FINANCIAL ACCOUNTING FUNDAMENTALS W/CO
FINANCIAL ACCOUNTING FUNDAMENTALS W/CO
5th Edition
ISBN: 9781259695759
Author: Wild
Publisher: McGraw-Hill Publishing Co.
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Chapter 3, Problem 8AP

1.

To determine

Prepare the income statement and the statement of retained earnings for the calendar year 2015 and the classified balance sheet at December 31, 2015.

1.

Expert Solution
Check Mark

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement for the year ended 31st December 2015.

Construction T
Income statement
For the year ended December 31, 2015
ParticularsAmount ($)Amount ($)
Revenues  
Professional fees earned97,000 
Rent earned14,000 
Dividends earned2,000 
Interest earned2,100 
Total revenue 115,100 
Expenses  
Depreciation expense, Building 11,000 
Depreciation expense, Equipment6,000 
Wages expense32,000 
Interest expense5,100 
Insurance expense10,000 
Rent expense13,400 
Supplies expense7,400 
Postage expense4,200 
Property taxes expense5,000 
Repairs expense8,900 
Telephone expense3,200 
Utilities expense4,600 
Total Expenses110,800
Net income $4,300

Table (1)

Statement of Retained Earnings:

Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare the statement of retained earnings for the year ended 31st December 2015.

Construction T
Statement of Retained Earnings
For the year ended 31st December 2015
ParticularsAmount ($)Amount ($)
Retained earnings, Beginning121,400 
Add: Net income4,300 
Subtotal125,700 
Less: Dividends13,000 
Retained earnings, Ending $112,700

Table (2)

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet as on 31st December 2015.

Construction T
Balance Sheet
As an December 31, 2015
ParticularsAmount($)Amount($)
ASSETS  
Current Assets:  
Cash5,000 
Short-term investment23,000 
Supplies8,100 
Prepaid insurance7,000 
Total Current Assets 43,100
Equipment40,000 
Less: Accumulated depreciation, Equipment20,00020,000
Building150,000 
Accumulated depreciation, Building50,000100,000
Land 55,000
Total plant and Assets 175,000
Total assets $218,100
  
LIABILITIES  
Current Liabilities:  
Accounts payable16,500 
Interest payable2,500 
Rent payable3,500 
Wages payable2,500 
Property tax payable900 
Unearned professional fees7,500 
Current portion of long-term note payable7,000 
Total current liabilities 40,400
Long-liabilities:  
Long-term notes payable ($67,000$7,000) 60,000
Total liabilities 100,400
Stockholders’ equity  
Paid-in capital  
Common stock5,000 
Retained earnings112,700 
Total Stockholders’ Equity117,700
Total liabilities and Stockholders’ Equity $218,100

Table (3)

2.

To determine

Prepare the closing entries at December 31, 2015.

2.

Expert Solution
Check Mark

Explanation of Solution

Closing entries: The journal entries prepared to close the temporary accounts to Retained Earnings account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare the closing entry for revenue accounts.

DateAccounts title and explanationPost Ref.

Debit

($)

Credit

($)

December 31Professional fee earned 97,000 
 Rent earned 14,000 
 Dividends earned 2,000 
 Interest earned 2,100 
 Income summary  115,100
 (To close the revenues account)   

Table (4)

In this closing entry, revenue accounts are closed by transferring the amount of revenue accounts to the income summary account in order to bring the revenue account balance to zero. Hence, debit the revenue accounts and credit income summary account.

Prepare the closing entry for expenses account.

DateAccounts title and explanationPost Ref.

Debit

($)

Credit

($)

December 31Income summary 110,800 
 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
 (To close the expenses account)   

Table (5)

In this closing entry, expenses account is closed by transferring the amount of expenses to the income summary in order to bring the expenses account balance to zero. Hence, debit the income summary account and credit all expenses account.

Prepare closing entry for income summary account.

DateAccounts title and explanationPost Ref.

Debit

($)

Credit

($)

December 31Income Summary 4,300 
 Retained Earnings  4,300
 (To close the income summary account)   

Table (6)

Closing entry of income summary account:

On December 31, total revenues are $115,100 and total expenses are $110,800. Close the Income Summary account to the Retained Earnings account.

Thus, net income on Income Summary account}=Total RevenuesTotal Expenses=$115,100$110,800=$4,300

Therefore, credit balance of the Income Summary account of $4,300 is closed to Retained Earnings.

In this closing entry, income summary account is closed by transferring the amount of income summary (profit) to the retained earnings in order to bring the income summary account balance to zero. Hence, debit the income summary account and credit retained earnings account.

Prepare closing entry for dividend account.


Date
Accounts title and explanationPost Ref.

Debit

($)

Credit

($)

December 31Retained Earnings 13,000 
 Dividends  13,000
 (To close the dividends account)   

Table (7)

In this closing entry, dividend account is closed by transferring the amount of dividend to the retained earnings in order to bring the dividend account balance to zero. Hence, debit the retained earnings account and credit dividend account.

3.

To determine

Compute:

a. Return on assets

b. Debt ratio

c. Profit margin ratio

d. current ratio

3.

