Company Trial Balance and Financial Statements Question

by Anonymous

Before you begin: It's really important when you're preparing for tests and exams to make sure you not only answer questions correctly but also do so at the right speed (especially important for long exercises like this). So please time yourself while attempting this exercise.

Difficulty Rating:
Intermediate --> Advanced

Time limit:
75 minutes

The trial balance of Palicio Security Services Inc. as of January 1, 2016 had the following normal balances:

Cash 74,210
Accounts receivable 13,500
Supplies 200
Prepaid rent 3,200
Merchandise inventory (24 @ $265; 1 @ $260) 6,620
Land 4000
Accounts payable 1,950
Unearned revenue 980
Salaries payable 1,000
Common stock 50,000
Retained earnings 47,800

The following transactions took place during 2016 for Palicio Security Services:
1. Paid the salaries payable from 2015.
2. On March 1, 2016, Palicio established a $100 petty cash fund to handle small expenditures.
3. Paid $4,800 on May 1, 2016, for one year's lease on the company van in advance.
4. Paid $7,200 on May 2,2016 for one year's office rent in advance.
5. Purchased $400 of supplies on account.
6. Purchased 100 alarm systems for $28,000 cash during the year.
7. Sold 102 alarm systems for $57,120. All sales were on account.
(Compute cost of goods sold using the FIFO cost flow method)
8. Paid $2,100 on accounts payable during the year.
9. Replenished the petty cash fund on August 1. At this time, the petty cash fund had only $7 of currency left. It contained the following receipts: office supplies expense $23, cutting grass $55, and miscellaneous $14.
10. Billed $52,000 of monitoring services for the year.
11. Paid installers and other employees a total of $25,000 cash for salaries.
12. Collected $89,300 of accounts receivable during the year.
13. Paid $3,600 of advertising expense during the year.
14. Paid $2,500 of utilities expense for the year.
15. Paid a dividend of $10,000 to the shareholders.

1. Prepare the trial balance as at Dec 31, 2016 for Palicio Security Services Inc.
2. Prepare the income statement, statement of changes in equity and balance sheet for Palicio Security Services Inc.

This is actually a pretty tricky and advanced accounting question. You should only try it if you have a pretty good understanding of the following topics (click for a tutorial on each):prepaid income and expensesAdditionally, this question also deals with prepaid expenses and income received in advance, which are concepts I don’t go into detail about on this website (I only cover these topics in detail in my basic accounting books).

Here are some brief explanations though: Prepaid expenses are expenses you paid too early. Because it is paid too early it is as if you are owed the amount you
paid, and the prepaid expense essentially is a debtor/receivable (an asset account).

In a similar way, income earned in advance means you have been paid money before delivering the services/products, and so it is as if you owe this amount. Thus, income earned in advance is a creditor/payable.

Note also that in this exercise we are dealing with a company or corporation, not a simple sole proprietor. With a corporation there are some new terms and concepts.

company shareholders diagram

First of all there are many owners in a corporation and these owners are called shareholders.

Also, each of the shareholders owns shares in the corporation, which is also known as common stock.

Finally, instead of “drawings,” we have dividends that are paid to all the shareholders from the accumulated profits (AKA retained earnings).

Okay, so now that we’ve cleared up all those terms, here’s the solutions, starting with the trial balance:

trial balance


** Cash includes $100 petty cash. Calculation of cash balance:
74,210 - 1,000 - 4,800 - 7,200 - 28,000 - 2,100 - (100 - 7) - 25,000 + 89,300 - 3,600 - 2,500 - 10,000
= 79,217

The opening balance of prepaid rent ($3,200) has been expensed out during 2016 as we have assumed this rent (that was paid the previous year) applies to the 2016 year. This is a likely assumption as there was a new prepaid rent cash payment on 2 May, 2016.

