Chapter 4, Problem 2COMP

1, 2, 3 and 6.

To determine

Prepare T-accounts for the accounts on the trial balance and enter beginning balances.

Explanation of Solution

T-account: T-account refers to an individual account, where the increases or decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded. This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

(a)The title of the account

(b)The left or debit side

(c)The right or credit side

Prepare T-account (amounts in thousands).

Cash (A) account
Beginning Balance	$5	b	$18
a	20	e	28
c	5	f	3
d	56	h	11
g	8
j	3	k	10
Ending Balance	$27

Accounts Receivable (A) account
Beginning Balance	$4
d	14	g	$8
Ending Balance	$10

Supplies (A) account
Beginning Balance	$2
i	10	l	$8
Ending Balance	$4

Small Tools (A) account
Beginning Balance	$6
f	3
Ending Balance	$8

Equipment (A) account
Beginning Balance	$0
b	18
Ending Balance	$18

Accumulated Depreciation (XA) account
		Beginning Balance	$0
		m	2
		Ending Balance	$2

Other Assets (A) account
Beginning Balance	$9
Ending Balance	$9

Accounts Payable (L) account
h	11	Beginning Balance	$7
		e	7
		i	10
		Ending Balance	$13

Notes Payable (L) account
		Beginning Balance	$0
		a	20
		Ending Balance	$20

Dividends Payable (L) account
		Beginning Balance	$0
k-2	10	k-1	10
		Ending Balance	$0

Wages Payable (L) account
		Beginning Balance	$0
		o	3
		Ending Balance	$3

Interest Payable (L) account
		Beginning Balance	$0
		n	1
		Ending Balance	$1

Income Taxes Payable (L) account
		Beginning Balance	$0
		p	4
		Ending Balance	$4

Unearned Revenue (L) account
		Beginning Balance	$0
		j	3
		Ending Balance	$3

Common Stock (SE) account
		Beginning Balance	$6
		C	1
		Ending Balance	$7

Additional Paid-in Capital account
		Beginning Balance	$9
		c	4
		Ending Balance	$13

Retained Earnings (SE) account
		Beginning Balance	$$4
k	$10
		Closing entry	16
		Ending Balance	10

Service Revenue (R) account
		Beginning Balance	$0
Closing entry	$70	d	70
		Ending Balance	$0

Depreciation expense (E) account
Beginning Balance	$0
m	2	Closing entry	$2
Ending Balance	$0

Income Tax Expense (E) account
Beginning Balance	$0
p	4	Closing entry	$4
Ending Balance	$0

Interest Expense (E) account
Balance	$0
n	1	Closing entry	$1
Ending Balance	$0

Wages Expense (E) account
Beginning Balance	$0
e	27
o	3	Closing entry	30
Ending Balance	$0

Miscellaneous Expenses (E) account
Beginning Balance	$0
e	8
l	9	Closing entry	17
Ending Balance	$0

2.

To determine

Record journal entries for transactions (a) to (k).

Explanation of Solution

Journal entries for the transactions (a) to (k) are as follows:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
a)	Cash (+A)	20,000
	Notes Payable (+L)		20,000
	(Record cash borrowed on note)
b)	Equipment (+A)	18,000
	Cash (–A)		18,000
	(Record purchase of equipment)
c)	Cash (+A)	5,000
	Common Stock (+SE)		1,000
	Additional Paid-in Capital (+SE)		4,000
	(Record common stock issued for cash)
d)	Cash (+A)	56,000
	Accounts Receivable (+A)	14,000
	Service Revenue (+R, +SE)		70,000
	(Record service revenue earned during the year 2020)
e)	Wages expenses (–E, –SE)	27,000
	Miscellaneous Expenses (–E, –SE)	8,000
	Accounts Payable (+L)		7,000
	Cash (–A)		28,000
	Record expenses incurred and paid)
f)	Small Tools (+A)	3,000
	Cash (–A)		3,000
	(Record purchase of assets)
g)	Cash (+A)	8,000
	Accounts Receivable (–A)		8,000
	(Record cash collected on account)
h)	Accounts Payable (–L)	11,000
	Cash (–A)		11,000
	(Record cash paid to creditors)
i)	Supplies (+A)	10,000
	Accounts Payable (+L)		10,000
	(Record supplies purchased on account)
j)	Cash (+A)	3,000
	Unearned Revenue (+L)		3,000
	(Record receipt of unearned revenue)
k-1)	Retained Earnings (–SE)	10,000
	Dividends Payable (+L)		10,000
	(Record dividends declared)
k-2)	Dividends Payable (–L)	10,000
	Cash (–A)		10,000
	(Record payment of declared dividends)

Table (1)

3.

To determine

Record adjusting journal entries (l) to (p).

Explanation of Solution

Prepare adjusting journal entries (l) to (p).

Date	Account Titles and Explanation	Debit ($)	Credit ($)
l.	Miscellaneous Expenses (+E, –SE)	9,000
	Supplies(–A) $(\$12,000-\$4,000)$		8,000
	Small Tools (–A) $(\$9,000-\$8,000)$		1,000
	(Record consumption of supplies and small tools)
m.	Depreciation Expense (+E, –SE)	2,000
	Accumulated Depreciation (+XA, –A)		2,000
	(Record adjusting entry for depreciation expense)
n.	Interest Expense (+E, –SE) $\left(\$20,000\times \frac{10}{100}\times \frac{6}{12}\right)$	1,000
	Interest Payable(+L)		1,000
	(Record the adjusting entry for interest expense)
o.	Wages Expense (+E, –SE)	3,000
	Wages Payable (+L)		3,000
	(Record the adjusting entry for wages expenses)
p.	Income Tax Expense (+E, –SE)	4,000
	Income Tax Payable(+L)		4,000
	(Record the adjusting entry for income tax expense)

Table (2)

4.

