Chapter 10, Problem 10.17E

(LO 10–2, 10–4, 10–5, 10–8)

On January 1, 2018, the general ledger of Grand Finale Fireworks includes the following account balances:

Accounts	Debit	Credit
Cash	$ 42,700
Accounts Receivable	44,500
Supplies	7,500
Equipment	64,000
Accumulated Depreciation		$ 9,000
Accounts Payable		14,600
Common Stock. $1 par value		10,000
Additional Paid-in Capital		80,000
Retained Earnings		45,100
Totals	$158,700	$158,700

  During January 2018, the following transactions occur:

January	2	Issue an additional 2,000 shares of $1 par value common stock for $40,000.
January	9	Provide services to customers on account, $14,300.
January	10	Purchase additional supplies on account, $4,900.
January	12	Repurchase 1,000 shares of treasury stock for $18 per share.
January	15	Pay cash on accounts payable, $16,500.
January	21	Provide services to customers for cash, $49,100.
January	22	Receive cash on accounts receivable, $16,600.
January	29	Declare a cash dividend of $0.30 per share to all shares outstanding on January 29. The dividend is payable on February 15. (Hint: Grand Finale Fireworks had 10,000 shares outstanding on January 1, 2018 and dividends are not paid on treasury stock.)
January	30	Reissue 600 shares of treasury stock for $20 per share.
January	31	Pay cash for salaries during January, $42,000.

  Required:

  1.    Record each of the transactions listed above.

  2.    Record adjusting entries on January 31.

  a.    Unpaid utilities for the month of January are $6,200.

  b.    Supplies at the end of January total $5,100.

  c.    Depreciation on the equipment for the month of January is calculated using the straight-line method. At the time the equipment was purchased, the company estimated a service life of three years and a residual value of $10,000.

  d.    Accrued income taxes at the end of January are $2,000.

  3.    Prepare an adjusted trial balance as of January 31, 2018, after updating beginning balances (above) for transactions during January (Requirement 1) and adjusting entries at the end of January (Requirement 2).

  4.    Prepare a multiple-step income statement for the period ended January 31, 2018.

  5.    Prepare a classified balance sheet as of January 31, 2018.

  6.    Record closing entries.

  7.    Analyze the following for Grand Finale Fireworks:

  a.    Calculate the return on equity for the month of January. If the average return on equity for the industry for January is 2.5%, is the company more or less profitable than other companies in the same industry?

  b.    How many shares of common stock are outstanding as of January 31, 2018?

  c.    Calculate earnings per share for the month of January. (Hint: To calculate average shares of common stock outstanding take the beginning shares outstanding plus the ending shares outstanding and divide the total by 2.) If earnings per share was $3.60 last year (i.e., an average of $0.30 per month), is earnings per share for January 2018 better or worse than last year’s average?

To determine

To record: Each of the transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Record each of the given transactions.

Date	Account Title and Explanation	Debit ($)	Credit($)
2018
January 2	Cash	40,000
	Common stock $\left(2,000\times \$1\right)$		2,000
	Additional paid in capital (difference)		38,000
	(To record issuance of 2,000 shares of common stock for $40,000)
January 9	Accounts receivable	14,300
	Service revenue		14,300
	(To provide services on account)
January 10	Supplies	4,900
	Accounts payable		4,900
	(To record the purchase of supplies on account)
January 12	Treasury stock $\left(1,000\times \$18\right)$	18,000
	Cash		18,000
	(To record the repurchase of 1,000 shares of treasury stock)
January 15	Accounts payable	16,500
	Cash		16,500
	(To record the payment of cash on account)
January 21	Cash	49,100
	Service revenue		49,100
	(To record the service provided for cash)
January 22	Cash	16,600
	Accounts receivable		16,600
	(To record the receipt of cash on account)
January 29	Dividends $\left(11,000\left(1\right)\times \$0.3\right)$	3,300
	Dividends Payable		3,300
	(To record the declaration of cash dividend)
January 30	Cash $\left(600\times \$20\right)$	12,000
	Treasury stock $\left(600\times \$18\right)$		10,800
	Additional paid in capital(difference)		1,200
	(To record the reissue of treasury stock above the cost)
January 31	Salaries expense	42,000
	Cash		42,000
	(To record the payment of monthly salaries)

Table (1)

Working note:

Compute the number of share outstanding as of January 29:

Details	Number of shares
Common shares at the beginning of the year	10,000
Add: Addition common stock issued	2,000
Less: Treasury stock held	(1,000)
Number of shares outstanding as of January 29	11,000(1)

Table (2)

To determine

To record: The adjusting entries on January 31.

Explanation of Solution

Adjusting entries:  Adjusting entries are the journal entries which are recorded at the end of the accounting period to correct or adjust the revenue and expense accounts, to concede with the accrual principle of accounting.

Record the adjusting entries on January 31.

