Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781260005042
Author: Wild
Publisher: MCG
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Chapter 3, Problem 8BP

1.

To determine

Prepare the income statement and the statement of retained earnings for the calendar year 2017 and the classified balance sheet at December 31, 2017.

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 2017.

Corporation A
Income statement
For the year ended December 31, 2017
ParticularsAmount ($)Amount ($)
Revenues
Professional fees earned56,900
Rent earned4,500
Dividends earned1,000
Interest earned1,000
Total revenue66,420
Expenses
Depreciation expense, Building2,000
Depreciation expense, Equipment1,000
Wages expense18,500
Interest expense1,550
Insurance expense1,525
Rent expense3,600
Supplies expense1,000
Postage expense410
Property taxes expense4,825
Repairs expense679
Telephone expense521
Utilities expense1,920
Total Expenses37,530
Net income28,890

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 2017.

Corporation A
Statement of Retained Earnings
For the year ended 31st December 2017
ParticularsAmount ($)Amount ($)
Retained earnings, Beginning62,800 
Add: Net income28,890 
Subtotal91,690 
Less: Dividends8,000 
Retained earnings, Ending 83,690

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 2017.

Corporation A
Balance Sheet
As an December 31, 2017
ParticularsAmount($)Amount($)
ASSETS  
Current Assets:  
Cash7,400 
Short-term investment11,200 
Supplies4,600 
Prepaid insurance1,000 
Total Current Assets 24,200
Equipment24,000 
Less: Accumulated depreciation, Equipment4,00020,000
Building100,000 
Accumulated depreciation, Building10,00090,000
Land 30,500
Total assets 164,700
  
LIABILITIES  
Current Liabilities:  
Accounts payable3,500 
Interest payable1,750 
Rent payable400 
Wages payable1,280 
Property tax payable3,330 
Unearned professional fees750 
Current portion of long-term note payable8,400 
Total current liabilities 19,410
Long-liabilities:  
Long-term notes payable ($40,000$8,400) 31,600
Total liabilities 51,010
Stockholders’ equity  
Paid-in capital  
Common stock30,000 
Retained earnings83,690 
Total Stockholders’ Equity113,690
Total liabilities and Stockholders’ Equity 164,700

Table (3)

2.

To determine

Prepare the closing entries at December 31, 2017.

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 59,600 
 Rent earned 4,500 
 Dividends earned 1,000 
 Interest earned 1,320 
 Income summary  66,420
 (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 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
 (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 28,890 
 Retained Earnings  28,890
 (To close the income summary account)   

Table (6)

Closing entry of income summary account:

On December 31, total revenues are $66,420 and total expenses are $37,530. Close the Income Summary account to the Retained Earnings account.

Thus, net income on Income Summary account}=Total RevenuesTotal Expenses=$66,420$37,530=$28,890

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 8,000 
 Dividends  8,000
 (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=$28,890($160,000+$164,7002)=0.178

Thus, the return on asset ratio is 0.178 or 17.8%.

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=$51,010$164,700=0.31

Thus, the debt ratio is 0.31.

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=$28,860$66,420×100=43.5%

Hence, the profit margin ratio is 43.5%.

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=$24,200$19,410=1.25:1

Thus, the current ratio is 1.25:1.

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Chapter 3 Solutions

Financial Accounting Fundamentals

Ch. 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. 28QSCh. 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 - Prob. 9ECh. 3 - Prob. 10ECh. 3 - Prob. 11ECh. 3 - Prob. 12ECh. 3 - Prob. 13ECh. 3 - Prob. 14ECh. 3 - Prob. 15ECh. 3 - Prob. 16ECh. 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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