Chapter 10, Problem 17E

1)

To determine

Record the given transactions.

Explanation of Solution

Record the given transactions:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 2, 2021	Cash		40,000
	Common stock $\left(2,000\text{shares}\times \$1\right)$			2,000
	Additional paid-in-capital (balance)			38,000
	(To record the issue of common stock)
January 9, 2021	Accounts receivable		14,300
	Service revenue			14,300
	(To record service revenue on account )
January 10, 2021	Supplies		4,900
	Accounts payable			4,900
	(To record supplies on account)
January 12, 2021	Treasury stock		18,000
	Cash			18,000
	(To record purchase of treasury stock )
January 15, 2021	Accounts payable		16,500
	Cash			16,500
	(To record payment of cash on account )
January 21, 2021	Cash		49,100
	Service revenue			49,100
	(To record service for cash)
January 22, 2021	Cash		16,600
	Accounts receivable			16,600
	(To record receipt of cash on account)
January 29, 2021	Dividends $\left(\left[10,000+2,000-1,000\right]\times \$0.30\right)$		3,300
	Dividends payable			3,300
	(To record declaration of dividend)
January 30, 2021	Cash		12,000
	Treasury stock			10,800
	Additional paid-in capital			1,200
	(To record resale of treasury stock)
January 31, 2021	Salaries expense		42,000
	Cash			42,000
	(To record the payment of monthly salaries)

Table (1)

2)

To determine

Record the given adjustment entries.

Explanation of Solution

Record the given adjustment entries:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2021	Utilities expenses		6,200
	Utilities payable			6,200
	(To record utilities adjustments)
January 31, 2021	Supplies expenses		7,300
	Supplies $\left(\$7,500+\$4,900-\$5,100\right)$			7,300
	(To record supplies adjustments)
January 31, 2021	Depreciation expense $\left[\$64,000-\$10,000\right]÷36\text{ months}$		1,500
	Accumulated depreciation			1,500
	(To record depreciation for January)
January 31, 2021	Income tax expense		2,000
	Income tax payable			2,000
	(To record the adjustment for income taxes)

Table (2)

3)

To determine

Prepare the adjusted trial balance as of January 31, 2021.

Explanation of Solution

Adjusted trial balance: Adjusted trial balance is that statement which contains complete list of accounts with their adjusted balances, after all relevant adjustments have been made. This statement is prepared at the end of every financial period.

Prepare the adjusted trial balance as of January 31, 2021:

GF Fireworks
Adjusted Trial balance
January 31, 2021
Accounts	Debit ($)	Credit ($)
Cash	$83,900
Accounts Receivable	42,200
Supplies	5,100
Equipment	64,000
Accumulated Depreciation		$10,500
Accounts Payable		3,000
Utilities Payable		6,200
Dividends Payable		3,300
Income Tax Payable		2,000
Common Stock		12,000
Additional Paid-in Capital		119,200
Retained Earnings		45,100
Dividends	3,300
Treasury Stock	7,200
Service Revenue		63,400
Salaries Expense	42,000
Utilities Expense	6,200
Supplies Expense	7,300
Depreciation Expense	1,500
Income Tax Expense	2,000
Totals	$264,700	$264,700

Table (3)

Working note:

Prepare the T-accounts for ending balances:

4)

To determine

Prepare an income statement for the period ended January 31, 2021.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for the period ended January 31, 2021:

GF Fireworks
Income statement
For the month ended January 31, 2021
Particulars	Amount ($)	Amount ($)
Service revenue		$63,400
Salaries expense	(42,000)
Utilities expense	(6,200)
Supplies expense	(7,300)
Depreciation expense	(1,500)	57,000
Income before taxes		6,400
Income tax expense		2,000
Net income		$ 4,400

Table (5)

Conclusion

Therefore, net income for the month of January is $4,400.

5)

To determine

Prepare a classified balance sheet as of January 31, 2021.

Explanation of Solution

Classified balance sheet: The main elements of balance sheet assets, liabilities, and stockholders’ equity are categorized or classified further into sections in a classified balance sheet. Assets are further classified as current assets, long-term investments, property, plant, and equipment (PPE), and intangible assets. Liabilities are classified into two sections current and long-term. Stockholders’ equity comprises of common stock and retained earnings. Thus, the classified balance sheet includes all the elements under different sections.

