Chapter 4, Problem 4APSA

To determine

Concept Introduction:

An Income statement:

An income statement can be defined as the statement explaining the company’s financial performance over a specific accounting period. The income or revenues are recorded on the income statement along with the expenses incurred for the period.

Statement of owner’s equity:

A statement of owner’s equity represents the changes in the capital of the owner of the business including the additions in form of net income and subtractions in the form of withdrawals.

Classified Balance sheet:

A balance sheets represents the financial position of a business in terms of its assets, liabilities and owner’s equity.

Post-trial balance after adjusting entries:

A post-trial balance after adjusting entries can be defined as the trial balance prepared after incorporating all the adjusting entries for the year.

Rate of Return on total assets:

Rate of Return on total assets can be defined as the ratio that measures a company’s earnings before interest and taxes (EBIT) against its total net assets or average total assets.

Rate of Return on total assets can be calculated as –

$\text{Rate of Return on Total Assets}=\frac{\text{Net Income}}{\text{Average Total assets}}$

Now, the average total assets are calculated as –

$\text{Average total assets}=\frac{\text{Beginning Total assets}+\text{Ending total assets}}{2}$

Debt-ratio:

Debt-ratio is the solvency ratio that measures a firm’s total liabilities as a percentage of its total assets. Debt ratio shows, a company’s ability to pay off it liabilities with its assets.

Debt – ratio is calculated as under –

$\text{Debt-ratio }=\frac{TotalLiabilities}{Total\text{ assets}}$

Current ratio:

The current ratio can be defined as the ratio of total current assets to total current liabilities. A current ratio is a measures that a company’s ability to pay short-term and long-term obligations.

A current ratio is calculated as under –

$Currentratio=\frac{Totalcurrentassets}{Totalcurrentliabilities}$

Requirement 1

To prepare:

1. Income statement

2. Statement of Owner’s equity

3. Classified balance sheet

Answer to Problem 4APSA

Solution:

1. Income statement –

Tybalt Construction
Income Statement
For the year Ended December, 2017
Revenues
Professional fees earned	97,000
Rent earned	14,000
Dividends earned	2,000
Interest Earned	2,100
Total Revenues		1,15,100
Less: Expenses
Depreciation expense - Building	11,000
Depreciation expense - Equipment	6,000
Wages Expense	32,000
Interest Expense	5,100
Insurance Expense	10,000
Rent Expense	13,400
Supplies Expense	7,400
Postage Expense	4,200
Property taxes Expense	5,000
Repairs Expense	8,900
Telephone Expense	3,200
Utilities expense	4,600
Total Expenses		1,10,800
Net Income		4,300

2. Statement of Owner’s Equity –

Tybalt Construction
Statement of Owner's Equity
For the year Ended December, 2017
Tybalt Capital, Beginning	1,26,400
Add: Net Income	4,300
Less: Tybalt, Withdrawals	13,000
Tybalt Capital, Ending	1,17,700

3. Classified Balance Sheet –

Tybalt Construction
Balance Sheet
For the year Ended December, 2017
Current Assets		Current Liabilities
Cash	5,000	Accounts Payable	16,500
Short-term Investments	23,000	Interest Payable	2,500
Supplies	8,100	Rent Payable	3,500
Prepaid Insurance	7,000	Wages Payable	2,500
		Property Taxes Payable	900
Total current assets	43,100	Unearned professional fess	7,500
		Current portion of Long-term notes payable	7,000
		Total current liabilities	40,400
Long-term assets
Equipment	40,000	Long-term liabilities and Owner's Equity
Less: Accumulated Depreciation	20,000	Long-term Liabilities
	20,000	Long-term notes payable	60,000
Building	150,000
Less: Accumulated Depreciation	50,000	Owner's Equity	117,700
	100,000
Land	55,000
Total Long-term assets	175,000	Total long-term liabilities and Owner's equity	177,700
Total Assets	218,100	Total liabilities and Owner's equity	218,100

Explanation of Solution

The income statement, statement of Owner’s equity and balance sheet are prepared as under –

