Chapter 3, Problem 16E

1.

To determine

Identify the amounts for assets, liabilities, and stockholders’ equity.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\boxed{\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}}$

Identify the amount:

Assets	=	Liabilities	+	Stockholders’ Equity
3,200		2,400		800
8,000		5,600		4,000
6,400		1,600		3,200
$17,600		$9,600		$8,000

Table (1)

Note:

Assets include cash, accounts receivable, and long-term investments.

Liabilities include accounts payable, unearned revenue, and long-term note payable.

Stockholders’ equity includes common stock, additional paid-in capital, and retained earnings.

2

To determine

Prepare the T- account and enter the amount for the given transaction in their respective accounts.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a) The title of the account

b) The left or debit side

c) The right or credit side

Prepare the T-accounts:

Cash account:

Cash account
Beginning balance	$3,200	(d)	$57,200
(a)	$48,000	(g)	$480
(b)	$5,600
(c)	$400
(e)	$1,600
Ending balance	$1,120

Accounts receivable account:

Accounts receivable account
Beginning balance	$8,000	(b)	$5,600
(a)	$10,000
Ending balance	$12,400

Long-term investment account:

Long-term investment account
Beginning balance	$6,400
Ending balance	$6,400

Accounts payable account:

Accounts payable account
		Beginning balance	$2,400
(d)	$1,600	(f)	$800
		Ending balance	$1,600

Unearned revenue account:

Unearned revenue account
		Beginning balance	$5,600
		(e)	$1,600
		Ending balance	$7,200

Long-term note payable account:

Long-term note payable account
		Beginning balance	$1,600
		Ending balance	$1,600

Common stock account:

Common stock account
		Beginning balance	$800
		Ending balance	$800

Additional paid-in capital account:

Additional paid-in capital account
		Beginning balance	$4,000
		Ending balance	$4,000

Retained earnings account:

Retained earnings account
		Beginning balance	$3,200
(g)	$480
		Ending balance	$2,720

Consulting fees revenue account:

Consulting fees revenue account
		Beginning balance	0
		(a)	$58,000
		Ending balance	$58,000

Investment income account:

Investment income account
		Beginning balance	0
		(c)	$400
		Ending balance	$400

Wages expense account:

Wages expense account
Beginning balance	0
(d)	$36,000
Ending balance	$36,000

Travel expense account:

Travel expense account
Beginning balance	0
(d)	$12,000
Ending balance	$12,000

Utilities expense account:

Utilities expense account
Beginning balance	0
(f)	$800
Ending balance	$800

Rent expense account:

Rent expense account
Beginning balance	0
(d)	$7,600
Ending balance	$7,600

Thus, the t-accounts are prepared and the ending balances are calculated.

3.

To determine

Ascertain the amount for the given equations at the end of the 31^st December 2015.

Answer to Problem 16E

For the equation$\text{Revenues}-\text{Expenses}=\text{Net income}$:

$\begin{array}{c}\text{Revenue}-\text{Expenses}=\text{Net income}\\ \text{\$58,400}-\$56,400=\$2,000\end{array}$

For the equation$\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}$:

$\begin{array}{c}\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}\\ \$19,920=\$10,400+\$9,520\end{array}$

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.

Working note:

Calculate the revenues:

$\begin{array}{c}\text{Revenues}=\text{Revenue from sales}+\text{Revenue from investments}\\ =\$58,000+\$400\\ =\$58,400\end{array}$ (1)

Calculate the expenses:

$\begin{array}{c}\text{Expenses}=\left(\begin{array}{l}\text{Wages expenses}+\text{Utilities expenses}+\\ \text{Travel expenses}+\text{Rent expenes}\end{array}\right)\\ =\$36,000+\$800+12,000+\$7,600\\ =\$56,400\end{array}$ (2)

Calculate the net income:

Particulars	Amount($)	Amount ($)
Revenues	(1)58,400
Less: Expenses	(2)56,400
Net income		$2,000

Table (2)

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\boxed{\text{Assets = Liabilities + Stockholders' Equity}}$

Calculate the amount for the accounting equation:

Assets	=	Liabilities	+	Stockholders’ Equity
$1,120		$1,600		$800
$12,400		$7,200		$4,000
$6,400		$1,600		$2,720
				$2,000
$19,920	=	$10,400	+	$9,250

Table (3)

4.

To determine

Calculate the net profit margin ratio for 2015.

Explanation of Solution

Net profit margin ratio:

Net profit is the financial ratio that shows the relationship between the net profit and net sales (Operating revenue). Net profit is the difference between total operating revenue and total operating expenses. It can be calculated by dividing net profit and operating revenue.

Net profit margin ratio can be calculated by using the following formula:

$\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenues}}$

Calculate the net profit margin ratio for 2015:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$2,000}{\$58,000}\times 100\\ =3.\text{45\%}\end{array}$

Hence, the net profit margin ratio for the year 2015 is 3.45%.

• By computing the net profit margin ratio, Company KK net profit margin ratio is 3.45%. This indicates that there is an increase in the net profit margin ratio.
• Company KK has become effective in managing its sales and the expenses.