Chapter 3, Problem 6AP

1.

To determine

Journalize the given transactions.

Explanation of Solution

Journalize the given transactions:

Date	Account Title and Explanation	Debit ($)	Credit ($)
a	Property and equipment (+A)	$1,610
	Long-term notes payable (+L)		$1,610
	(To record the long-term notes payable)
b	Cash (+A)	$3,100
	Accounts receivable (-A)		$3,100
	(To record the receivables collected)
c	Utilities expense (+E) (-SE)	$3
	Cash (-A)		$3
	(To record the expenses paid)
d	Accounts receivable (+A)	$39,780
	Sales Revenue (+SE, +R)		$39,780
	(To record the expenses paid)
	Cost of Sales (+E) (-SE)	$5,984
	Inventory (-A)		$5,984
	(To record the cost involved in sales)
e	Wages (+E) (-SE)	$1,238
	Cash (-A)		$1,238
	(To record the wages paid)
f	Income tax payable (-L)	$9,545
	Cash (-A)		$9,545
	(To record the income taxes paid)
g	Inventory (+A)	$23
	Accounts payable (+L)		$23
	(To record the inventory purchased on account)
h	Prepaid expenses (+A)	$82
	Cash (-A)		$82
	(To record the expenses paid in advance)
i	Other long-term debt (-L)	$10
	Interest expense	$1
	Cash (-A)		$11
	(To record the debt paid off)
j	Other assets and intangibles (+A)	$6
	Cash (-A)		$6
	(To record the purchase of other assets and intangibles)

Table (1)

2

To determine

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

Explanation of Solution

Prepare the T-accounts:

Cash account:

Short-term investments account:

Accounts receivables account:

Inventories account:

Prepaid expenses account:

Other current assets account:

Long-term investments account:

Other assets and intangibles account:

Property and equipment account:

Short-term notes payable account:

Accounts payable account:

Income taxes payable account:

Long-term note payable account:

Other long-term debt account:

Common stock account:

Retained earnings account:

Sales revenue account:

Cost of sales account:

Utilities expense account:

Interest expense account:

Wage expense account:

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

3.

To determine

Prepare an income statement for the month of January.

Explanation of Solution

Prepare an income statement:

Corporation EM
Income statement
For the month ended 31st January
Particulars	Amount ($)	Amount ($)
Revenues:
Sales revenue		39,780
Expenses:
Cost of sales	5,984
Wage expense	1,238
Utilities expense	3
Total costs and expenses		7,225
Operating income		32,555
Less: Other expense
Interest expense		1
Net Income		$32,554

Table (2)

Hence, the net income of Company E is $32,554.

4.

To determine

Compute the net profit margin ratio and based on the result give suggestion to the company.

Explanation of Solution

Compute the net profit margin ratio:

$\begin{array}{c}\text{Net profit margin ratio}=\frac{\text{Net income}}{\text{Net sales revenue}}\\ =\frac{\$32,554}{\$39,780}\\ =0.8184\end{array}$

Hence, the net profit margin ratio is 0.82.

• By evaluating the net profit margin ratio, the company has earned $0.82 in net income for every $ 1 in the sales revenue.
• To know the better result about the company, net profit margin ratio should be calculated to identify the way in which the management is generating its revenue and controlling the various expenses.