1. Income Statement –

Given,

• Professional fees earned = $ 97,000

• Rent earned = $ 14,000

• Dividends earned = $ 2,000

• Interest Earned = $ 2,100

• Depreciation expense – Building = $ 11,000

• Depreciation expense – Equipment = $ 6,000

• Wages Expense = $ 32,000

• Interest Expense = $ 5,100

• Insurance Expense = $ 10,000

• Rent Expense = $ 13,400

• Supplies Expense = $ 7,400

• Postage Expense = $ 4,200

• Property taxes Expense = $ 5,000

• Repairs Expense = $ 8,900

• Telephone Expense = $ 3,200

• Utilities expense = $ 4,600

Now, the total revenues will be calculated -

$\begin{array}{l}Totalrevenues=Professionalfeesearned+Rentearned+Dividendsearned+InterestEarned\hfill \\ Totalrevenues=\$97,000+\$14,000+\$2,000+\$2,100\hfill \\ Totalrevenues=\$115,100\hfill \end{array}$

Total expenses –

$\begin{array}{l}TotalExpenses=\left(\begin{array}{l}Depreciationexpense–Building\\ +Depreciationexpense–Equipment+WagesExpense\\ +InterestExpense+InsuranceExpense+RentExpense\\ +SuppliesExpense+PostageExpense+PropertytaxesExpense\\ +RepairsExpense+TelephoneExpenses+Utilitiesexpense\end{array}\right)\hfill \\ TotalExpenses=\left(\begin{array}{l}\$11,000+\$6,000+\$32,000+\$5,100+\$10,000+\$13,400\\ +\$7,400+\$4,200+\$5,000+\$8,900+\$3,200+\$4,600\end{array}\right)\hfill \\ TotalExpenses=\$110,800\hfill \end{array}$

Net income will be calculated as –

$\begin{array}{l}NetIncome=TotalRevenues–TotalExpenses\hfill \\ NetIncome=\$115,100-\$110,800\hfill \\ NetIncome=\$4,300\hfill \end{array}$

Thus, the income statement has been prepared.

2. Statement of Owner’s equity –

Given,

• Tybalt Capital, Beginning = $ 126,400

• Net Income = $ 4,300

• Tybalt, Withdrawals = $ 13,000

$\begin{array}{l}TybaltCapital,Ending=TybaltCapital,Beginning+NetIncome-Withdrawals\hfill \\ TybaltCapital,Ending=\$126,400+4,300-\$13,000\hfill \\ TybaltCapital,Ending=\$117,700\hfill \end{array}$

Thus, the statements of owner’s equity has been prepared.

3. Classified Balance Sheet –

For Assets Section –

Given,

• Cash = $ 5,000

• Short-term Investments = $ 23,000

• Supplies = $ 8,100

• Prepaid Insurance = $ 7,000

• Equipment = $ 40,000

• Accumulated Depreciation – Equipment = $ 20,000

• Building = $ 150,000

• Accumulated Depreciation – Building = $ 50,000

• Land = $ 55,000

$\begin{array}{l}TotalCurrentassets=Cash+Short-termInvestments+Supplies+PrepaidInsurance\hfill \\ TotalCurrentassets=\$5,000+\$23,000+\$8,100+\$7,000\hfill \\ TotalCurrentassets=\$43,100\hfill \\ TotalLong-termassets=\left(\begin{array}{l}Equipment\\ -AccumulatedDepreciation\end{array}\right)+\left(\begin{array}{l}Building-\\ AccumulatedDepreciation\end{array}\right)+Land\hfill \\ TotalLong-termassets=\left(\$40,000-\$20,000\right)+\left(\$150,000-\$50,000\right)+55,000\hfill \\ TotalLong-termassets=\$175,000\hfill \\ Totalassets=TotalCurrentassets+TotalLong-termassets\hfill \\ Totalassets=\$43,100+\$175,000\hfill \\ Totalassets=\$218,100\hfill \end{array}$

For Liabilities and Owner’s Equity Section –

• Accounts Payable = $ 16,500

• Interest Payable = $ 2,500

• Rent Payable = $ 3,500

• Wages Payable = $ 2,500

• Property Taxes Payable = $ 900

• Unearned professional fess = $ 7,500

• Current portion of Long-term notes payable = $ 7,000

• Long-term notes payable = $ 60,000 (i.e. $ 67,000 - $ 7,000)

• Owner's Equity = $ 117,700

$\begin{array}{l}TotalcurrentLiabilities=\left(\begin{array}{l}AccountsPayable+InterestPayable+RentPayable+WagesPayable\\ +PropertyTaxesPayable+Unearnedprofessionalfees\\ +CurrentportionofLong-termnotespayable\end{array}\right)\hfill \\ TotalcurrentLiabilities=\left(\$16,500+\$2,500+\$3,500+\$2,500+\$900+\$7,500+\$7,000\right)\hfill \\ TotalcurrentLiabilities=\$\text{ 40},400\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\left(\begin{array}{l}TotalcurrentLiabilities+Long-termnotespayable\\ +Owner\text{'}sEquity\end{array}\right)\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\$\text{ 40},400+\$60,000+\$117,700\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\$218,100\hfill \end{array}$

Thus, the classified balance sheet has been prepared.

