SAMMYS PARKING

TUTORIAL OBJECTIVES

The goal of this case is to familiarize you on how to account for basic financial transactions.
INSTRUCTIONS

This case has been organized by transaction date. If you have questions about completing this tutorial, you can send an email to your instructor by clicking on your professors name in the Faculty/Staff link on the left. As well, we have provided a page, called Tutorial 1 FAQ at the end of this document, which gives answers to frequently asked questions.
February 1

Bavaro invested $24,000 of his own money in the company bank account in return for 100% of the common shares. Next, the company obtained a $63,000 bank loan to help finance the purchase of land that was already paved and ready for use. Bavaro then paid $80,000 for the land.
Transaction #1

Bavaro is putting money into the company bank account; therefore, he is increasing the cash (asset) of the company. We must debit cash for $24,000. We must increase the equity by $24,000 because this is Bavaros own money. To increase a liability or equity account, we must credit it. You would record the entry as follows: DR CR
Transaction #2

Cash Common stock

24,000 24,000

Bavaro then received a $63,000 loan. This increases his cash position, resulting in another debit to cash. He now has a liability, though, so we must create a liability account for the bank loan and credit this account. You would record the entry as follows: DR CR Cash Bank loan 63,000 63,000

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Transaction #3

Bavaro then paid for the land. Land is an asset purchase, so we must debit (increase) the land account. We paid cash for it; therefore, we must decrease the cash account. A decrease in an asset results in a credit entry. You would record the entry as follows: DR CR
February 3

Land Cash

80,000 80,000

Sammy came to an agreement with the adjacent Olympus Restaurant to provide parking privileges for Olympus customers.
Transaction

No transaction is recorded here. No cash has traded hands, and no service has been performed;
therefore, this does not qualify as an accounting transaction.
February 4

Sammy spent $980 on advertising services.

Transaction #4

The case made no mention of Sammy paying on credit; therefore, we can deduce he has paid cash. This will mean a credit entry of $980 to cash, thus reducing this account. The corresponding debit will be to a new expense account called Advertising Expense. Advertising is a cost of doing business during this accounting period; therefore, it is an expense. Make sure you put the Advertising account in the bottom-left quadrant of your super-T. The entry would be recorded as follows: DR CR
February 14

Advertising expense Cash

980 980

Parking revenue earned from the first two weeks of operation amounted to $6,826. Sammy paid employees $3,684 for work completed in the first two weeks.

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Transaction #5

We can assume from experience (and the absence of information to the contrary) that customers pay in cash; therefore, cash will increase, and we must debit the cash account. The credit entry is to a new account called parking revenue. A credit entry to revenue accounts increases them. Remember your revenue accounts are income statement accounts, and they should be created in the bottom-right quadrant of the super-T. The entry would be recorded as follows: DR CR
Transaction #6

Cash Parking revenue

6,826 6,826

We assume that Sammy has paid his employees in cash; therefore, we must credit cash for $3,684 (decreasing the asset). Again, the debit is an expense of the business, and we record it as Salaries Expense in the Expense (bottom-left) quadrant of the super-T. The entry would be recorded as follows: DR CR
February 26

Salaries expense Cash

3,684 3,684

Sammy paid $560 for minor repairs to the parking lot; he decided to treat the repair as an expense.
Transaction #7

Repairs are another cost of doing business, and as a result, they should be recorded as an expense. The debit entry would be to a new account called Repairs Expense. The credit entry would be to cash. Sammy did not pay on credit; therefore, he would have to pay cash for the service. This reduces his bank balance, which results in the credit entry. You would record the entry as follows: DR CR
February 28

Repairs expense Cash

560 560

Bavaro paid his employees $3,724 in the last two weeks. He also withdrew a salary of $2,500 from the company bank account to compensate himself for his time.

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Transaction #8

We record the salaries we paid to our employees in the same way as we did on February 14. You should record the transaction as follows: DR CR
Transaction #9

Salaries expense Cash

3,724 3,724

Since Bavaro is compensating himself for his time, this compensation should be recorded as a salaries expense. You should record the transaction as follows: DR CR Salaries expense Cash 2,500 2,500

END OF PERIOD ADJUSTING ENTRIES

At the end of the February period, other transactions had occurred: Bavaro had earned parking revenue of $7,140. Bavaro billed Olympus Restaurant $675 for their customers parking, with payment due on March 10. Bavaro paid $345 for light and power. Bavaro paid $475 in cash for interest on the bank loan and $125 against the principal amount of the loan.

