
1.
Prepare the income statement and the statement of
1.

Explanation of Solution
Income statement:
Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.
Prepare the income statement for the year ended 31st December 2017.
Construction T | ||
Income statement | ||
For the year ended December 31, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Revenues | ||
Professional fees earned | 97,000 | |
Rent earned | 14,000 | |
Dividends earned | 2,000 | |
Interest earned | 2,100 | |
Total revenue | 115,100 | |
Expenses | ||
11,000 | ||
Depreciation expense, Equipment | 6,000 | |
Wages expense | 32,000 | |
Interest expense | 5,100 | |
Insurance expense | 10,000 | |
Rent expense | 13,400 | |
Supplies expense | 7,400 | |
Postage expense | 4,200 | |
Property taxes expense | 5,000 | |
Repairs expense | 8,900 | |
Telephone expense | 3,200 | |
Utilities expense | 4,600 | |
Total Expenses | 110,800 | |
Net income | 4,300 |
Table (1)
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 the statement of retained earnings for the year ended 31st December 2017.
Construction T | ||
Statement of Retained Earnings | ||
For the year ended 31st December 2017 | ||
Particulars | Amount ($) | Amount ($) |
Retained earnings, Beginning | 121,400 | |
Add: Net income | 4,300 | |
Subtotal | 125,700 | |
Less: Dividends | 13,000 | |
Retained earnings, Ending | 112,700 |
Table (2)
Balance sheet:
This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
Prepare the balance sheet as on 31st December 2017.
Construction T | ||
Balance Sheet | ||
As an December 31, 2017 | ||
Particulars | Amount($) | Amount($) |
ASSETS | ||
Current Assets: | ||
Cash | 5,000 | |
Short-term investment | 23,000 | |
Supplies | 8,100 | |
Prepaid insurance | 7,000 | |
Total Current Assets | 43,100 | |
Equipment | 40,000 | |
Less: | 20,000 | 20,000 |
Building | 150,000 | |
Accumulated depreciation, Building | 50,000 | 100,000 |
Land | 55,000 | |
Total plant and Assets | 175,000 | |
Total assets | 218,100 | |
LIABILITIES | ||
Current Liabilities: | ||
Accounts payable | 16,500 | |
Interest payable | 2,500 | |
Rent payable | 3,500 | |
Wages payable | 2,500 | |
Property tax payable | 900 | |
Unearned professional fees | 7,500 | |
Current portion of long-term note payable | 7,000 | |
Total current liabilities | 40,400 | |
Long-liabilities: | ||
Long-term notes payable | 60,000 | |
Total liabilities | 100,400 | |
Stockholders’ equity | ||
Paid-in capital | ||
Common stock | 5,000 | |
Retained earnings | 112,700 | |
Total Stockholders’ Equity | 117,700 | |
Total liabilities and Stockholders’ Equity | 218,100 |
Table (3)
2.
Prepare the closing entries at December 31, 2017.
2.

Explanation of Solution
Closing
Prepare the closing entry for revenue accounts.
Date | Accounts title and explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Professional fee earned | 97,000 | ||
Rent earned | 14,000 | |||
Dividends earned | 2,000 | |||
Interest earned | 2,100 | |||
Income summary | 115,100 | |||
(To close the revenues account) |
Table (4)
In this closing entry, revenue accounts are closed by transferring the amount of revenue accounts to the income summary account in order to bring the revenue account balance to zero. Hence, debit the revenue accounts and credit income summary account.
Prepare the closing entry for expenses account.
Date | Accounts title and explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Income summary | 54,700 | ||
Depreciation expense-Building | 11,000 | |||
Depreciation expense- Equipment | 6,000 | |||
Wages expense | 32,000 | |||
Interest expense | 5,100 | |||
Insurance expense | 10,000 | |||
Rent expense | 13,400 | |||
Supplies expense | 7,400 | |||
Postage expense | 4,200 | |||
Property taxes expense | 5,000 | |||
Repairs expense | 8,900 | |||
Telephone expense | 3,200 | |||
Utilities expense | 4,600 | |||
(To close the expenses account) |
Table (5)
In this closing entry, expenses account is closed by transferring the amount of expenses to the income summary in order to bring the expenses account balance to zero. Hence, debit the income summary account and credit all expenses account.
Prepare closing entry for income summary account.
Date | Accounts title and explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Income Summary | 4,300 | ||
Retained Earnings | 4,300 | |||
(To close the income summary account) |
Table (6)
Closing entry of income summary account:
On December 31, total revenues are $115,100 and total expenses are $110,800. Close the Income Summary account to the Retained Earnings account.
Therefore, credit balance of the Income Summary account of $4,300 is closed to Retained Earnings.
In this closing entry, income summary account is closed by transferring the amount of income summary (profit) to the retained earnings in order to bring the income summary account balance to zero. Hence, debit the income summary account and credit retained earnings account.
Prepare closing entry for dividend account.
Date | Accounts title and explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Retained Earnings | 13,000 | ||
Dividends | 13,000 | |||
(To close the dividends account) |
Table (7)
In this closing entry, dividend account is closed by transferring the amount of dividend to the retained earnings in order to bring the dividend account balance to zero. Hence, debit the retained earnings account and credit dividend account.
3.
Compute:
a. Return on assets
b. Debt ratio
c. Profit margin ratio
d.
3.

Explanation of Solution
a. Return on asset ratio:
Return on assets indicates the company’s overall profitability by excluding specific sources of finance. The Profitability is achieved through a high profit margin or a high turnover or a combination of both.
Formula for calculating the return on asset:
Compute the return on asset ratio:
Thus, the return on asset ratio is 0.021 or 2.1%.
b. Debt ratio:
Debt to asset ratio is the ratio between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.
Formula for calculating the debt ratio:
Compute the debt ratio:
Thus, the debt ratio is 0.46.
c. Profit margin ratio:
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:
Hence, the profit margin ratio is 3.7%.
d. current ratio:
Current ratio
Current ratio is one of the
Calculate the current ratio:
Thus, the current ratio is 1.07:1.
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