Question

Gerdes Psychological Services, Inc., closes its temporary accounts once each year on December 31. The company recently issued the following income statement as part of its annual report:

GERDES PSYCHOLOGICAL SERVICES, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR
Revenue:       
Counseling revenue        $270,000
Expenses:       
Advertising expense    $ 2,160   
Salaries expense    112,800   
Office supplies expense    1,440   
Utilities expense    1,020   
Malpractice insurance expense    7,200   
Office rent expense    28,800   
Continuing education expense    3,180   
Depreciation expense: fixtures    5,400   
Miscellaneous expense    7,200   
Income taxes expense    35,280    204,480
Net income        $ 65,520

The firm’s statement of retained earnings indicates that a $7,200 cash dividend was declared and paid during the current year.

   1. Prepare the necessary closing entries on December 31, current year.

2. If the firm’s Retained Earnings account had a $110,400 balance on January 1, current year, at what amount should Retained Earnings be reported in the firm’s balance sheet dated December 31, current year?

Answer 1

1) Closing entries

Date	account and explanation	Debit	Credit
Dec 31	Counseling revenue	270000
	Income summary		270000
	(to close revenue)
Dec 31	Income summary	204480
	Advertising expense		2160
	Salaries expense		112800
	Office supplies expense		1440
	Utilities expense		1020
	Malpractice insurance expense		7200
	Office rent expense		28800
	Continuing education expense		3180
	Depreciation expense: fixtures		5400
	Miscellaneous expense		7200
	Income tax expense		35280
	(To close expense)
Dec 31	Income summary	65520
	retained earnings		65520
	(To close net income)
Dec 31	Retained earnings	7200
	Dividend		7200
	(To close dividend)

2) Ending retained earnings = 110400+65520-7200 = 168720