
Salaries and Wages Expense 1,006
Utilities Expense 125
Advertising Expense 165
Supplies Expense 1,025
Depreciation Expense 40
Insurance Expense 110
Interest Expense 15
$7,801 $7,801

Instructions:
a. Prepare an Income Statement and a Retained Earnings Statement for the 2 months ended
December 31,2017 and a classified Statement of Financial Position at December 31, 2017. The
note payable has a stated interest rate of 6%, and the principal and interest are due on
November 16,2019.
b. Prepare closings entries as of December 31, 2017.
c. Prepare Post-Closing Trial Balance.
CHART OF ACCOUNTS
Code Account Name
1001 Cash
1002 Accounts Receivable
1003 Supplies
1004 Prepaid Insurance
1010 Equipment
1011 Accumuated Depreciation - Equipment Interest Expense 5005
2001 Accounts Payable 5
2002 Interest Payable
2003 Unearned Service Revenue
2004 Notes Payable
3001 Share Capital - Ordinary
3002 Retained Earnings Ledger
3003 Dividends
4001 Service Revenue Cash 1001 Acc. Receivable 1002 Supplies 1003
5001 Utilities Expense 500 65 300 125 35
5002 Advertising Expense 2000 125
5003 Supplies Expenses 125 900
5004 Depreciation Expense 30 1320
5005 Interest expense

General Journal 245 300 90

Acc. Depreciation -
Trans. Description Reff Dr Cr Prepaid Insurance 1004 Equipment 1010 Equipment 1011
8-Nov Cash 1001 500 1320 300 20
Share Capital - Ordinary 3001 500 900
11-Nov Advertising Expense 5002 65
Cash 1001 65
13-Nov Supplies 1003 125
Cash 1001 125
14-Nov Equipment 1010 300 1320 1200
Share Capital - Ordinary 3001 300 Account Payable 2001 Interest Payable 2002 Unearned Revenue 2003
16-Nov Cash 1001 2000 45 5 30
Notes Payable 2004 2000
17-Nov Equipment 1010 900
Cash 1001 900
20-Nov Cash 1001 125
Service Revenue 4001 125
25-Nov Cash 1001 30 30
Unearned service revenue 2003 30 Notes Payable 2004 Share Capital- Ordinary 3001 Retained Earning 3002
30-Nov Prepaid Insurance 1004 1320 2000 500
Cash 1001 1320 300

MONSTER COOKIES
Trial Balance
30-Nov-14
Debit Credit 2000 800
Cash 245 Dividend 3003 Service Revenue 4001 Utilities Expense 5001
Supplies 125 125 45
Prepaid Insurance 1320 300
Equipment 1200
Unearned Service Revenue 30
Notes Payable 2000
Share Capital - Ordinary 800
Service Revenue 125 425
Advertising Expense 65 Advertising Expense 5002 Supplies Expense 5003 Depreciation Expense 5004
Total 2955 2955 65 35 20
Adjusting Entries

Date Description Reff Dr Cr

30-Nov Supplies Expense 5003 35
Supplies 1003 35
30-Nov Depreciation Expense 5004 20
Accumulated Depreciation 1011 20
30-Nov Interest Expense 5004 5
Interest Payable 2002 5
30-Nov Accounts Receivable 1002 300
Service Revenue 4001 300
30-Nov Utilities Expense 5001 45
Accounts Payable 2001 45

MONSTER COOKIES
Adjusted Trial Balance
30-Nov-14
Debit Credit
Cash 245
Accounts Receivable 300
Supplies 90
Prepaid Insurance 1320
Equipment 1200
Accumulated Depreciation - Equipment 20
Accounts Payable 45
Interest Payable 5
Unearned Service Revenue 30
Notes Payable 2000
Share Capital - Ordinary 800
Retained Earnings
Dividends
Service Revenue 425
Utilities Expense 45
Advertising Expense 65
Supplies Expenses 35
Depreciation Expense 20
Interest expense 5
Total 3325 3325

MONSTER COOKIES
Income Statement
December 31, 2014

Revenue
Service Revenue
Expenses
Supplies Expenses
Salaries and Wages Expense
Advertising Expense
Utilities Expense
Insurance Expense
Depreciation Expense
Interest expense
Total Expense
Net Income

MONSTER COOKIES
Retained Earnings Statement
December 31, 2014
Retained earnings, November 1
Add: Net Income
Less: Dividends
Retained earnings, December 31
 MONSTER COOKIES
Statement of Financial Position
December 31, 2014
Assets

Property, plant, and equipment

Equipment
Less: Accumuated depreciation - equipment
Current Assets
Prepaid Insurance
Supplies
Account Receivable
Cash
Total Current Assets
Total Assets

Equity and Liabilities

Equity
Share Capital - Ordinary
Retained Earning
Non Current Liabilities

Current Liabilities
Account payable

Salaries and wages payable

Unearned service revenue
Total Current Liabilities
Total Liabilities
Total Equity and Liabilities

Closing Entries

Date Description Reff Dr Cr

30-Nov

30-Nov

MONSTER COOKIES
Post Closing Trial Balance
30-Nov-14
Debit Credit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation - Equipment
Accounts Payable
Salaries and Wages Payable
Interest Payable
Unearned Service Revenue
Notes Payable
Share Capital - Ordinary
Retained Earnings