Gen Combo Loose Leaf Financial Accounting; Connect Access Card
Gen Combo Loose Leaf Financial Accounting; Connect Access Card
18th Edition
ISBN: 9781264094295
Author: williams
Publisher: MCG
Question
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Chapter 5, Problem 3AP

a.

To determine

Prepare an income statement, statement of retained earnings and balance sheet of Incorporation M for the year ended December 31, current year.

a.

Expert Solution
Check Mark

Answer to Problem 3AP

  • Prepare the income statement of Incorporation M as on December 31, current year as follows:
Incorporation M
Income Statement
For the Year Ended December 31, Current Year
Particulars$$
Revenues:
revenue earned52,000
Less: Expenses:
Insurance expense$6,000
Office rent expense9,000
Supplies expense440
Salary expense48,000
Depreciation expense of furniture & fixtures1,400
Office and telephone expense3,000
Internet service expense4,900
Legal expense1,500
Interest expense4,000
Miscellaneous expense5,00083,240
Net Loss31,240

Table (1)

  • Prepare the statement of retained earnings of Incorporation M as on December 31, current year as follows:
Incorporation M
Statement of retained earnings
For the Year Ended December 31, Current Year
Particulars$
Retained earnings as on January 1, Current Year2,600
Less: Net Loss31,240
Retained earnings as on December 31, Current Year$28,640

Table (2)

  • Prepare the Balance Sheet of Incorporation M as on December 31, current year as follows:
Incorporation M
Balance Sheet
December 31, Current Year
Assets$$
Cash $960
Accounts receivable 300
Unexpired insurance 2,000
Prepaid rent 1,500
Supplies 200
Furniture & fixtures 8,400
Less: Accumulated depreciation of Furniture & fixtures5,2003,200
Total Assets 8,160
Liabilities
Accounts payable $6,540
Notes payable 24,000
Salaries payable 1,700
Interest payable 360
Unearned revenue 200
Total Liabilities32,800
Stockholders' Equity
Capital stock4,000
Retained earnings -deficit(28,640)
Total Stockholders' Equity24,640
Total Liabilities and Stockholders' Equity8,160

Table (3)

Explanation of Solution

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Statement of retained earnings:

This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends are deducted from beginning retained earnings to arrive at the end result, ending retained earnings.

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.

b.

To determine

Prepare the year-end closing entries of Incorporation M.

b.

Expert Solution
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Answer to Problem 3AP

Prepare the year-end closing entries of Incorporation M as follows:

DateAccounts title and ExplanationPost Ref.

Debit

($)

Credit

($)

December 31Client revenue Earned52,000
     Income Summary52,000
(To record the closure of revenues account )
December 31Income Summary83,240
     Insurance Expense6,000
     Office Rent Expense9,000
     Supplies Expense440
     Salaries Expense48,000
     Depreciation Expense of Furniture & fixtures1,400
     Office & Telephone Expense3,000
      Internet Service Expense4,900
      Legal Expense1,500
      Interest Expense4,000
      Miscellaneous Expense5,000
(To record the closure of expense account to income summary)
December31Retained earnings31,240
    Income Summary31,240
(To record the closure of net income from income summary to retained earnings)

Table (4)

Explanation of Solution

  • Revenue Earned are the revenue account. Since the amount of revenue is closed, and transferred to retained earnings account, they are debited.
  • Insurance Expense, Office Rent Expense, Supplies expense, Salaries Expense, Depreciation Expense, Office & Telephone Expense, Internet Service Expense, Legal Expense, Interest Expense, Miscellaneous Expense are the expense accounts. Since the amounts of expenses are closed to retained earnings account, they are credited.
  • Since Retained Earnings account’s amount has decreased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has decreased. Therefore, debit Retained Earnings account with $31,240.
  • Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Since Income Summary account has a debit balance, it is transferred to Retained Earnings account by crediting it. Therefore, credit Income Summary account with $31,240.

c.

To determine

Prepare an after-closing trial balance of Incorporation M.

c.

Expert Solution
Check Mark

Answer to Problem 3AP

Prepare an after-closing trial balance of Incorporation M as follows:

Incorporation M
After-Closing Trial Balance
December 31, Current Year
Particulars$$
Cash $960
Accounts receivable 300
Unexpired insurance 2,000
Prepaid rent 1,500
Supplies 200
Furniture & fixtures 8,400
Accumulated depreciation of Furniture & fixtures $5,200
Accounts payable 6,540
Notes payable 24,000
Salaries payable 1,700
Interest payable 360
Unearned client revenue 200
Capital stock4,000
Retained earnings28,640
Totals42,00042,000

Table (5)

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

d.