Transaction #10

We record the revenue paid to us in cash as we did in the February 14th transaction. You should record the transaction as follows: DR CR
Transaction #11

Cash Parking revenue

7,140 7,140

We record the revenue for providing the service for Olympus Restaurant. We earned this revenue during the month of February, so we should record it now; therefore, we should credit the parking revenue account. The difference between this and all of our other sales is that we have not yet collected the cash; therefore, it is recorded as an accounts receivable (A/R). A/R is an asset because it represents cash we will collect in the future. Since this asset is now increasing, we debit A/R.

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You should record the transaction as follows: DR CR

Transaction #12

Accounts receivable Parking revenue

675 675

Light and power (commonly called Utilities) expenses are another cost of doing business, and we should record them as expenses; therefore debit Light and Power Expense for $345. Since we paid cash, and we should credit (decrease) the cash account. You should record the transaction as follows: DR Light & power expense CR Cash 345 345

Transactions #13 & #14

Interest is an expense a business incurs when it takes on debt, in this case, the bank loan. We should then record the Interest Expense with a debit entry to that account. The corresponding credit is to cash because interest was paid in cash. Interest charged is often a percentage of the principal borrowed. When a company takes out a loan, it records the principal as a liability. Since Bavaro also made a principal payment, he reduced the amount of the Bank Loan account. We credited the account when we wanted to increase the amount of the loan; therefore, we must debit the Bank Loan account to decrease it. We made the principal repayment with cash, so we must credit (decrease) the cash account. You should record the transactions as follows: DR CR DR Interest expense Cash 475 475 125 125

Bank loan CR Cash

CLOSING ENTRIES

Closing entries involve five steps: Close the revenue accounts to the income summary account. Close the expense accounts to the income summary account. Calculate and record income tax expense/income tax payable. Close the income tax expense account to the income summary account. Close the income summary account to the retained earnings account.

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Closing Entry #1

We must sub-total (trial balance) the Parking Revenue Account. The sub-total is a $14,641 credit balance. To close this account (i.e., bring the balance to $0), we must debit the account, found in the revenue quadrant on the super-T, for $14,641. The credit entry is to the Income Summary account for the same amount. The income summary account collects all revenues and expenses from the bottom half of the super-T. The balance in this account will show whether the company made profit or loss for this accounting period. You would record the entry as follows: DR CR
Closing Entry #2

Parking revenue Income summary

14,641 14,641

We must sub-total each expense account on our super-T. To close each of these accounts, we then credit the expense accounts individually. Each corresponding debit is entered into the Income Summary account. You can either debit the Income Summary with individual debits for each expense, or you can debit it once for the grand total of all of the expenses. You would record the entry as follows (uses the grand total of all the expenses as a single debit entry to the income summary account): DR CR Income summary Advertising expense Salaries expense Repairs expense Light & Power expense Interest expense 12,268 980 9,908 560 345 475

Closing Entry #3

We then sub-total the Income Summary account. The trial balance after the first two closing entries is a $2,373 credit balance. This means Sammys Parking made a profit in this month (i.e., revenues exceeded expenses). As a result, Sammys Parking must pay tax on this profit. To determine the tax cost, we multiply the profit by the tax rate. Doing this, we calculate a tax cost of $473 ($2,373 x 20%). We record this entry as a debit to income tax expense and a credit to income tax payable since this amount will be paid subsequent to year-end. You would record the entry as follows: DR CR Income tax expense Income tax payable 475 475

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Closing Entry #4

In the previous transaction, we created a new expense account, income tax expense. Similar to the other expense accounts, we must also close income tax expense at period end. As a result, we must debit income summary and credit income tax expense by $475. You would record the entry as follows: DR CR
Closing Entry #5

