Chapter 4, Problem 4BPSB

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 4BPSB

Solution:

1. Income statement –

Anara Construction
Income Statement
For the year Ended December, 2017
Revenues
Professional fees earned	59,600
Rent earned	4,500
Dividends earned	1,000
Interest Earned	1,320
Total Revenues		66,420
Less: Expenses
Depreciation expense - Building	2,000
Depreciation expense - Equipment	1,000
Wages Expense	18,500
Interest Expense	1,550
Insurance Expense	1,525
Rent Expense	3,600
Supplies Expense	1,000
Postage Expense	410
Property taxes Expense	4,825
Repairs Expense	679
Telephone Expense	521
Utilities expense	1,920
Total Expenses		37,530
Net Income		28,890

2. Statement of Owner’s Equity –

Anara Construction
Statement of Owner's Equity
For the year Ended December, 2017
Tybalt Capital, Beginning	92,800
Add: Net Income	28,890
Less: Tybalt, Withdrawals	8,000
Tybalt Capital, Ending	113,690

3. Classified Balance Sheet –

Anara Construction
Balance Sheet
For the year Ended December, 2017
Current Assets		Current Liabilities
Cash	7,400	Accounts Payable	3,500
Short-term Investments	11,200	Interest Payable	1,750
Supplies	4,600	Rent Payable	400
Prepaid Insurance	1,000	Wages Payable	1,280
		Property Taxes Payable	3,330
Total current assets	24,200	Unearned professional fess	750
		Current portion of Long-term Notes payable	8,400
		Total current liabilities	19,410
Long-term assets
Equipment	24,000	Long-term liabilities and Owner's Equity
Less: Accumulated Depreciation	4,000	Long-term Liabilities
	20000	Long-term notes payable	31,600
Building	100,000
Less: Accumulated Depreciation	10,000	Owner's Equity	113,690
	90000
Land	30,500
Total Long-term assets	140,500	Total long-term liabilities and Owner's equity	1,45,290
Total Assets	164,700	Total liabilities and Owner's equity	164,700

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 = $ 59,600

• Rent earned = $ 4,500

• Dividends earned = $ 1,000

• Interest Earned = $ 1,320

• Depreciation expense – Building = $ 2,000

• Depreciation expense – Equipment = $ 1,000

• Wages Expense = $ 18,500

• Interest Expense = $ 1,550

• Insurance Expense = $ 1,525

• Rent Expense = $ 3,600

• Supplies Expense = $ 1,000

• Postage Expense = $ 410

• Property taxes Expense = $ 4,825

• Repairs Expense = $ 679

• Telephone Expense = $ 521

• Utilities expense = $ 1,920

Now, the total revenues will be calculated -

$\begin{array}{l}Totalrevenues=Professionalfeesearned+Rentearned+Dividendsearned+InterestEarned\hfill \\ Totalrevenues=\$\text{ 5}9,600+\$4,500+\$\text{ 1},000+\$\text{ 1},320\hfill \\ Totalrevenues=\$\text{ 66},420\hfill \end{array}$

Total expenses –

$\begin{array}{l}TotalExpenses=\left(\begin{array}{l}Depreciationexpense–Building\\ +Depreciationexpense–Equipment+WagesExpense\\ +InterestExpense+InsuranceExpense+RentExpense\\ +SuppliesExpense+PostageExpense+PropertytaxesExpense\\ +RepairsExpense+TelephoneExpenses+Utilitiesexpense\end{array}\right)\hfill \\ TotalExpenses=\left(\begin{array}{l}\$\text{ 2},000+\$\text{ 1},000+\$\text{ 18},500+\$\text{ 1},550+\$1,525+\$3,600\\ +\$\text{ 1},000+\$\text{ 41}0+\$\text{ 679 }+\$\text{ 4,825 }+\$\text{ 521 }+\$\text{ 1},920\end{array}\right)\hfill \\ TotalExpenses=\$\text{ 37},530\hfill \end{array}$

Net income will be calculated as –

$\begin{array}{l}NetIncome=TotalRevenues–TotalExpenses\hfill \\ NetIncome=\$\text{ 66},420-\$\text{ 37},530\hfill \\ NetIncome=\$\text{ 28},890\hfill \end{array}$

Thus, the income statement has been prepared.

2. Statement of Owner’s equity –

Given,

• Anara Capital, Beginning = $ 92,800

• Net Income = $ 28,890

• Anara, Withdrawals = $ 8,000

$\begin{array}{l}AnaraCapital,Ending=AnaraCapital,Beginning+NetIncome-Anara,Withdrawals\hfill \\ AnaraCapital,Ending=\$92,800+\$28,890-\$8,000\hfill \\ AnaraCapital,Ending=\$113,690\hfill \end{array}$

