Chapter 3, Problem 4AP

1 and 2

To determine

Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.

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	$0	(b)	$31,000
(a)	$60,000	(g)	$1,240
(d)	$13,200	(h)	$2,700
(e)	$2,400	(j)	$6,000
(i)	$10,000	(k)	$3,600
		(m)	$500
Ending balance	$40,560

Accounts receivable account:

Accounts receivable account
Beginning balance	$0	(i)	$10,000
(h)	$35,260
Ending balance	$25,260

Supplies account:

Supplies account
Beginning balance	$0
(a)	$12,000
(f)	$3,810
Ending balance	$15,810

Prepaid insurance account:

Prepaid insurance account
Beginning balance	0
(k)	$3,600
Ending balance	$3,600

Land account:

Land account
Beginning balance	$0
(a)	$90,000
Ending balance	$90,000

Barns account:

Barns account
Beginning balance	$0
(a)	$100,000
(b)	$62,000
Ending balance	$162,000

Accounts payable account:

Accounts payable account
		Beginning balance	0
		(f)	$3,810
(h)	$2,700	(l)	$1,800
		Ending balance	$2,910

Unearned revenue account:

Unearned revenue account
		Beginning balance	$0
		(e)	$2,400
		Ending balance	$2,400

Long-term note payable account:

Long-term note payable account
		Beginning balance	$0
		(b)	$31,000
		Ending balance	$31,000

Common stock account:

Common stock account
		Beginning balance	$0
		(a)	$150
		Ending balance	$150

Additional paid-in capital account:

Additional paid-in capital account
		Beginning balance	$0
		(a)	$261,850
		Ending balance	$261,850

Retained earnings account:

Retained earnings account
		Beginning balance	$0
(m)	$500
Ending balance	$500

Animal care service revenue account:

Animal care service revenue account
		Beginning balance	0
		(c)	$35,260
		Ending balance	$35,260

Rental revenue account:

Rental revenue account
		Beginning balance	0
		(d)	$13,200
		Ending balance	$13,200

Utilities expense account:

Utilities expense account
Beginning balance	0
(g)	$1,240
(l)	$1,800
Ending balance	$3,040

Wages expense account:

Wages expense account
Beginning balance	0
(j)	$6,000
Ending balance	$6,000

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

3.

To determine

Prepare an income statement for 30^th April 2014.

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:

Incorporation AS
Income statement
For the month ended 30th April 2014
Particulars	Amount ($)	Amount ($)
Revenues:
Animal care revenue	35,260
Rental revenue	13,200
Total revenues (A)		48,460
Expenses:
Wages expense	6,000
Utilities expense	3,040
Total expenses (B)		9,040
Net Income $\left(\text{A}-\text{B}\right)$		$39,420

Table (1)

Hence, the net income of Incorporation AS is $39,420.

4.

To determine

Write a memo to stockholders’ regarding the results of operations during the first month of the business.

Explanation of Solution

MEMO

From

XYZ

Incorporation AS

To

Stockholders’ of Incorporation AS

Incorporation AS

30^th April 2014

Sub: Results of operation during the first month of the business.

After the evaluation of effects of the transactions of Company KS, one can conclude that the company has earned a profit of $39,420. But, these are based upon unadjusted amounts. There are several expenses such as rent, supplies, depreciation, furniture and fixtures, interest on the borrowing and wages. The company does not seem to be profitable, as this situation is very common in small businesses during the inception of the operations. The company must focus on increasing revenues and while maintaining the expenses that should result in the upcoming years. The company should prepare budgeted cash flows for each month in the upcoming years that would help the management to handle the probable cash shortages.

Regards,

XYZ

5.

To determine

Compute the net profit margin ratio for each year and explain the reason for promotion to chief financial officer.

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 net sales revenue.

Compute the net profit margin ratio:

Net profit margin ratio for 2016:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$50,000}{\$450,000}\\ =0.111\end{array}$

Hence, the net profit margin ratio for the year 2016 is 0.111.

Net profit margin ratio for 2015:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$30,000}{\$400,000}\\ =0.0750\end{array}$

Hence, the net profit margin ratio for the year 2015 is 0.0750.

Net profit margin ratio for 2014:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net loss}}{\text{Net sales revenue}}\\ =\frac{\left(\$10,000\right)}{\$360,000}\\ =\left(0.0278\right)\end{array}$

Hence, the net profit margin ratio for the year 2014 is (0.0278).

• By evaluating the net profit margin ratio, it is clear that the profit level of the Company has increased.
• This states that the company is very efficient in generating the revenue from the sales and controlling the expenses.
• Based on the above reason, the company can promote him as the chief financial officer.