Chapter 3, Problem 8PSB

1.

To determine

To prepare:

Income statement, statement of retained earnings and classified balance sheet.

Explanation of Solution

Prepare income statement as follow:

A Company
Income Statement
For Year Ended December 31, 2015
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
Depreciation Expense-Building	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,

$\begin{array}{c}\text{Service}\text{revenue}=\text{Professional}\text{fees}\text{earned}+\text{Rent}\text{earned}\\ =\$59,600+\$4,500\\ =\$64,100\end{array}$

Calculation of other revenue,

$\begin{array}{c}\text{Other}\text{Revenue}=\text{Dividend}\text{Earned}+\text{Interest}\text{Earned}\\ =\$1\text{,000+\$1,320}\\ =\text{\$2,320}\end{array}$

Statement of retained Earnings

A. Company
Retained Earnings Statement
For Year Ended December 31, 2015
Particulars	Amount ($)
Opening balance of retained earnings	62,800
Net income	28,890
	91,690
Dividends	(8,000)
Ending balance of retained earnings	83,690

Therefore, retained earnings of A Company are $83,690.

Prepare balance sheet as follow:

A. Company
Balance sheet
As on December 31, 2015
Particulars	Amount ($)	Amount ($)
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: Accumulated depreciation	(4,000)	20,000
Building	100,000
Less: Accumulated depreciation	(10,000)	90,000
Land		30,500
Total Assets		164,700
Liabilities and Stockholder’s Equity
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 determine

To prepare:

Closing entries

Explanation of Solution

Service Revenue transfer to income summary account for closing.

Date	Account Title and Explanation	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	Account Title and Explanation	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	Account Title and Explanation	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.

Dividend paid to shareholders.

Date	Account Title and Explanation	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.

To determine

Return on assets ratio.

Explanation of Solution

Calculated info,

Net income is $28,890 (refer part 1).

Total average asset is $162,350 (working note).

Formula to calculate return on asset:

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

Substitute $28,890 for net income, and $162,350 for total average asset in the above formula,

$\begin{array}{c}\text{Return}\text{on}\text{Asset}=\frac{\$28,890}{\$162,350}\\ =0.178\end{array}$

Working Note:

Total average assets

$\begin{array}{c}\text{Total}\text{average}\text{asset}=\frac{\text{Opening}\text{total}\text{asset}+\text{Closing}\text{total}\text{asset}}{2}\\ =\frac{\$160,000+\$164,700}{2}\\ =\$162,350\end{array}$

Thus, return on asset of the company is 0.178.

b.

To determine

Debt ratio.

Explanation of Solution

Calculated info (refer part 1),

Total debt capital is $40,000.

Total assets are $164,000.

Formula to calculate debt ratio:

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

Substitute $40,000 for total debt capital, and $164,700 for total assets in the above formula,

$\begin{array}{c}\text{Debt}\text{ratio}=\frac{\$40,000}{\$164,700}\\ =0.24\end{array}$

Thus, debt ratio of the company is 0.24.

c.

To determine

Profit margin ratio.

Explanation of Solution

Calculated info (refer part 1),

Net income is $28,890.

Total revenue is $66,420.

Formula to calculate profit margin:

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

Substitute $28,890 for net income, and $66,420 for total revenue in the above formula,

$\begin{array}{c}\text{Profit}\text{margin}=\frac{\$28,890}{\$66,420}\times 100\\ =43.396\%\end{array}$

Thus, profit margin of the company is 43.396%.

d.

To determine

Current ratio.

Explanation of Solution

Calculated info (refer part 1),

Total current liabilities are $11,010.

Total current assets are $24,200.

Formula to calculate current ratio:

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

Substitute $11,010 for total liabilities, and $24,200 for current assets in the above formula,

$\begin{array}{c}\text{Current}\text{ratio}=\frac{\$11,010}{\$24,200}\\ =0.45\end{array}$

Thus, current ratio of the company is 0.45.