Prepare a classified balance sheet as of January 31, 2021:

GF Fireworks
Classified balance sheet
As on January 31, 2021
Assets		Liabilities and stockholders’ equity
Particulars	Amount  ($)	Particulars	Amount ($)
Current assets:		Liabilities
Cash	$ 83,900	Accounts payable	$3,000
Accounts receivable	42,200	Utilities payable	6,200
Supplies	5,100	Dividends payable	3,300
Total current assets	131,200	Income tax payable	2,000
		Total current liabilities	14,500
Long term assets:		Stockholders’ Equity
Equipment	64,000	Common stock	12,000
Less: Accumulated Depreciation	(10,500)	Additional paid-in capital	119,200
Equipment , net	$54,500	Retained earnings (1)	46,200
		Treasury stock	(7,200)
		Total stockholders’ equity	170,200
Total assets	$184,700	Total liabilities and stockholders’ equity	$184,700

Table (6)

Working note:

Compute the ending balance of retained earnings:

$\begin{array}{c}\text{Retained earnings = Beginning retained earnings + Net income}-\text{Dividends}\\ \text{= \$45,000}\text{+}\text{\$4,400}-\text{\$3,300}\\ \text{=}\text{\$46,200}\end{array}$

6)

To determine

Prepare the closing entries.

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare the closing entries:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 31, 2021	Service revenue		63,400
	Retained earnings			63,400
	(To record closing entries)
January 31, 2021	Retained earnings		59,000
	Salaries expense			42,000
	Utilities expense			6,200
	Supplies expense			7,300
	Depreciation expense			1,500
	Income tax expense			2,000
	(To record the closing entries)
January 31, 2021	Retained earnings		3,300
	Dividends			3,300
	(To record the closing entries)

Table (7)

7a)

To determine

Calculate the return on equity for the month of January. Compare it with the industry average of 2.5% and state whether the company more or less profitable than other companies in the same industry.

Explanation of Solution

Return on equity ratio: Rate of return on equity ratio is used to determine the relationship between the net income available for the common stockholders’ and the average common equity that is invested in the company.

$\text{Return on Equity}\text{=}\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$

Calculate the return on equity in 2021:

Given, the net income is $4,400 and beginning and ending stockholder’ equity are 135,100 and 170,200 respectively.

$\begin{array}{c}\text{Return on Equity}\text{=}\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}\\ =\frac{\$4,400}{\left(\$135,100+\$170,200\right)÷2}\\ =\frac{\$4,400}{\$152,650}\\ =2.9\%\end{array}$

Therefore, return on equity in January 2021 is 2.9%.

The industry average is 2.5%.

Conclusion

Therefore the company’s return on equity (2.9%) is more profitable than other companies in the same industry.

7b)

To determine

Identify the common stock outstanding as on January 31, 2021.

Explanation of Solution

Outstanding stock: The total number of shares that are authorized and issued by a public company, and are held by the stockholders or investors are referred to as outstanding stock.

Identify the common stock outstanding as on January 31, 2021:

Particulars	Shares
Common shares outstanding at beginning of January	10,000
Add: Shares issued during January	2,000
Less: Treasury stock	(1,000)
Add: Resell of treasury stock	­600
Common stock outstanding as on January 31, 2021	11,600

Table (8)

Conclusion

The common stock outstanding as on January 31, 2021 is 11,600.

7c)

To determine

Calculate earnings per share for the month of January.

Explanation of Solution

Earnings per share: Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.

$\text{Earnings Per Share}=\frac{\text{Net Income}}{\text{Average Number of common Shares Outstanding}}$

Calculate the projected earnings per share for 2021 before purchase of stock.

Given, net income is $4,400 and shares outstanding at the beginning and ending 10,000 and 11,600 respectively.

$\begin{array}{c}\text{Earnings Per Share}=\frac{\text{Net Income}}{\text{Average Number of common Shares Outstanding}}\\ =\frac{\$4,400}{\left(10,000+11,600\right)÷2}\\ =\frac{\$4,400}{10,800}\\ =\$0.41\end{array}$

Therefore, earnings’ per share January in 2021 is $0.41.