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

3. Classified Balance Sheet –

For Assets Section –

Given,

• Cash = $ 7,400

• Short-term Investments = $ 11,200

• Supplies = $ 4,600

• Prepaid Insurance = $ 1,000

• Equipment = $ 24,000

• Accumulated Depreciation – Equipment = $ 4,000

• Building = $ 100,000

• Accumulated Depreciation – Building = $ 10,000

• Land = $ 30,500

$\begin{array}{l}TotalCurrentassets=Cash+Short-termInvestments+Supplies+PrepaidInsurance\hfill \\ TotalCurrentassets=\$\text{ 7},400+\$\text{ 11},200+\$\text{ 4},600+\$\text{ 1},000\hfill \\ TotalCurrentassets=\$\text{ 24},200\hfill \\ TotalLong-termassets=\left(\begin{array}{l}Equipment\\ -AccumulatedDepreciation\end{array}\right)+\left(\begin{array}{l}Building-\\ AccumulatedDepreciation\end{array}\right)+Land\hfill \\ TotalLong-termassets=\left(\$\text{ 24},000-\$\text{ 4},000\right)+\left(\$100,000-\$\text{ 1}0,000\right)+\text{ 30},500\hfill \\ TotalLong-termassets=\$140,500\hfill \\ Totalassets=TotalCurrentassets+TotalLong-termassets\hfill \\ Totalassets=\$\text{ 24},200+\$140,500\hfill \\ Totalassets=\$\text{ 164},700\hfill \end{array}$

For Liabilities and Owner’s Equity Section –

• Accounts Payable = $ 3,500

• Interest Payable = $ 1,750

• Rent Payable = $ 400

• Wages Payable = $ 1,280

• Property Taxes Payable = $ 3,330

• Unearned professional fess = $ 750

• Current portion of Long-term notes payable = $ 8,400

• Long-term notes payable = $ 31,600 (i.e. $ 40,000 - $ 8,400)

• Owner's Equity = $ 113,690

$\begin{array}{l}TotalcurrentLiabilities=\left(\begin{array}{l}AccountsPayable+InterestPayable+RentPayable+WagesPayable\\ +PropertyTaxesPayable+Unearnedprofessionalfees\\ +CurrentportionofLong-termnotespayable\end{array}\right)\hfill \\ TotalcurrentLiabilities=\left(\$\text{ 3},500+\$\text{ 1},750+\$\text{ 4}00+\$\text{ 1},280+\$\text{ 3,33}0+\$750+\$8,400\right)\hfill \\ TotalcurrentLiabilities=\$\text{ 19},410\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\left(\begin{array}{l}TotalcurrentLiabilities+Long-termnotespayable\\ +Owner\text{'}sEquity\end{array}\right)\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\$\text{ 19},410+\$\text{ 31},600+\$113,690\hfill \\ TotalliabilitiesandOwner\text{'}sequity=\$\text{ 164,700}\hfill \end{array}$

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 4BPSB

Solution:

Date	Accounts Titles and Descriptions	Debit	Credit
Dec-31 a.	Professional fees earned	59,600
	Rent earned	4,500
	Dividends earned	1,000
	Interest Earned	1,320
	Income Summary		66,420
	(Being the revenues transferred to Income summary)
Dec-31 b.	Income Summary	37,530
	Depreciation expense - Building		2,000
	Depreciation expense - Equipment		1,000
	Wages Expense		18,500
	Interest Expense		1,550
	Insurance Expense		1,525
	Rent Expense		3,600
	Supplies Expense		1,000
	Postage Expense		410
	Property taxes Expense		4,825
	Repairs Expense		679
	Telephone Expense		521
	Utilities expense		1,920
	(Being all expenses transferred to Income summary)
Dec-31 c.	Income Summary	28,890
	Anara, Capital		28,890
	(To close the income summary)
Dec-31 d.	Anara, Capital	8,000
	Anara, Withdrawals		8,000
	(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 Anara.

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

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 4BPSB

Solution:

The answers are –

a. Return on total assets = 0.178

b. Debt ratio = 0.310

c. Profit Margin ratio = 0.435

d. Current Ratio = 1.248

Explanation of Solution

The above answers are calculated as under –

a. Return on Total assets –

Given,

• Net Income = $ 28,890

• Beginning total assets = $ 160,000

• Ending total assets = $ 164,700

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

$\begin{array}{l}\text{Average total assets}=\frac{\$160,000+\$164,700}{2}\\ \text{Average total assets}=\$162,350\end{array}$

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

$\begin{array}{l}=\frac{\$28,890}{\$162,350}\\ =\text{ 0}\text{.178 }\end{array}$

b. Debt Ratio –

Given information –

• Total Liabilities = $ 51,010 (i.e. $ 19,410 + $ 31,600)

• Total assets = $ 164,700

Debt – ratio is –

$\begin{array}{l}\text{Debt-ratio }=\frac{TotalLiabilities}{Total\text{ assets}}\\ \text{Debt-ratio }=\frac{\$51,010}{\$164,700}\\ \text{ Debt-ratio }=\text{ 0}\text{.310}\end{array}$

c. Net profit Ratio –

Given,

• Net Income = $ 28,890

• Total revenues = $ 66,420

$\begin{array}{l}NetProfitMargin=\frac{NetIncome}{TotalRevenues}\hfill \\ NetProfitMargin=\frac{\$\text{ 28},890}{\$\text{ 66},420}\hfill \\ NetProfitMargin=0.435\hfill \end{array}$

d. Current Ratio –

Given,

• Total current assets = $ 24,200

• Total current liabilities = $ 19,410

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

$\begin{array}{c}CurrentRatio=\frac{\$\text{ 24},200}{\$\text{ 19},410}\\ CurrentRatio=\text{ 1}\text{.248}\end{array}$

Conclusion

Thus, all the required ratios have been calculated.