Income summary Income tax expense

475 475

Finally, we must close the income summary account. In order to accomplish this, we subtotal (trial balance) the income summary account. The resulting trial balance is $1,898. In order to close this account, we debit the income summary account and credit the retained earnings account. You would record the entry as follows: DR CR
INCOME STATEMENT

Income summary Retained earnings

18,898 18,898

Preparing the income statement is easy now that you have performed all of the closing entries. The two bottom quadrants of the super-T contain the accounts used to prepare the income statement. Remember the income statement follows the general format below: Revenues Expenses = Net income Start with every revenue account you closed out (bottom right quadrant of the super-T). Note what the amount was that you closed out during the first closing entry (this is where trail numbers come in handy). Record this amount on your income statement as revenue. Do the same thing with the expense accounts (bottom left quadrant of the super-T). Note what the amount was that you closed out in each account during the second closing entry. List these individual expenses on the income statement as expenses. Subtract the expenses from the revenue to determine the net profit or loss. Check your income statement against the one following.

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Sammys Parking INCOME STATEMENT For the month of February 28

Parking Revenue Earned Less Expenses: Salaries Advertising Repairs Light & power Interest Net income before tax Less: Income tax Net income after tax
BALANCE SHEET

$ 14,641

$ 9,908 980 560 345 475

12,268 2,373 (475) $ 1,898

With all of the closing entries and the income statement completed, you can now use the accounts located in the top quadrants of the super-T to complete the balance sheet. The general format of the balance sheet is as follows: Assets = Liabilities + Equity Remember your assets will include both current and long-term assets. Likewise, your liabilities will include current and long-term liabilities. In the equity section, you typically start out with the balance from last periods retained earnings account and perform the following calculation: Last periods retained earnings E/B + Net income/Loss after tax = This periods retained earnings E/B In this case, the opening balance in retained earnings was zero since it is the first year of operations. As a result, the calculation is not needed. Check your balance sheet against the following:

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Sammys Parking BALANCE SHEET As of February 28 ASSETS

Current assets: Cash Accounts receivable Total current assets Land Total assets
LIABILITIES & EQUITY

8,573 675 9,248 80,000

$ 89,248

Liabilities: Bank loan Income tax payable Shareholders equity: Common stock Retained earnings Total liabilities & equity

$ 62,875 475

$ 63,350

24,000 1,898

25,898 $ 89,248

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Sammys Parking SUPER-T ASSETS Cash 24,000 (1) 63,000 (2) (3) (4) 6,826 (5) (6) (7) (8) (9) 7,140 (10) (12) (13) (4) 8,573 E/B Land 80,000 (3) 80,000 980 3,684 560 3,724 2,500 345 475 125 LIABILITIES & EQUITY Bank Loan (2) 63,000 125 (14) 62,875 Income Tax Payable (C3) 475

Accounts Receivable 675 (11)

S. Bavaro, Capital (1) 24,000

Retained Earnings (C3) 1,898

Balance Sheet
EXPENSES Advertising Expense 980 (4) (C2) 980 Salaries Expense 3,684 (6) 3,724 (8) 2,500 (9) 9,908 T/B (C2) 9,908 REVENUES Parking Revenue Earned (5) 6,826 (10) 7,140 (11) 675 T/B 14,641 14,641 (C1)

Repairs Expense 560 (7) (C2) 560

Interest Expense 475 (13) (C2) 475

Light & Power Expense 345 (12) (C2) 345

Income Tax Expense 475 (C3) (C4) 475

Income Summary (C1) 14,641 980 (C2) 9,908 (C2) 560 (C2) 345 (C2) 475 (C2) T/B 2,373 475 (C3) T/B 1,898 1,898 (C5)

Income Statement

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FINISHED? UNDERSTAND? QUESTIONS?

If youve completed up to this point, youve finished the lab. If you are still having difficulties, you can check the following Tutorial 1 FAQ page to see if an instructor has posted a response to a similar question. If you dont see that question there, dont hesitate to contact your instructor by email.

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TUTORIAL 1 FAQ PAGE

This page contains instructors responses to your common questions. If you want the answer to a question not discussed here, contact your instructor by email.
1.1 Question:

I was wondering if it is important what order I list expenses on the income statement.
1.1 Answer:

No, any order is fine.