Conclusion

Thus, the income statement, the statement of owner’s equity and the classified balance sheet has been prepared.

To determine

Requirement 2

To prepare:

Necessary Closing entries at December 31, 2017

Answer to Problem 4APSA

Solution:

Date	Accounts Titles and Descriptions	Debit	Credit
Dec-31 a.	Professional fees earned	97000
	Rent earned	14000
	Dividends earned	2000
	Interest Earned	2100
	Income Summary		115100
	(Being the revenues transferred to Income summary)
Dec-31 b.	Income Summary	110800
	Depreciation expense - Building		11000
	Depreciation expense - Equipment		6000
	Wages Expense		32000
	Interest Expense		5100
	Insurance Expense		10000
	Rent Expense		13400
	Supplies Expense		7400
	Postage Expense		4200
	Property taxes Expense		5000
	Repairs Expense		8900
	Telephone Expense		3200
	Utilities expense		4600
	(Being all expenses transferred to Income summary)
Dec-31 c.	Income Summary	4300
	Tybalt, Capital		4300
	(To close the income summary)
Dec-31 d.	Tybalt, Capital	13,000
	Tybalt, Withdrawals		13,000
	(To close withdrawals account)

Explanation of Solution

The above journal entries can be explained as under –

All the entries are made on December 31, 2017.

a. In this entry, all the revenues are transferred to income summary account, thus, the revenues are debited and income summary is credited.

b. In this entry, all the expenses are transferred to income summary, thus, the, expenses are credited and income summary is debited.

c. In this entry, the net income is transferred to the capital account of Tybalt.

d. In this entry, the drawings account of Tybalt has been closed by transferring it to to capital account of Tybalt.

Conclusion

Thus, the necessary closing entries have been recorded.

To determine

Requirement 3

To compute:

a. Return on total assets

b. Debt ratio

c. Profit Margin ratio

d. Current Ratio

Answer to Problem 4APSA

Solution:

The answers are –

a. Return on total assets = 0.021

b. Debt ratio = 0.460

c. Profit Margin ratio = 0.0374

d. Current Ratio = 1.067

Explanation of Solution

The above answers are calculated as under –

a. Return on Total assets –

Given,

• Net Income = $ 4,300

• Beginning total assets = $ 200,000

• Ending total assets = $ 218,100

$\text{Average total assets}=\frac{\text{Beginning Total assets}+\text{Ending total assets}}{2}$

$\begin{array}{l}\text{Average total assets}=\frac{\$200,000+\$218,100}{2}\\ \text{Average total assets}=\$209,050\end{array}$

$\text{Rate of Return on Total Assets}=\frac{\text{Net Income }}{\text{Average Total assets}}$

$\begin{array}{l}=\frac{\$4,300}{\$209,050}\\ =\text{ 0}\text{.021 }\end{array}$

b. Debt Ratio –

Given information –

• Total Liabilities = $ 100,400 (i.e. $ 33,400 + $ 67,000)

• Total assets = $ 218,100

Debt – ratio is –

$\begin{array}{l}\text{Debt-ratio }=\frac{TotalLiabilities}{Total\text{ assets}}\\ \text{Debt-ratio }=\frac{\$100,400}{\$218,100}\\ \text{ Debt-ratio }=\text{ 0}\text{.460}\end{array}$

c. Net profit Ratio –

Given,

• Net Income = $ 4,300

• Total revenues = $ 115,100

$\begin{array}{l}NetProfitMargin=\frac{NetIncome}{TotalRevenues}\hfill \\ NetProfitMargin=\frac{\$4,300}{\$115,100}\hfill \\ NetProfitMargin=0.0374\hfill \end{array}$

d. Current Ratio –

Given,

• Total current assets = $ 43,100

• Total current liabilities = $ 40,400

$Currentratio=\frac{Totalcurrentassets}{Totalcurrentliabilities}$

$\begin{array}{c}CurrentRatio=\frac{\$43,100}{\$40,400}\\ CurrentRatio=1.067\end{array}$

Conclusion

Thus, all the required ratios have been calculated.