Name Samiullah Rahman

Registration Number 912-2004012

Course Title Financial Accounting
Session Spring 2020, first semester
Assignment Major Assignment

Problem-1
Mr. Zaman Masood started his business under the name “Kabul Star Hotel” as proprietor on
December 1, 2019. The transactions related to business during December are as follows:
Dec1 The owner, Zaman Masood, invested $ 2,000,000 in his business.
Dec1 A room was rented to a corporation for six months at monthly rental of $5,000. The
entire six-month rental of $30,000 was collected in advance and credited to Unearned
Rental Revenue.
Dec1 A one-year fire insurance policy had been purchased and the premium of $24,000 for
entire life of the policy had been paid and recorded as Unexpired Insurance.
Dec10 Purchased building for $500,000 of which $150,000 was paid in cash and note
payable was issued for balance amount.
Dec15 Purchased office equipment for $20,000 on credit from Alpha Corporation.
Dec18 Borrowed $500,000 cash from the bank by signing a 90-day note payable.
Instructions:
1. Prepare Journal Entries of above transactions.
2. Post transactions to ledger & prepare Trial Balance.
 Answer Question#1

Step-1: journal, First book of original entry which record business transaction day by day in
order of date. And it is consisting of four steps identify number of account, determine category of
accounts, determine increase or decrease in account and the last one is apply debit and credit
rule. We should always consider sequence of account in eight steps of accounting cycle.
1)
general journal
Date, Description Post Debits Credits
Dec- Reference
2019
Dec1 Cash 01 $2,000,000
Capital 08 $ 2000,000
Invested by Owner, Zaman
Masood
Dec1 Cash 1 $ 30,000
Unearned rental revenue 05 $ 30,000
Rent collected in Advance Dec
Dec1 Unexpired insurance 04 $ 24,000
Cash 1 $ 24,000
To record one year Insurance
Dec10 Building 02 $ 500,000
Cash 01 $ 150,000
Note payable 06 $ 350,000
Purchased building on Cash & note
Dec15 Equipment 03 $ 20,000
Account payable 07 $ 20,000
Purchased equipment on credit
Dec18 Cash 01 $ 500,000
Note payable 06 $ 500,000
Borrowed Cash from Bank on Note

Step-2: ledger, it is second book of entry posted from journal and contains all classified record
of business transaction which keeps a separate record for each financial transaction also called T
Account. Shows an increase and decrease in a financial statement items, left is debit side and
right side is credit side
2) Ledger

Debit Cash#1 Credit Debit Building L#2 Credit

Dec1 2,000,000 Dec1 24,000 Dec10 500,000

Dec1 30,000 Dec10 150,000
Dec18 500,000

D/B 2356000
D/B 500,000

2530000 2530000 500,000 500,000

Debit Equipment L#3 Credit debit unexpired insurance L#4 Credit

Dec15 20,000 20,000 20,000

Dec1 24,000

D/B 20,000
D/B 24,000

24,000 24,000

20,000 20,000

Debit unearned rental Revenue L#5 Credit debit note payable L#6 credit
850,000 850,000
Dec1 30,000 Dec10 350,000
Dec18 500,000

C/B 30,000 C/B 850,000

30,000 30,000

Debit Acc/payable L#7 Credit Debit Capital L#8 Credit

Dec1 2000,000
Dec 15 20,000

C/B 20,000 C/B 2000,000

20,000 20,000
2000,000 2000,000
Step-3: Trial balance, when all the posting in the ledger has been made from journal, next is
preparation of trial balance, here we prove the accuracy of our work before proceeding further.it
contain all debit and credit balance of account appearing in ledger, here all the debit and credit
record in single sheet consist of two column schedule listing name and balance, and the total of
debit must be equal to total of credit. It includes both balance sheet and income statement.

