On December 31, 2007, Bert’s Farm Store had the followingaccount balances in its
ID: 2453152 • Letter: O
Question
On December 31, 2007, Bert’s Farm Store had the followingaccount balances in its accounting system. All year-end adjustmentshad been entered, but the books had not yet been closed.
Bert’s FarmStore
Account BalancesBefore Closing
December 31, 2007
Account Balance Account Balance
Cash $700 SalesRevenue $2,200
Merchandise 2,800 Cost of GoodsSold 900
Supplies 925 WagesExpense 400
PrepaidInsurance 450 UtilitiesExpense 150
Equipment 3,550 DepreciationExpense 50
AccumulatedDepreciation 1,750 InsuranceExpense 100
InterestPayable 150 SuppliesExpense 150
NotesPayable 2.000 Interest Expense 100
Owner’sEquity 4,175
a. What is the purpose ofclosing the books?
b. Prepare all necessary closingentries.
c. After closing, what is theamount of owner’s equity that will be reported on the balancesheet?
Explanation / Answer
A.
B.
1
2
3
C.
Owner's Equitystatement
$4520
A.
The closing process reduces the balanceof nominal (temporary) accounts to zero in order to prepare the accounts for thenext perio'ds transactions. Transferes all revenue and expense accounts toIncome summary. Income summary account matches revenue and expenseand find out net profit or loss. That Profit or loss is transferd to Retainedearnings.B.
CLOSING ENTRIES1
Sales Revenue 2200 Incomesummary 22002
Income summary 1850 Cost of goods sold 900 Wagesexpense 400 UtilitiesExpense 150 Depreciationexpense 50 Insuranceexpense 100 Suppliesexpense 150 Interestexpense 1003
Income summary 350 Retainedearnings 350C.
Owner's Equitystatement
Owner's equity $4175 Add: Retained earnings 350$4520
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