Expert Solution
Check Mark

Explanation of Solution

a. Return on asset ratio:

Return on assets indicates the company’s overall profitability by excluding specific sources of finance.  The Profitability is achieved through a high profit margin or a high turnover or a combination of both.

Formula for calculating the return on asset:

Return on assets=Net incomeAverage total assets

Compute the return on asset ratio:

Return on assets=Net incomeAverage total assets=$4,300($200,000+$218,1002)=0.021

Thus, the return on asset ratio is 0.021 or 2.1%.

b. Debt ratio:

Debt to asset ratio is the ratio between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Formula for calculating the debt ratio:

Debt ratio=Total assetsTotal liabilities

Compute the debt ratio:

Debt ratio=Total assetsTotal liabilities=$100,400$218,100=0.46

Thus, the debt ratio is 0.46.

c. Profit margin ratio:

Net profit margin ratio:

Net profit is the financial ratio that shows the relationship between the net profit and net sales (Operating revenue). Net profit is the difference between total operating revenue and total operating expenses. It can be calculated by dividing net profit and net sales revenue.

Compute the net profit margin:

Net profit margin ratio=Net incomeTotal revenues ×100=$4,300$115,100×100=3.7%

Hence, the profit margin ratio is 3.7%.

d. current ratio:

Current ratio

Current ratio is one of the liquidity ratios, which measures the capacity of the company to meet its short-term obligations using its current assets.

Calculate the current ratio:

Current ratio=Current assetsCurrent liabilities=$43,100$40,400=1.07:1

Thus, the current ratio is 1.07:1.

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Chapter 3 Solutions

FINANCIAL ACCOUNTING FUNDAMENTALS W/CO

Ch. 3 - Prob. 5DQCh. 3 - Prob. 6DQCh. 3 - Prob. 7DQCh. 3 - Prob. 8DQCh. 3 - Prob. 9DQCh. 3 - Prob. 10DQCh. 3 - Prob. 11DQCh. 3 - Prob. 12DQCh. 3 - Prob. 13DQCh. 3 - Prob. 14DQCh. 3 - Prob. 15DQCh. 3 - Prob. 16DQCh. 3 - Prob. 17DQCh. 3 - Prob. 18DQCh. 3 - Prob. 19DQCh. 3 - Prob. 20DQCh. 3 - Prob. 21DQCh. 3 - Prob. 22DQCh. 3 - Prob. 23DQCh. 3 - Prob. 24DQCh. 3 - Prob. 25DQCh. 3 - Prob. 26DQCh. 3 - Prob. 27DQCh. 3 - Prob. 28DQCh. 3 - Prob. 29DQCh. 3 - Prob. 1QSCh. 3 - Prob. 2QSCh. 3 - Prob. 3QSCh. 3 - Prob. 4QSCh. 3 - Prob. 5QSCh. 3 - Prob. 6QSCh. 3 - Prob. 7QSCh. 3 - Prob. 8QSCh. 3 - Prob. 9QSCh. 3 - Prob. 10QSCh. 3 - Prob. 11QSCh. 3 - Prob. 12QSCh. 3 - Prob. 13QSCh. 3 - Prob. 14QSCh. 3 - Prob. 15QSCh. 3 - Prob. 16QSCh. 3 - Prob. 17QSCh. 3 - Prob. 18QSCh. 3 - Prob. 19QSCh. 3 - Prob. 20QSCh. 3 - QS 3-21 Preparing closing entries from the...Ch. 3 - Prob. 22QSCh. 3 - QS 3-23 Identifying the accounting cycle List the...Ch. 3 - Prob. 24QSCh. 3 - Prob. 25QSCh. 3 - Prob. 26QSCh. 3 - Prob. 27QSCh. 3 - Prob. 1ECh. 3 - Prob. 2ECh. 3 - Prob. 3ECh. 3 - Prob. 4ECh. 3 - Prob. 5ECh. 3 - Prob. 6ECh. 3 - Prob. 7ECh. 3 - Exercise 3-8 Preparing closing entries Following...Ch. 3 - Exercise 3-7 Preparing financial statements Use...Ch. 3 - Prob. 10ECh. 3 - Prob. 11ECh. 3 - Prob. 12ECh. 3 - Prob. 13ECh. 3 - Prob. 14ECh. 3 - Prob. 15ECh. 3 - Prob. 1APCh. 3 - Prob. 2APCh. 3 - Prob. 3APCh. 3 - Prob. 4APCh. 3 - Prob. 5APCh. 3 - Prob. 6APCh. 3 - Problem 3-7A Determining balance sheet...Ch. 3 - Prob. 8APCh. 3 - Prob. 1BPCh. 3 - Prob. 2BPCh. 3 - Prob. 3BPCh. 3 - Prob. 4BPCh. 3 - Prob. 5BPCh. 3 - Prob. 6BPCh. 3 - Prob. 7BPCh. 3 - Prob. 8BPCh. 3 - Prob. 3SPCh. 3 - Prob. 1BTNCh. 3 - Prob. 2BTNCh. 3 - Prob. 3BTNCh. 3 - Prob. 4BTNCh. 3 - Prob. 5BTNCh. 3 - Prob. 7BTNCh. 3 - Prob. 9BTN
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