It is not stated in the question whether the unearned revenue of $980 at the beginning of 2016 was actually earned during the year. In this solution we have assumed that the unearned revenue still remains unearned at the end of 2016. However, it is quite acceptable to treat this as having been earned during 2016. If treating it as earned during 2016 one would add $980 to revenue and remove the unearned revenue account ($980 - $980).

accounting workbook

income statement

Calculation of Cost of Sales and Closing Inventory (FIFO Basis):

Opening Balance of Merchandise Inv. (24 Units @ $265 + 1 Unit @ $260) $6,620
Purchased during the year
100 Units @ $280 $28,000
Total available for sale
124 + 1 Units (125 Units) $34,620
Sold*(Cost of Sales)
102 Units $28,180
Closing Balance of Merchandise Inv.
23 Units @ $280 $6,440

*Cost of Sales
102 Units (24 Units @ $265) + (1 Unit @ $260) + (77 Units @ $280) = $28,180

statement of changes in equity

balance sheet

Note that the prepayments (prepaid office rent and prepaid motor lease) have been included under debtors/receivables. Likewise, the income received in advance (“unearned revenue” of $980) has been included under creditors/payables.

Hope you enjoyed this and got some good practice with the Company Trial Balance and Financial Statements Question!

Michael Celender

Return to the Financial Statements Tutorial

For more free exercises return to the Full Accounting Questions and Answers page.

And for exercises you can do at home get one of our official books: Accounting Basics: Workbook or Accounting Basics: Complete Guide!

Comments for Company Trial Balance and Financial Statements Question

Click here to add your own comments

by: Anonymous

why we treated cash in balance sheet

Confused with P & L Account
by: Tender

Are we supposed to add all total indirect expenses like lease and rent totaling 4800 and 7200 and did you miss including supplies of 600 under indirect expense? Thank you.

Hi there. The lease and rent payments have to be split between what are actual expenses for the current period (8/12 months of the year) versus the prepaid portion (4/12 months of next year). Hope that answers your question.

Regarding supplies, we started with $200 and purchased another $400. Since the question does not state how much of the supplies was used, one can only assume no supplies were used during the year. This is unusual but you have to follow the info the question gives. So at the end of the period we have $600 supplies (asset) and $0 supplies used during the year (expense).

Hope that helps!

Michael C.

Great Job!
by: Shaun

Thank you so much. This has made my revision sooooo much easier, thanks. You are great, man.

You're most welcome Shaun. Glad it helped!

Michael Celender
Founder of Accounting Basics for Students

Income statement
by: Anonymous

Would anyone please explain to me how we calculate the closing inventory. Why it turned out 24 units @ 280 instead of 77 units?? Thanks

by: Michael

Thanks for all the positive feedback guys!

- Michael Celender
Founder of Accounting Basics for Students

Well Presented
by: Anonymous

As a learner I'm very pleased. I wish I should always have such presentation in the learning environment in which I am in order to fully master the Accounting profession.

Thanks for your kind words.

You can tell your teachers and administrators that you want better teaching with clear presentations.

They can always make use of my accounting books at the school or college - they can be ordered through Amazon or local bookstores.

Michael Celender

office rent Exps
by: Anonymous

Thank you for the Exercise
I believe the Office Rent Exps showed on the Income Statement should be $4800 NOT $8000, where the monthly rent amount is $600 multiply with 8 Month (from May to Dec)

Best Regards


useful exercise
by: Anonymous

very very useful

"Accounts receivable" doubt
by: Anonymous

This is a brilliant piece of example. However, shouldn't Accounts receivable of 33,320 be included as a credit entry?

Thank you
by: Iva


Useful exercise
by: Elisaphan

This is a very important exercise

Student Excelling
by: Eriau

I AM very happy for helping me now understand trial balance and financial statements. I am very sure of excelling so as to fit well in accounting profession. Thank you.

by: Elis

Tks very much. only one question, you use the formal format for the statements?

Yes, use the more formal format if you can in tests/exams and definitely if practicing as an accountant.

- Michael Celender
Founder of Accounting Basics for Students

Financial Statements
by: Ana

This site is very helpful for the accounting students like me. And at last i got the solution from your site.

Good post
by: Annabell Jacobs

Thanks for your great article!

by: Renz

I have felt it very useful to me. You have helped me a lot to understand more about balance and financial statements. I am sure that this post will be very helpful for many people like me. Keep sharing such posts!

Accountant Adviser In Melbourne
by: Anonymous

Nice Post Thanks for sharing the blogs with us.

Journaling Queston
by: Anonymous

10. Billed $52,000 of monitoring services for the year. how do you journal this?

Question about journaling
by: Anonymous

3. Paid $4,800 on May 1, 2016, for one year's lease on the company van in advance. How do I journalize this?

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