Chapter 3, Problem 12E

Worksheet, Including Inventory Surian Motors Company prepared a trial balance on the following partially completed worksheet for the year ended December 31, 2019:

Additional information: (a) The equipment is being depreciated on a straight-line basis over a 10-year life, with no residual value; (b) salaries accrued but nor recorded total $500; (c) on January 1, 2019, the company had paid 3 years’ rent in advance at $100 per month; (d) bad debts are expected to be 1% of total sales; (e) interest of $400 has accrued on the note payable; and (f) the income tax rate is 40% on current income and will be paid in the first quarter of 2020.

Required:

1. 1. Complete the worksheet.
2. 2. Prepare financial statements for 2019.
3. 3. Prepare closing entries in the general journal.

To determine

Prepare the worksheet for the year ended December 31, 2019.

Explanation of Solution

Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form, having multiple columns and it is used in the adjustment process.

Prepare the worksheet for the year ended December 31, 2019:

Table (1)

To determine

Prepare the financial statements of Company S for the year ended December 31, 2019.

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 income statement of Company S for the year ended December 31, 2019:

Company S
Income statement
For the Year Ended December 31, 2019
Particulars	Amount($)	Amount($)
Sales revenue	45,000
Less: Cost of goods sold	(21,000)
Gross profit		24,000
Less: Operating expenses:
Salaries expense	7,600
Utilities expense	3,300
Advertising expense	4,400
Depreciation expense	3,000
Rent expense	1,200
Bad debt expense	450
Total operating expense		(19,950)
Income from operations		4,050
Other items:
Interest expense		(400)
Income before income taxes		3,650
Less: Income tax expense		(1,460)
Net income		$2,190
Earnings per share (1,000 shares)		$2.19

Table (2)

Working notes 1: Calculate the amount of salaries expense.

$\begin{array}{c}\text{Salaries expense= Salaries expense + Accrued salary}\\ =\$7,100+\$500\\ =\$7,600\end{array}$

Working note 2: Calculate the amount of rent expense.

$\begin{array}{c}\text{Rent expense = }\left(\begin{array}{l}\text{Rent for 1 month}\times \text{Period }\\ \text{from January 1 to December 31}\end{array}\right)\\ =\left(\text{\$100}\times 12\right)\\ =\$1,200\end{array}$

Working note 3: Calculate the amount of depreciation expense.

$\begin{array}{c}\text{Depreciation expense =}\left(\frac{\text{ Cost of office equipment}}{\text{Life of asset}}\right)\\ =\left(\frac{\text{ \$30,000}}{\text{10}}\right)\\ =\$3,000\end{array}$

Working note 4: Calculate the amount of income tax expense.

$\begin{array}{c}\text{Income tax=}\left(\begin{array}{l}\text{ Income before incom tax expense}\\ \times \text{Income tax rate}\end{array}\right)\\ =\$3,650\times 40\%\\ =\$1,460\end{array}$

Working note 5: Calculate the amount of bad debt expense.

$\begin{array}{c}\text{Bad debt expense = 1\% of total sales}\\ =\$45,000\times 1\%\\ =\$450\end{array}$

Working note 6: Calculate earnings per share.

$\begin{array}{c}\text{Earnings per share}\text{=}\frac{\text{Net income }}{\text{Number of Common stock oustanding}}\\ =\frac{\$2,190}{1,000}\\ =\$2.19\end{array}$

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare statement of retained earnings of Company S for the year ended December 31, 2019:

Company S
Statement of Retained Earnings
For the Year Ended December 31, 2019
Particulars	Amount ($)	Amount ($)
Retained earnings, January 1, 2019	10,200
Add: Net income	2,190
Subtotal		12,390
Less: Dividends		(1,000)
Retained earnings at December  31, 2019		$11,390

Table (3)

Balance Sheet:  Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company S for the year ended December 31, 2019:

Company S
Balance Sheet
As on December 31, 2019
Assets
Current assets:	Amount ($)	Amount ($)
Cash		2,500
Accounts receivable	4,000
Less: Allowance for doubt accounts	(750)	3,250
Inventory		8,200
Prepaid rent		2,400
Total current assets
Property, plant and equipment:
Equipment	30,000
Less: Accumulated depreciation	(15,000)
Net property, plant and equipment		15,000
Total assets		$31,350
Liabilities and Equity
Liabilities:
Current liabilities:
Accounts payable	3,700
Notes payable	5,000
Salaries payable	500
Interest payable	400
Income taxes payable	1,460
Total liabilities		11,060
Shareholders’ Equity
Contributed Capital:
Common stock	8,900
Retained earnings	11,390
Total shareholders’ equity		20,290
Total liabilities and shareholders’ equity		$31,350

Table (4)

To determine

Prepare the closing entries for the year ended December 31, 2019 in the general journal.

Explanation of Solution

Prepare the closing entries:

Date	Accounts title and explanation	Post Ref.	Debit	Credit
			($)	($)
December 31, 2019	Sales Revenue		45,000
	Income Summary			45,000
	(To close the revenue accounts)
December 31, 2019	Income Summary		42,810
	Cost of Goods Sold			21,000
	Salaries Expense			7,600
	Utilities Expense			3,300
	Advertising Expense			4,400
	Depreciation Expense			3,000
	Rent Expense			1,200
	Bad Debt Expense			450
	Interest Expense			400
	Income Tax Expense			1,460
	(To close the expense accounts)
December 31, 2019	Income Summary		2,190
	Retained Earnings			2,190
	(To close the income summary account)
December 31, 2019	Retained Earnings		1,000
	Dividends			1,000
	(To close the dividends account)

Table (5)