Kabul Star Hotel

2) unadjusted Trial Balance
December 31,2019
Description Debit Credit
Cash 2,356,000
Building 500,000
Equipment 20,000
Note payable 850,000
Account payable 20,000
Capital 2,000,000
Unearned rental revenue 30,000
Unexpired insurance 24,000
Total 2900000 2900000
Problem #2
Kabul Star Hotel adjusts its accounts on monthly basis. Most guests pay at the time they check
out, and the amount collected are credited to Rental Revenue. A few guests pay in advance for
rooms and these amounts are credited to Unearned Rental Revenue at the time of receipt.
a: Salaries earned by employees but not paid amount to $20,000.
b: As of Dec 31, Kabul Star Hotel has earned $11,000 rental revenue but has not received
any amount yet.
c: On Dec 1, a room was rented to a corporation for six months at monthly rental of $5,000.
The entire six-month rental of $30,000 was collected in advance and credited to
Unearned Rental Revenue.
d: A Corolla Car to carry guest to and from airport had been rented on Dec 15, at daily rate
of $250. No rental payment has yet been made.
e: Depreciation on the Hotel’s building is based on an estimated useful life of 15 years. The
original cost of building was $500,000 and residual value of $50,000.
f: A one-year fire insurance policy had been purchased on Dec. 1, The premium of $24,000
for entire life of the policy had been paid on Dec. 1 and recorded as Unexpired Insurance.
Instructions:
1. Prepare adjusting entries of above transactions.
2. Prepare adjusted Trial Balance.
3. Prepare Financial Statements (Balance Sheet & Income Statement).
4. Prepare closing entries and prepare after closing trail balance.
Answer Question#2
Adjustment
Every adjusting entry involves the recognitions of either revenue or expenses; there must be also
corresponding change either in Assets or Liability. adjusting entry is based Accrual accounting,
not open monthly bills or month-end transaction.in some situation business activities affect the
revenue and expenses of multiple Accounting periods, hence at the end of current accounting
period we need to make adjusting entries to get the account up to date for the financial
statements. Every adjusting entry involves a change in either revenue or expenses and an asset or
liability. Adjusting entry falls into four categories. But can be more according to type of business
activities.
A-converting Assets to revenue: cash expenditure or cost that benefits more than one
accounting period, usually recorded by debiting, example supplies, expiring insurance policy
(unexpired or prepaid insurance) and depreciation. At the beginning of accounting period
transaction take place as paid future expenses in advance which create an asset, at the end of
current period adjusting entry take place which recognizes portion of asset consumed as
expenses, and reduces balance of asset account. Result from cash being paid prior to and
expenses being incurred. In cause of depreciation fixed asset which debit convert to accumulated
depreciation which is contra asset(credit), and cash asset which is credit convert to depreciation
expenses(debit) in adjusted entry. Depreciation expenses are equal to cost minus residual value
divided by number of estimated useful life.
B-converting liability to revenue: in some instance customer may pay in advance for service to
be rendered in later accounting period or business collect cash in advance for future service.
Revenue that benefits more than one accounting period are recorded as liability.
Transection recorded by debiting cash and by crediting a liability account typically called
unearned revenue. Adjusting entry made by allocating portion earned as revenue and reduces
balance of liability accounts. In adjusting entry liability recorded as debiting (unearned revenue)
and by crediting revenue earned.
C-Accruing unpaid expenses: in some instance expenses incurred in current accounting period
but still not paid by business, may pay in future period. The adjusting entry initially record
expenses account as debiting such as interest expenses, salary expenses and record related
liability as a crediting
Record expenses incurred at the end of current period and record liability for future payment.
Result from expenses being incurred before cash is paid. Initially an expenses and a liability
recorded.
D- Accruing uncollected revenue: in some causes we rendered our service to customer during
current period but have not received any revenue yet. And the business will collect cash in
future.
Require adjusting entry at the end of period, initially record the asset as a debit (ex, Account
receivable, interest receivable) and crediting revenue account such as service revenue earned or
interest earned. Result from revenue being earned before cash is received.

Step-4: in this question we use trial balance of previews question #1, means unadjusted trial
balance which already answered.
1) Adjusted entry

Date,Y Account title and explanation Debi Credit

t
Dec31 Salary expenses $20,000
Salary payable $20,000
a To record salary earned by employees but
not paid by Kabul star hotel
Rent receivable $11,000
b Rental revenue $11,000
To record revenue earned but not received
yet
Unearned rental revenue $5,000
c Rental revenue $5,000
To record earning of rent revenue which
has been received in
advance($30,000/6=$5000)
Corolla car rental expenses $4,250
Rent payable $4,250
d To record Accrue rent expenses for corolla
car for 17 days@$250
Depreciation expenses (hotel building) $2,500
e Accumulated depreciation (HB) 2,500
To record depreciation for Dec on hotel
building
($500,000-$50,000/15*12)=2,500
Insurance expenses $2,000
f Unexpired insurance $2,000
To record insurance expenses for Dec:
($24,000*1/12=2,000)
Step-5: After adjustment we need to prepare adjusted trial balance at the end of period by
considering all adjustment done so far. And we record the adjusted trial balance in the next
column of adjusted entry and the sum of debit and credit must be equal. In Adjusted trial balance
we record information from trial balance and adjusted entry by applying debit and credit balance
rules.