To determine

Evaluate the performance of the company, using the financial statements prepared in requirement (a).

d.

Expert Solution
Check Mark

Explanation of Solution

  • For $52,000 sales, the company has incurred a net loss of $31,240 for the year ended December 31. This indicates that the net loss has been incurred for 60% ($31,240$52,000×100)  of the total sales and also this indicates a deficit balance in stockholders’ equity, makes an interpretation that the return on equity is impossible. Therefore, the company appears to be extremely unprofitable.
  • On the other hand, the balance sheet of the company reports cash and accounts receivable for $1,260. However the liabilities of the company report $32,800. Thus, this indicates the company may not currently be liquid even if the amount of note payable reported in the balance sheet is not due in the near future. Thus the company faces extreme shortfall with respect to its ability to make good on its current obligations.

e.

To determine

Identify the information that the company is apt to disclose in the notes that accompany the financial statements prepared in requirement (a).

e.

Expert Solution
Check Mark

Explanation of Solution

The company must inspect the following primary issues in the notes to the financial statements:

  • Ability of the company (or)
  • Lack thereof,
  • To remain a going concern

In other words, the company should disclose how long it can stay afloat even in its desperate financial condition. The information regarding the note payable amount of $24,000 should also be disclosed. The information about the maker of the note and its due date and whether the note is secured by company assets everything must be disclosed.  Similarly, the company has to disclose information regarding the legal problems it faces.  The legal expenses that are reported in the income statement could suggest that one or more lawsuits are currently pending.

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Chapter 5 Solutions

Gen Combo Loose Leaf Financial Accounting; Connect Access Card

Ch. 5 - Prob. 3DQCh. 5 - Prob. 4DQCh. 5 - 5. What type of accounts are referred to as...Ch. 5 - Prob. 6DQCh. 5 - Prob. 7DQCh. 5 - Which accounts appear in a company’s after-closing...Ch. 5 - Prob. 9DQCh. 5 - Prob. 10DQCh. 5 - Prob. 11DQCh. 5 - Prob. 12DQCh. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - BRIEF EXERCISE 5.1 Balancing the Accounting...Ch. 5 - BRIEF EXERCISE 5.2 Income Statement and Balance...Ch. 5 - BRIEF EXERCISE 5.3 Classifying Balance Sheet...Ch. 5 - BRIEF EXERCISE 5.4 Identifying and Closing...Ch. 5 - BRIEF EXERCISE 5.5 Closing Entries of a Profitable...Ch. 5 - Prob. 6BECh. 5 - Prob. 7BECh. 5 - Prob. 8BECh. 5 - Prob. 9BECh. 5 - Prob. 10BECh. 5 - EXERCISE 5.1 Accounting Terminology Listed as...Ch. 5 - EXERCISE 5.2 Financial Statement Preparation Green...Ch. 5 - EXERCISE 5.3 Financial Statement...Ch. 5 - EXERCISE 5.4 Preparing Closing Entries and an...Ch. 5 - EXERCISE 5.5 Preparing Closing Entries and an...Ch. 5 - Prob. 6ECh. 5 - EXERCISE 5.7 Closing Entries of a Profitable...Ch. 5 - EXERCISE 5.8 Closing Entries of an Unprofitable...Ch. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - PROBLEM 5.1A Correcting Classification...Ch. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 5APCh. 5 - Prob. 6APCh. 5 - Prob. 7APCh. 5 - Prob. 8APCh. 5 - PROBLEM 5.1B Correcting Classification...Ch. 5 - PROBLEM 5.2B Preparing Financial Statements and...Ch. 5 - Prob. 3BPCh. 5 - PROBLEM 5.4B Interim Financial Statements Howard...Ch. 5 - Prob. 5BPCh. 5 - Prob. 6BPCh. 5 - Prob. 7BPCh. 5 - Prob. 8BPCh. 5 - Prob. 1CTCCh. 5 - Prob. 3CTCCh. 5 - Prob. 4CTCCh. 5 - Prob. 1CP
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