	Date	Account Title and Explanation	Debit ($)	Credit($)
	2018
a	January 31	Utilities expense	6,200
		Utilities payable		6,200
		(To record the accrued utilities expenses for the month of January )
b	January 31	Supplies expense (2)	7,300
		Supplies		7,300
		(To adjust the supplies)
c	January 31	Depreciation expense (3)	1,500
		Accumulated depreciation		1,500
		(To record the depreciation expense for the month of January)
d	January 31	Income tax expense	2,000
		Income tax payable		2,000
		(To record the income tax expense for the month of January)

Table (3)

Working note:

Compute supplies expense incurred in the month of January.

$\begin{array}{c}\begin{array}{l}\text{Supplies expense incurred}\\ \text{in the month of January}\end{array}\}=\left[\begin{array}{l}\text{Supplies at the beginning in the month of January+}\\ \text{Supplies purchased during the month}-\\ \text{Supplies in hand at the end of the month}\end{array}\right]\\ =\$7,500+\$4,900-\$5,100\\ =\$7,300\end{array}$ (2)

Compute the depreciation expense for the month of January.

$\begin{array}{c}\begin{array}{l}\text{Depreciation expense for}\\ \text{the month of January}\end{array}\}=\left[\frac{\text{Cost of equipment }-\text{Salvage value}}{\text{Useful life of equipment}}\right]\\ =\frac{\$64,000-\$10,000}{\text{36 months}}\\ =\$1,500\end{array}$ (3)

To determine

To prepare: adjusted trial balances as of January 31, 2018.

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Prepare adjusted trial balances as of January 31, 2018.

Account title	Debit	Credit
Cash	$83,900
Accounts Receivable	42,200
Supplies	5,100
Equipment	64,000
Accumulated Depreciation		10,500
Accounts Payable		3,000
Utilities Payable		6,200
Dividends Payable		3,300
Income Tax Payable		2,000
Common Stock		12,000
Additional Paid-in Capital		119,200
Retained Earnings		45,100
Dividends	3,300
Treasury Stock	7,200
Service Revenue		63,400
Salaries Expense	42,000
Utilities Expense	6,200
Supplies Expense	7,300
Depreciation Expense	1,500
Income Tax Expense	2,000
Totals	$264,700	$264,700

Table (4)

Working note:

Prepare T-account to determine the ending balance of each account.

Cash
Beginning balance	42,700	January 12	18,000
January  2	40,000	January 15	16,500
January 21	49,100	January 31	42,000
January 22	16,600
January 30	12,000
Ending Balance	83,900

Accounts receivable
Beginning balance	44,500	January 22		16,600
January  9	14,300
Ending Balance	42,200

Supplies
Beginning balance	7,500	January 31	7,300
January  10	4,900
Ending Balance	5,100

Equipment
Ending balance	64,000

Accumulated depreciation
		Beginning balance	9,000
		January  31	1,500
		Ending Balance	10,500

Accounts payable
January  15	16,500	Beginning balance	14,600
		January  10	4,900
		Ending Balance	3,000

Utilities payable
		Beginning balance	6,200

Dividend payable
		Beginning balance	3,300

Income tax payable
		Beginning balance	2,000

Common stock
		Beginning balance	10,000
		January  2	2,000
		Ending Balance	12,000

Additional paid in capital
		Beginning balance	80,000
		January  2	38,000
		January 30	1,200
		Ending Balance	119,200

Retained earnings
		Beginning balance	45,100

Dividends
Beginning balance	3,300

Treasury stock
January 30	10,800	Beginning balance	18,000
		Ending Balance	7,200

Service revenue
		January  9	14,300
		January  21	49,100
		Ending Balance	63,400

Salaries expense
Ending balance	42,000

Utilities expense
Ending balance	8,200

Supplies expense
Ending balance	7,300

Depreciation expense
Ending balance	1,500

Income tax expense
Ending balance	2,000

To determine

To prepare: A multiple-step income statement for the period ended January 31, 2018.

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.

Prepare a multiple-step income statement for the period ended January 31, 2018.

GF Fireworks
Income statement
For the month ended January 31, 2018
Particulars	Amount in $
Service revenue	$63,400
Less: Expenses
Salaries expense	42,000
Utilities expense	6,200
Supplies expense	7,300
Depreciation expense	1,500
Income before taxes	6,400
Less: Income tax expense	2,000
Net income	$ 4,400

Table (5)

To determine

To prepare: A classified balance sheet as of January 31, 2018.

Explanation of Solution

Balance sheet:

This is a financial statement that shows the assets available (owner’s equity and outsider’s equity) and owed liabilities from investing, as well as the financial activities of a company. This statement reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps users to know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The main components of a balance sheet are assets, liabilities, and stockholders’ equity.

