Chapter 3, Problem 8PSA

1.

To determine

To prepare: Income statement, statement of retained earnings and classified balance sheet.

Explanation of Solution

Prepare income statement.

T Company
Income Statement
For Year Ended December 31, 2017
Particulars	Amount ($)	Amount ($)
Revenue:
Service revenue	111,000
Other revenue	4,100
Total Revenue		115,100
Expenses:
Insurance expense	10,000
Wages expense	32,000
Interest expense	5,100
Supplies expense	7,400
Rent expenses	13,400
Repairs expense	8,900
Telephone expense	3,200
Depreciation expense-Building	11,000
Depreciation expense-Equipment	6,000
Postage expense	4,200
Property taxes expense	5,000
Utilities expense	4,600
Total Expense		110,800
Net income		4,300

Net income is $4,300.

Working notes:

Calculation of service revenue,

$\begin{array}{c}\text{Service}\text{revenue}=\text{Professional}\text{fees}\text{earned}+\text{Rent}\text{earned}\\ =\$97,000+\$14,000\\ =\$111,000\end{array}$

Calculation of other revenue,

$\begin{array}{c}\text{Other}\text{revenue}=\text{Dividend}\text{earned}+\text{Interest}\text{earned}\\ =\$2,000+\$2,100\\ =\$4,100\end{array}$

Prepare Retained Earnings Statement:

T Company
Retained Earnings Statement
For Year Ended December 31, 2017
Particulars	Amount ($)
Retained earnings, December 1, 2017	121,400
Plus: Net income	4,300
	125,700
Less: Dividends	(13,000)
Retained earnings, December 31, 2017	112,700

Therefore, retained earnings are $112,700.

Prepare balance sheet:

T Company
Balance Sheet
As on December 31, 2017
Particulars	Amount ($)	Amount ($)
Assets
Current assets
Cash	5,000
Short-term Investment	23,000
Supplies	8,100
Prepaid Insurance	7,000	43,100
Property assets
Equipment	40,000
Less: Accumulated depreciation	(20,000)	20,000
Building	150,000
Less: Accumulated depreciation	(50,000)	100,000
Land		55,000
Total assets		218,100
Liabilities
Current liabilities
Accounts Payable	16,500
Rent Payable	3,500
Interest Payable	2,500
Wages payable	2,500
Property Taxes payable	900
Unearned professional fees	7,500	33,400
Long-term liabilities
Long-term notes payable		67,000
Total liabilities
Stockholder’s equity
Common Stock	5,000
Retained earnings	112,700
Total stockholders’ equity		117,700
Total liabilities and stockholder’s equity		218,100

Balance sheet total is $218,100.

2.

To determine

To prepare: Journal entries to close the temporary accounts.

Explanation of Solution

Service revenue transfer to income summary account for closing.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Service Revenue		115,100
	Income Summary			115,100
	(Being service revenue transfer to income summary account)

• Service revenue is revenue account. Since, revenue is transferred to income summary account, it reduces revenue. Hence, debit income summary account.
• Income summary is a temporary account. Since, it is used for closing revenue account. Hence, credit income summary account.

Expenses transfer to income summary account for closing.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Income summary		110,800
	Insurance Expense			10,000
	Wages Expense			32,000
	Supplies Expense			7,400
	Rent expenses			13,400
	Repairs Expense			8,900
	Telephone Expense			3,200
	Depreciation Expense-Equipment			6,000
	Depreciation Expense-Building			11,000
	Postage Expense			4,200
	Property taxes Expense			5,000
	Utilities Expense			4,600
	Interest Expense			5,100
	(Being all expenses transfer to income summary account)

• Income summary is a temporary account. Since, it is used for closing expense account. Hence, debit income summary account.
• Income summary account is used to transfer all expenses. Hence, credit all expenses.

Income summary transfer to retained earnings account for closing.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Income Summary		4,300
	Retained Earning			4,300
	(Being net income transfer to retained earnings)

• Income summary is a temporary account. Since, it is used for transferring net income summary to retained account. Hence, debit income summary account.
• Retained earnings come under stockholder’s equity. Since, retained earning has increased. Hence, credit retained earning account.

Payment of dividend to shareholder.

Date	Particulars	Post ref	Debit ($)	Credit ($)
Dec 31	Retained Earnings		13,000
	Dividend			13,000
	(Being dividend distributed)

• Retained earnings come under stockholder’s equity. Since, retained earnings is used to pay dividend, retained earnings has decreased. Hence, debit retained earnings account.
• Dividend is distributed from profit. Since it reduce retained earnings. Hence, credit dividend account.

3.

a.

To determine

Return on assets ratio.

Explanation of Solution

Formula to determine return on asset ratio:

$\text{Return}\text{on}\text{asset}=\frac{\text{Net}\text{income}}{\text{Total}\text{average}\text{asset}}$

Substitute net income for $4,300 and Total average asset for $209,050 (Working Note) in the above formula,

$\begin{array}{c}\text{Return}\text{on}\text{asset}=\frac{\$4,300}{\$209,050}\\ =0.021\end{array}$

Working Note:

Compute the total average asset,

$\begin{array}{c}\text{Total}\text{average}\text{asset}=\frac{\text{Opening}\text{total}\text{asset}+\text{Closing}\text{total}\text{asset}}{2}\\ =\frac{\text{\$200,000+\$218,100}}{\text{2}}\\ =\$209,050\end{array}$

Hence, return on asset of the company is 0.021.

b.

To determine

Debt ratio.

Explanation of Solution

Debt ratio

Formula to determine debt ratio:

$\text{Debt}\text{ratio}=\frac{\text{Total}\text{debt}\text{capital}}{\text{Total}\text{assets}}$

Substitute total debt capital for $67,000 and current assets for $218,100 in the above formula,

$\begin{array}{c}\text{Debt}\text{ratio}=\frac{\$67,000}{\$218,100}\\ =0.31\end{array}$

Hence, debt ratio of the company is 0.31.

c.

To determine

Profit margin ratio.

Explanation of Solution

Profit margin ratio

Formula to determine profit margin ratio:

$\text{Profit}\text{margin}=\frac{\text{Net}\text{income}}{\text{Service}\text{revenue}}\times 100$

Substitute net income for $4,300 and service revenue for $115,100 in the above formula,

$\begin{array}{c}\text{Profit}\text{margin}=\frac{\$4,300}{\$115,100}\times 100\\ =3.736\%\end{array}$

Hence, profit margin of the company is 3.736%.

d.

To determine

Current ratio.

Explanation of Solution

Current ratio

Formula to determine current ratio,

$\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Substitute current liabilities for $33,400 and current assets for $43,100 in the above formula,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$43,100}{\$33,400}\\ =1.29\end{array}$

Hence, current ratio of the company is 1.29.