Chapter 4, Problem 4BPSB

To determine

Concept Introduction:

Income Statement: The financial statement concerned with computation net income during an accounting period is called income statement. Net income is the excess amount of revenue over the expenses of a company and when the expenses are more than the revenue is termed as net loss.

Statement of Owner's Equity: It is a financial statement which shows the portion of owner's fund in the total capital of a company.

Classified Balance Sheet: A classified balance sheet interprets the financial position of a business during particular period under different categories i.e. current assets, current liabilities, non-current assets, long-term liabilities, property, plant and equipment and owner's equity.

Requirement 1:

To Prepare:

Income statement, statement of owner's equity and the classified balance sheet for the year ended December 31, 2019.

Answer to Problem 4BPSB

Particulars	Amount
Net Income	$4,300
Statement of Owner's Equity	$117,700
Balance Sheet Total	$218,100

Explanation of Solution

ANARA CO.Income Statement December 31, 2019
Revenue:
Professional Fees Earned	$59,600
Rent Earned	4,500
Dividends Earned	1,000
Interest Earned	1,320
Total Revenue		$66,420
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 Expense		$37,530
Net Income		$28,890

ANARA CO.Statement of Owner's Equity December 31, 2019
P. Anara, Capital; December 31, 2018	$92,800
Add:Net Income	28, 890
Subtotal	121,690
Less: P. Anara, Withdrawals	8,000
P. Anara, Capital; December 31, 2019	$113,690

ANARA CO.Balance Sheet December 31, 2019
Assets
Current Assets:
Cash	$7,400
Short-Term Investment	11,200
Supplies	4,600
Prepaid Insurance	1,000
Total Current Assets		$24,200
Property, Plant and Equipment
Equipment24,000
Less: Accumulated Depreciation4,000	20,000
Building100,000
Less: Accumulated Depreciation10,000	90,000
Land	30,500
Total Property, Plant and Equipment		140,500
Total Assets		$164,700
Liabilities and Owner's Equity
Liabilities
Current Liabilities:
Accounts Payable	3,500
Interest Payable	1,750
Rent Payable	400
Wages Payable	1,280
Property taxes payable	3,330
Unearned Professional Fees	750
Current Portion of Long-Term Note Payable	8,400
Total Current Liabilities		$19,410
Long-Term Liabilities
Long-term notes payable	31,600
Total Long-Term Liabilities		31,600
Total Liabilities		51,010
Owner's Equity
P. Anara, Capital; December 31, 2019		113,690
Total Liabilities and Owner's Equity		$164,700

To determine

Concept Introduction:

Closing Entries:

The journal entry which closes all the temporary accounts of a business organization is termed as closing entries.

Requirement 2:

Journalize the closing entries at December 31, 2019.

Answer to Problem 4BPSB

Account Title	Balance
Cash	$7,400
Short-Term Investment	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
Accounts Payable	3,500
Interest Payable	1,750
Rent Payable	400
Wages Payable	1,280
Property taxes payable	3,330
Unearned Professional Fees	750
Current Portion of Long-Term Note Payable	8,400
Long-term notes payable	31,600
P. Anara, Capital	113,690
P. Anara, Withdrawals	0
Professional Fees Earned	0
Rent Earned	0
Dividends Earned	0
Interest Earned	0
Depreciation expense − Building	0
Depreciation expense − Equipment	0
Wages expense	0
Interest expense	0
Insurance expense	0
Rent expense	0
Supplies expense	0
Postage expense	0
Property taxes expense	0
Repairs expense	0
Telephone expense	0
Utilities expense	0

Explanation of Solution

Date	Particulars	Debit	Credit
2019
Dec. 31
A.	Professional Fees Earned	$59,600
	Rent Earned	4,500
	Dividends Earned	1,000
	Interest Earned	1,320
	Income Summary		$66,420
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
C.	Income Summary	28, 890
	P. Anara, Capital		28, 890
D.	P. Anara, Capital	8,000
	P. Anara, Withdrawals		8,000

To determine

Concept Introduction:

Return on Asset:

Return on asset is a financial ratio which measures the amount of returns generated by the assets of the company.

Debt Ratio:

Debt ratio determines the proportion of the total assets financed by debt funds. It is key ratio in measuring the company's leverage.

Profit Margin Ratio:

It indicates the percentage of net income compared with total revenue earned during an accounting year.

Current Ratio:

The liquidity ratio which indicates the ability of company to pay off its short-term liabilities by using their current asset is termed as current ratio.

Requirement 3:

Computation of (a) return on assets (b) debt ratio (c) profit margin ratio (d) current ratio

Answer to Problem 4BPSB

Ratios
Return on Assets	17.79%
Debt Ratio	0.31
Profit Margin Ratio	43.50%
Current Ratio	2.20

Explanation of Solution

(a) Return on Assets = Net Income / Average Total Assets

= $28, 890 / $162,350

= 17.79%

Average Total Assets = Beginning Total Assets + Ending Total Assets / 2

= $160,000 + $164,700 / 2

= $162,350

(b) Debt Ratio = Total Liabilities / Total Assets

= $51,010 / $164,700

= 0.31

(c) Profit Margin Ratio = Net Income / Total Revenues

= $28, 890 / $66,420

= 43.50%

(d) Current Ratio = Current Assets / Current Liabilities

= $24,200 / $11,010

= 2.20