Prepare a classified balance sheet as of January 31, 2018 as follows:

GF Fireworks
Balance sheet
As of January 31, 2018
Assets	Amount	Liabilities	Amount
Cash	$ 83,900	Accounts payable	$    3,000
Accounts receivable	42,200	Utilities payable	6,200
Supplies	5,100	Dividends payable	3,300
Total current assets	131,200	Income tax payable	2,000
Equipment	64,000	Total current liabilities	14,500
Less: Accumulated Depreciation	(10,500)	Stockholders’ Equity
		Common stock	12,000
		Additional paid-in capital	119,200
		Retained earnings	46,200
		Treasury stock	(7,200)
		Total stockholders’ equity	170,200
Total assets	$184,700	Total liabilities and stockholders’ equity	$184,700

Table (6)

Working note:

Calculate the amount of retained earnings as follows:

$\begin{array}{c}\text{Retained earnings = }\left[\begin{array}{l}\text{Beginning retained earnings+Net income}-\\ \text{Dividends}\end{array}\right]\\ =\$45,100+\$4,400-\$3,300\\ =\$46,200\end{array}$

To determine

To record: Closing entries.

Explanation of Solution

Closing entries:

Closing entries are those journal entries, which are passed to transfer the final balances of temporary accounts such as revenues account, expenses account and dividend account to the retained earnings account. Closing entries produce a zero balance in each temporary account.

Record the closing entries as follows:

Date	Account Title and Explanation	Debit ($)	Credit($)
2018
January 31	Service revenue	63,400
	Retained earnings		63,400
	(To close the revenue account )
January 31	Retained earnings	59,000
	Salaries expense		42,000
	Utilities expense		6,200
	Supplies expense		7,300
	Depreciation expense		1,500
	Income tax expense		2,000
	(To close all expenses account)
January 31	Retained earnings	3,300
	Dividend		3,300
	(To close the dividend account)

Table (7)

To determine

To calculate: Return on equity, compare and analyze it with 2.5% of industry rate of return on equity.

Explanation of Solution

Return on equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on equity is as follows:

$\text{Return on equity}=\frac{\text{Net income}}{\text{Average stockholders' equity}}\times 100$

Calculate the return on equity for GF Fireworks as follows:

Step 1: Calculate total stockholders’ equity of GF Fireworks as of January 1, 2018.

$\begin{array}{c}\begin{array}{l}\text{Total stockholders’ equity}\\ \text{of GF Fireworks as of}\\ \text{January 1, 2018}\end{array}\}=\left[\begin{array}{l}\text{Common stock+}\\ \text{Additional paid-in capital+}\\ \text{Retained earnings}\end{array}\right]\\ =\$10,000+\$80,000+\$45,100\\ =\$135,100\end{array}$

Step 2: Calculate the return on equity of GF Fireworks as of January 31, 2018.

$\begin{array}{c}\text{Return on equity=}\frac{\text{Net income}}{\text{Average stockholders' equity}}\\ =\frac{\text{Net income}}{\left(\frac{\begin{array}{l}\text{Beginning stockholders' equity+}\\ \text{Ending stockholders' equity}\end{array}}{2}\right)}\\ =\frac{\text{\$4,400}}{\left(\frac{\text{\$135,100+\$170,200}}{2}\right)}\\ =2.9\%\end{array}$

Thus, the return on equity of GF Fireworks as of January 31, 2018 is 2.9%. GF Fireworks’ return on equity of 2.9% is higher than the industry return on equity of 2.5%, which shows that GF Fireworks profitability is better than other companies in the same industry.

To determine

The numbers of shares of common stock are outstanding as of January 31, 2018.

Explanation of Solution

Outstanding stock: It refers to the number of shares that are held by the existing stockholders of the company.

Compute the number of share outstanding as of January 31, 2018 as follows:

Details	Number of shares	Number of shares
Number of Common shares outstanding as of January 1, 2018	10,000
Add: Addition common stock issued on January 2, 2018	2,000
Total number of common stock issued		12,000
Less: Number of treasury stock repurchased on January 12, 2018	(1,000)
Add: Number of treasury stock reissued on January 30, 2018	600
Total number of treasury stock held		(400)
Number of shares outstanding as of December 1		11,600

Table (8)

Hence, the number of share outstanding as of January 31, 2018 is 11,600.

To determine

To calculate:  The earnings per share compare and analyze it with last year’s earnings per share average.

Explanation of Solution

Earnings per share:

Earnings per share represent the amount of income earned per share of outstanding common stock in a period. This ratio is used for analyzing the profitability of company’s stockholders’.

The following formula can be used to calculate earnings per share:

$\text{Earnings per share}\text{= }\frac{\text{Net income}\left(\text{loss}\right)\text{ – Preferred dividends}}{\text{Average number of common shares outstanding}}$

Calculate the earnings per share of GF Fireworks as follows:

$\begin{array}{c}\text{Earnings per share = }\frac{\text{Net income}}{\text{Average shares outstanding}}\\ =\frac{\text{Net income}}{\left(\frac{\begin{array}{l}\text{Shares outstanding as of January 1, 2018+}\\ \text{Shares outstanding as of January 31, 2018}\end{array}}{2}\right)}\\ =\frac{\$4,400}{\left(\frac{\text{10,000+11,600}}{2}\right)}\\ =\$0.41\end{array}$

Hence, the earnings per share of GF Fireworks are $0.41. Comparatively, $0.41 of earnings per share in January 2018 is higher than the last year’s earnings per share of $0.30, which shows that January 2018 is better than the last year’s average earnings per share.