To determine

Prepare an income statement, statement of stockholders’ equity, and balance sheet.

Explanation of Solution

Prepare an income statement for the year ended December 31, 2020.

Incorporation FR
Income statement
For the Year Ended December 31, 2020
Particulars	Amount ($)
Operating Revenues:
Service revenue	$70,000
Operating Expenses:
Depreciation expense	2,000
Wages expense	30,000
Miscellaneous expenses	17,000
Total operating expenses	49,000
Operating income	21,000
Other item:
Interest expense	1,000
Pretax income	20,000
Income tax expense	4,000
Net income	16,000
Earnings per share $\left(\frac{\$16,000}{70,000\text{shares}}\right)$	$0.23

Table (3)

Prepare a statement of stockholders’ equity.

Incorporation FR
Statement of stockholders’ equity
For the Year Ended December 31, 2020
Particulars	Common Stock	Additional Paid-in Capital	Retained Earnings	Total Stockholders' Equity
Balance, January 1, 2020	$6,000	$9,000	$4,000	$19,000
Additional stock issuance	1,000	4,000		5,000
Net income			16,000	16,000
Dividends declared			(10,000)	(10,000)
Balance, December 31, 2020	$7,000	$13,000	$10,000	$30,000

Table (4)

Prepare a balance sheet for the year December 31, 2020.

Incorporation FR
Balance Sheet
At December 31, 2020
Assets	Amount ($)	Liabilities and Stockholders’ Equity	Amount ($)
Current Assets:		Current Liabilities:
Cash	27,000	Accounts payable	13,000
Accounts receivable	10,000	Notes payable	20,000
Supplies	4,000	Interest payable	1,000
Small tools	8,000	Wages payable	3,000
Total current assets	49,000	Income taxes payable	4,000
		Unearned revenue	3,000
Equipment	18,000	Total current liabilities	44,000
Less: Accumulated depreciation	(2,000)	Stockholders' Equity:
Net book value	16,000	Common stock	7,000
		Additional paid-in capital	13,000
Other noncurrent assets	9,000	Retained earnings	10,000
		Total stockholders' equity	30,000
Total assets	74,000	Total liabilities and stockholders' equity	74,000

Table (5)

5.

To determine

Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect.

Explanation of Solution

Identify the type of transaction for (a) to (k) for the statement of cash flows and the direction and the amount of the effect.

Transaction	Type of Effect on Cash Flows	Direction and Amount of Effect
a.	F	+20,000
b.	I	–18,000
c.	F	+5,000
d.	O	+56,000
e.	O	–28,000
f.	O	–3,000
g.	O	+8,000
h.	O	–11,000
i.	NE	NE
j.	O	+3,000
k-1.	NE	NE
k-2.	F	–10,000

Table (6)

Statement of cash flow: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities. Operating activities include cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

Cash flows from investing activities:

The following amounts are to be adjusted from net income to calculate the cash flows from the operating activities:

• Deduct increase in current assets.
• Deduct decrease in current liabilities.
• Add decrease in current assets.
• Add the increase in current liability.
• Add depreciation expense.
• Add loss on sale of plant assets.
• Less gain on sale of plant assets.

Cash flows from investing activities:

• Deduct the amount of cash used to purchase any fixed assets from cash flows from investing activities to calculate the net cash provided or used for investing activities.
• Add the amount of cash received from the sale of any fixed assets to cash flows from investing activities to calculate the net cash provided or used from investing activities.

Cash flows from financing activities:

• Add the amount of cash received from any source of finance like amount from stockholders, debenture holders, or from any fixed liability to the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
• Deduct the payment of dividend and interest from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.
• Deduct the amount of cash paid to purchase the treasury stocks from the cash flows from financing activities to calculate the net cash used or provided by the financing activities.

6.

To determine

Prepare the closing entry for Incorporation FR on December 31, 2020.

Explanation of Solution

Prepare closing entries for Incorporation FR on December 31, 2020.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31, 2020	Service Revenue(–R)	70,000
	Retained Earnings(+SE)		16,000
	Depreciation Expense(–E)		2,000
	Interest Expense (–E)		1,000
	Income Tax Expense(–E)		4,000
	Wages Expense(–E)		30,000
	Miscellaneous expenses (–E)		4,000
	(Record the closing entries)

Table (7)

For closing of temporary accounts, the balances of revenues, expenses, and dividend accounts will be transferred to retained earnings in order to bring zero balance for expenses and revenues accounts.

7.

To determine

Ascertain the current ratio, total asset turnover and net profit margin and explain the results to suggest about the Company FR.

Explanation of Solution

a.

Calculate current ratio.

$\begin{array}{c}\text{Current ratio=}\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$49,000}{\$44,000}\\ =1.11:1\end{array}$

The current ratio of Incorporation FR suggests that its current assets are sufficient to pay current liabilities.

b.

Calculate total asset turnover.

$\begin{array}{c}\text{Total asset turnover = }\frac{\text{Sales}}{\text{ Average total assets}}\\ =\frac{\$70,000}{\left(\$26,000+\$74,000\right)÷2}\\ =\frac{\$70,000}{\$50,000}\\ =1.40\end{array}$

The total asset turnover ratio of Incorporation FR suggests that the total asset turnover ratio has generated $1.40 for every dollar of assets.

c.

Calculate net profit margin.

$\begin{array}{c}\text{Net profit margin = }\frac{\text{Net income }}{\text{Sales}}\\ =\frac{\$16,000}{\$70,000}\\ \text{=0}\text{.23 or 23\%}\end{array}$

The net profit margin of Incorporation FR suggests that the net profit margin earns $0.23 for every dollar in sales that it generates.