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Intermediate Accounting

Accounting Cycle Project

You have been engaged to perform accounting services for Herman and Sons Law
Offices. Your responsibilities include maintaining all accounting records and preparing
annual financial statements. Herman and Sons opened on January 1, 2015. During
the year, the firm had the following transactions:
1. January 2: The owners invested $325,000 into the business and acquired 25,000
shares of capital stock in return.
2. January 15: Herman and Sons took out a note for $100,000 from the bank to
finance the purchase of an office building.
3. January 15: Herman and Sons bought an office building in the amount of
4. February 12: Herman and Sons billed clients for $120,000 of services
5. March 1: Herman and Sons took out a two-year insurance policy, which it paid
cash for in the amount of $16,000.
6. March 10: Herman collected $20,000 from clients toward the outstanding
accounts receivable balance.
7. May 13: Herman received cash payments totaling $175,000 for legal services
$70,000 was for services previously billed to customers on February 12 and the
remainder was for services provided in May not yet recorded.
8. June 10: Herman purchased office supplies in the amount of $35,000, all of
which it paid on credit account with the supplier.
9. July 15: Herman paid wages of $50,000 in cash to office staff workers.
10.August 8: Herman paid the $15,000 owed to a supplier for the purchase made
on June 10.
11.September 3: Herman and Sons purchased $25,000 of office supplies in cash.
12.September 20: The company paid $9,000 cash for utilities.
13.October 1: Herman and Sons paid wages in the amount of $38,000 to office
14.December 1: Herman and Sons received cash payments from clients in the
amount of $200,000 for services to be performed in the upcoming months.
15.December 31: Herman declared and paid a $8,000 dividend.
Your first step is to analyze each transaction during Herman and Sons first year of
business and enter them into the accounting system. Specifically, you first perform
the following tasks.
a. Journalize the transactions for the year.
b. Post the transactions to the general ledger.
c. Prepare an unadjusted trial balance as of December 31.

Prepared by Dr. Elizabeth A. Gordon

Next, you begin to prepare the annual financial statements. Before preparing the
statements, you identify the following additional information.
Of the cash payments received from customers on December 1, 30% of these
services were performed in December and half relates to future services to be
rendered in the following year.
Ten months of the insurance policy expired by the end of the year.
Depreciation for the full year should be recorded on the building purchased. The
building has a 30-year life and no residual value. Depreciation will be recorded
on a straight-line basis.
A total of $10,000 of supplies remains on hand at the end of the year.
Interest expense in the amount of $6,000 should be accrued on the note payable.
Wages in the amount of $25,000 must be accrued at year end to be paid in
Using this additional information, you are able to make required adjusting journal
entries, prepare the financial statements and close the books for the year. To
accomplish these tasks, you must perform the following:

Journalize adjusting journal entries for Herman and Sons.

Post adjusting journal entries.
Prepare an adjusted trial balance as of December 31.
Prepare the financial statements including:
- A single-step income statement,
- A statement of changes in shareholders equity,
- A balance sheet, and
- A statement of cash flows.
h. Journalize and post the necessary closing entries at year-end.
i. Prepare a post-closing trial balance as of December 31, 2015.

Prepared by Dr. Elizabeth A. Gordon

You prepare the following chart of accounts for Herman and Sons Law Offices:

100: Assets

Chart of Accounts
Account #
Account Title

Accounts receivable
Office supplies
Prepaid insurance
Accumulated depreciation - building


Accounts payable
Unearned service revenue
Wages payable
Interest payable
Notes payable


Capital stock
Retained earnings
Dividends declared


Service revenue


Wage expense
Utilities expense
Selling expense
Administrative expense
Insurance expense
Supplies expense
Depreciation expense
Interest expense


Income summary

200: Liabilities

300: Equity

400: Revenues

500: Expenses

600: Other

Prepared by Dr. Elizabeth A. Gordon