
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, 2015 | ||
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 $4,300.
Working notes:
Calculation of service revenue,
Calculation of other revenue,
Prepare statement of retained earnings:
T Company | |
---|---|
Statement of Retained Earnings | |
For Year Ended December 31, 2015 | |
Particulars | Amount ($) |
Retained earnings, December 1, 2015 | 121,400 |
Plus: Net income | 4,300 |
125,700 | |
Less: Dividends | (13,000) |
Retained earnings, December 31, 2015 | 112,700 |
Therefore, retained earnings are $112,700.
Prepare classified balance sheet:
T Company | ||
---|---|---|
Balance Sheet | ||
As on December 31, 2015 | ||
Particulars | Amount ($) |
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
Transfer service revenue 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.
Transfer expenses 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.
Dividend paid 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
Net income is $4,300 (refer part 1).
Formula to determine return on asset ratio:
Substitute $4,300 for net income and $209,050 for total average asset (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
Calculated info (refer part 1),
Debt capital is $67,000.
Total amount of assets is $218,000.
Debt ratio
Formula to determine debt ratio:
Substitute $67,000 for total debt capital and $218,100 for current assets in the above formula,
Hence, debt ratio of the company is 0.31.
c.
Profit margin ratio.
c.

Explanation of Solution
Calculated info (refer part 1),
Total amount of revenue is 115,100.
Net income is $4,300.
Profit margin ratio
Formula to determine profit margin ratio:
Substitute $4,300 for net income and $115,100 for service revenue in the above formula,
Hence, profit margin of the company is 3.736%.
d.
d.

Explanation of Solution
Calculated info (refer part 1),
Total amount of current assets is $43,100.
Total amount of current liabilities is $33,400.
Current ratio
Formula to determine current ratio,
Substitute $43,100 for current assets, and $33,400 for current liabilities in the above formula,
Hence, current ratio of the company is 1.29.
Want to see more full solutions like this?
- A company's Accounts Receivable balance at Dec. 31 was $120,000, and there was a debit balance of $600 in the Allowance for Doubtful Accounts. The firm estimates that 4% of the A/R will prove to be uncollectible. After the appropriate adjusting entry is made for estimated credit losses, what is the net realizable value of the accounts receivables at year-end?helparrow_forwardSeaside Manufacturing Incarrow_forwardnonearrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





