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

Explanation of Solution
Income statement
A. Company | ||
Income Statement | ||
For year ended December 31, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Revenue: | ||
Service Revenue | 64,100 | |
Other Revenue | 2,320 | |
Total Revenue | 66,420 | |
Expenses: | ||
Insurance Expense | 1,525 | |
Wages Expense | 18,500 | |
Interest Expense | 1,550 | |
Supplies Expense | 1,000 | |
Rent expenses | 3,600 | |
Repairs Expense | 679 | |
Telephone Expense | 521 | |
2,000 | ||
Depreciation Expense-Equipment | 1,000 | |
Postage Expense | 410 | |
Property taxes Expense | 4,825 | |
Utilities Expense | 1,920 | |
Total Expense | 37,530 | |
Net income | 28,890 |
Thus, net income of A. Company is $28,890.
Working notes:
Calculation of service revenue,
Calculation of other revenue,
Retained Earnings Statement
A. Company | ||
Retained Earnings Statement | ||
For year ended December 31, 2017 | ||
Particulars | Amount ($) | |
Opening balance | 62,800 | |
Net income | 28,890 | |
Dividends | (8,000) | |
Retained earnings | 83,690 |
Therefore, retained earnings of A. Company are $83,690.
Balance Sheet
A. Company | ||
Balance sheet | ||
As on December 31, 2017 | ||
Particulars | Amount ($) | |
Assets | ||
Current Assets | ||
Cash | 7,400 | |
Short-term Investment | 11,200 | |
Supplies | 4,600 | |
Prepaid Insurance | 1,000 | 24,200 |
Plant Assets | ||
Equipment | 24,000 | |
Less: | (4,000) | 20,000 |
Building | 100,000 | |
Less: Accumulated depreciation | (10,000) | 90,000 |
Land | 30,500 | |
Total Assets | 164,700 | |
Liabilities and | ||
Current liabilities | ||
Accounts Payable | 3,500 | |
Rent Payable | 400 | |
Interest Payable | 1,750 | |
Wages payable | 1,280 | |
Property Taxes payable | 3,330 | |
Unearned professional fees | 750 | 11,010 |
Long-term liabilities | ||
Long-term notes payable | 40,000 | |
Stockholder’s Equity | ||
Common Stock | 30,000 | |
Retained earnings | 83,690 | |
Total stockholders’ equity | 113,690 | |
Total Liabilities and Stockholder’s equity | 164,700 |
Thus, balance sheet total is $164,700.
2.
To prepare: Closing entries
2.

Explanation of Solution
Service Revenue transfer to income summary account for closing.
Date | Particulars | Post ref | Debit ($) | Credit ($) |
December 31 | Service Revenue | 66,420 | ||
Income Summary | 66,420 | |||
(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 service revenue account.
- Income summary is a temporary account. Since, it is used for closing revenue account. Hence, credit income summary account.
All expenses transfer to income summary account for closing.
Date | Particulars | Post ref | Debit ($) | Credit ($) |
December 31 | Income summary | 37,530 | ||
Insurance Expense | 1,525 | |||
Wages Expense | 18,500 | |||
Supplies Expense | 1,550 | |||
Rent expenses | 1,000 | |||
Repairs Expense | 3,600 | |||
Telephone Expense | 679 | |||
Depreciation Expense-Equipment | 521 | |||
Depreciation Expense-Building | 2,000 | |||
Postage Expense | 1,000 | |||
Property taxes Expense | 410 | |||
Utilities Expense | 4,825 | |||
Interest Expense | 1,920 | |||
(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.
- All expenses are expenses. Since, expenses are transferred to income summary account, expenses is reduced. Hence, credit all expenses account
Income Summary transfer to retained earnings account for closing.
Date | Particulars | Post ref | Debit ($) | Credit ($) |
December 31 | Income Summary | 28,890 | ||
Retained Earning | 28,890 | |||
(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 ($) | Credit ($) |
December 31 | Retained Earnings | 8,000 | ||
Dividend | 8,000 | |||
(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
Total Average Assets
Return on Asset
Thus, return on asset of the company is 0.178.
b.
Debt ratio.
b.

Explanation of Solution
Debt Ratio
Thus, debt ratio of the company is 0.24.
c.
Profit margin ratio.
c.

Explanation of Solution
Profit Margin
Thus, profit margin of the company is 43.396%.
d.
d.

Explanation of Solution
Current Ratio
Thus, current ratio of the company is 0.45.
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