
Concept explainers
1.
To prepare: Income statement, statement of
1.

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 | |
| 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 $4,300.
Working notes:
Calculation of service revenue,
Calculation of other revenue,
Prepare Retained Earnings Statement:
T Company | ||
Retained Earnings Statement | ||
For Year Ended December 31, 2017 | ||
Particulars | Amount ($) | |
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: | (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 | ||
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 prepare:
2.

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.
Return on assets ratio.
3.
a.

Explanation of Solution
Formula to determine return on asset ratio:
Substitute net income for $4,300 and Total average asset for $209,050 (Working Note) in the above formula,
Working Note:
Compute the total average asset,
Hence, return on asset of the company is 0.021.
b.
Debt ratio.
b.

Explanation of Solution
Debt ratio
Formula to determine debt ratio:
Substitute total debt capital for $67,000 and current assets for $218,100 in the above formula,
Hence, debt ratio of the company is 0.31.
c.
Profit margin ratio.
c.

Explanation of Solution
Profit margin ratio
Formula to determine profit margin ratio:
Substitute net income for $4,300 and service revenue for $115,100 in the above formula,
Hence, profit margin of the company is 3.736%.
d.
d.

Explanation of Solution
Current ratio
Formula to determine current ratio,
Substitute current liabilities for $33,400 and current assets for $43,100 in the above formula,
Hence, current ratio of the company is 1.29.
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