2) Kabul Star Hotel

Adjusted Trial Balance
As the December 31,2019
Description Trial balance Adjustment Adjusted trial balance
Debit Credit Debit Credit Debit Credit
Cash $2,356,000 - - - $2,356,000
Building $500,000 - - - $500,000
Equipment $20,000 - - - $20,000
Note payable - $850,000 - - - $850,000
Account payable - $20,000 - - - $20,000
Capital - $2,000,0 - - - $2,000,000
00
Unearned rental - $30,000 $5,000 - $25,000
revenue
Unexpired $24,000 - - $2,000 $22,000
insurance
Total 2,900,000 2,900,000
a) salary expenses $20,000 - $20,000
b) salary payable - $20,000 $20,000
c) rent receivable $11,000 $11,000
d) rental revenue - $16,000 $16,000
e) Corrola car $4,250 - $4,250
rental expenses
f) rent payable - $4,250 $4,250
g) depreciation $2,500 - $2,500
expenses
 h) - $2,500 $2,500
Less:Accumulated
depreciation
i) insurance $2,000 - $2,000
expenses
Total $2,937,750 $2,937,750

Step-6: After adjusted trial balance we prepare income statement which is statement of profit
and loss by using revenue and expenses, also we prepare balance sheet using Assets, Liability
and owner’s equity plus net income or need lost from income statement. In balance sheet also
total of asset must be equal to total of liability and owner’s equity.

Kabul Star Hotel

3) Income statement
As the December 31,2019
Revenue

Rental revenue $16,000

Less: expenses

Salary expenses $20,000

Corolla car rental expenses $4,250
Depreciation expenses $2,500
Insurance expenses $2,000
($28,750)
Net Loss ($12,750)

Kabul Star Hotel

3) Balance sheet
As the December 31,2019
Assets Liability & Owner’s Equity

Current Asset Liability

Cash $ 2,356,000
Unexpired insurance $ 22,000 Salary payable $20,000
Rent receivable $ 11,000 Rent payable $4,250
Non-current Asset Note payable $850,000
Building $ 500,000 Account payable $20,000
Less:Acc Depreciation ($2,500) Unearned rent revenue $25,000
$497,500 Total Liability $919,250
Equipment $ 20,000 Owner’s equity
Capital $2,000,000
Total Assets $2,906,500 Less: Net Loss ($12750)
$1,987,250
Total liability & owner’s equity $2,906,500

Step-7: closing entry, when we prepared financial statement, next step is closing entry, because
we have to close all temporary account or nominal account, we know that all temporary or
nominal account is consist of revenue and expenses we have to close those account, here the rule
is all credit such as revenue should enter to closing entry as debit, similarly all debit account such
as expenses should enter to closing entry as a credit.
Income summary Account: in cause of closing entry we prepare temporary account, is called
summary account. We create income summary in order to close all revenue and expenses, then
we have to close this income summary account into profit and loss account. Here we have to
create income summary account and then finished, this is why called temporary account.

4) Closing entry
Date Description Debit
Credit
Rental revenue $16,000
Income summary account $16,000
Income summary account $28,750
Salary expenses $20,000
Corolla car rental expenses $4,250
Depreciation expenses $2,500
Insurance expenses $2,000

Profit # Loss $12,750

Income summary account $12,750

We have closed all the temporary account, if we prepare ledger we can see that debit side is
equal to credit side. For example, we consider rental revenue, by entering the data into T-
Account we can see both debit and credit side will be equal, hence account closed. Similarly, we
can check for expenses. We closed all revenue and expenses account.
0
Debit Rental revenue L#1 Credit
$16000 $16,000
$16,000 $16,000

When we close revenue and expenses account, we should close income summary account also.
Debit income summary A/C Credit 0
$28,750 $16,000

D/B $12,750
$28,750 $28,750
To make both side of income summary account equal, we have to Credit $12,750.
In order to close income summary account, we have to consider profit and loss account. As we
can see from closing entry expenses is more compare to revenue.

Step 8: After closing trial balance, here we have to consider same sequence, which we
considered in adjusted trial balance. Start from Asset, Liability and last one owner’s equity
except revenue and expenses which already closed in profit and loss account. Instead of revenue
and expenses, here we consider profit and loss account

Kabul Star Hotel

4) After closing trial Balance
As the December 31,2019
Items Debit Credit
Cash $2,356,000
Building $500,000
Equipment $20,000
Unexpired insurance $22,000
Less: Accumulated depreciation $2,500
Rent receivable $11,000
Note payable $850,000
Account payable $20,000
Unearned rental revenue $25,000
Salary payable $20,000
Rent payable $4,250
Capital $12,750 $2,000,000
Profit and loss
Total $2921750 $2921750