Financial and Managerial Accounting: Information for Decisions
Financial and Managerial Accounting: Information for Decisions
6th Edition
ISBN: 9780078025761
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 3, Problem 8PSB

1.

To determine

To prepare:

Income statement, statement of retained earnings and classified balance sheet.

1.

Expert Solution
Check Mark

Explanation of Solution

Prepare income statement as follow:

A Company
Income Statement
For Year Ended December 31, 2015
Particulars Amount
($)
Amount
($)
Revenue:    
Service Revenue 64,100  
Other Revenue 2,320  
Total Revenue   66,420
Expenses:    
Insurance Expense 1,525  
Wages Expense 18,500  
Interest Expense 1,550  
Supplies Expense 1,000  
Rent expenses 3,600  
Repairs Expense 679  
Telephone Expense 521  
Depreciation Expense-Building 2,000  
Depreciation Expense-Equipment 1,000  
Postage Expense 410  
Property taxes Expense 4,825  
Utilities Expense 1,920  
Total Expense   37,530
Net income   28,890

Thus, net income of A Company is $28,890.

Working notes:

Calculation of service revenue,

Servicerevenue=Professionalfeesearned+Rentearned=$59,600+$4,500=$64,100

Calculation of other revenue,

OtherRevenue=DividendEarned+InterestEarned=$1,000+$1,320=$2,320

Statement of retained Earnings

A. Company
Retained Earnings Statement
For Year Ended December 31, 2015
Particulars Amount
($)
Opening balance of retained earnings 62,800
Net income 28,890
  91,690
Dividends (8,000)
Ending balance of retained earnings 83,690

Therefore, retained earnings of A Company are $83,690.

Prepare balance sheet as follow:

A. Company
Balance sheet
As on December 31, 2015
Particulars Amount
($)
Amount
($)
Assets    
Current Assets    
Cash 7,400  
Short-term Investment 11,200  
Supplies 4,600  
Prepaid Insurance 1,000 24,200
Plant Assets    
Equipment 24,000  
Less: Accumulated depreciation (4,000) 20,000
Building 100,000  
Less: Accumulated depreciation (10,000) 90,000
Land   30,500
Total Assets   164,700
Liabilities and Stockholder’s Equity    
Current liabilities    
Accounts Payable 3,500  
Rent Payable 400  
Interest Payable 1,750  
Wages payable 1,280  
Property Taxes payable 3,330  
Unearned professional fees 750 11,010
Long-term liabilities    
Long-term notes payable   40,000
Stockholder’s Equity    
Common Stock 30,000  
Retained earnings 83,690  
Total stockholders’ equity   113,690
Total Liabilities and Stockholder’s equity   164,700

Thus, balance sheet total is $164,700.

2.

To determine

To prepare:

Closing entries

2.

Expert Solution
Check Mark

Explanation of Solution

Service Revenue transfer to income summary account for closing.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
December 31 Service Revenue   66,420  
  Income Summary     66,420
  (being service revenue transfer to income summary account)      

• Service revenue is revenue account. Since, revenue is transferred to income summary account, it reduces revenue. Hence, debit service revenue account.

• Income summary is a temporary account. Since, it is used for closing revenue account. Hence, credit income summary account.

All expenses transfer to income summary account for closing.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
December 31 Income summary   37,530  
  Insurance Expense     1,525
  Wages Expense     18,500
  Supplies Expense     1,550
  Rent expenses     1,000
  Repairs Expense     3,600
  Telephone Expense     679
  Depreciation Expense-Equipment     521
  Depreciation Expense-Building     2,000
  Postage Expense     1,000
  Property taxes Expense     410
  Utilities Expense     4,825
  Interest Expense     1,920
  (being all expenses transfer to income summary account)      

• Income summary is a temporary account. Since, it is used for closing expense account. Hence, debit income summary account.

• All expenses are expenses. Since, expenses are transferred to income summary account, expenses is reduced. Hence, credit all expenses account

Income Summary transfer to retained earnings account for closing.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
December 31 Income Summary   28,890  
  Retained Earning     28,890
  (being net income transfer to retained earnings)      

• Income summary is a temporary account. Since, it is used for transferring net income summary to retained account. Hence, debit income summary account.

• Retained earnings come under stockholder’s equity. Since, retained earning has increased. Hence, credit retained earning account.

Dividend paid to shareholders.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
December 31 Retained Earnings   8,000  
  Dividend     8,000
  (being dividend distributed)      

• Retained earnings come under stockholder’s equity. Since, retained earnings is used to pay dividend, retained earnings has decreased. Hence, debit retained earnings account.

• Dividend is distributed from profit. Since it reduce retained earnings. Hence, credit dividend account.

3.

a.

To determine

Return on assets ratio.

3.

a.

Expert Solution
Check Mark

Explanation of Solution

Calculated info,

Net income is $28,890 (refer part 1).

Total average asset is $162,350 (working note).

Formula to calculate return on asset:

Returnonasset=NetincomeTotalaverageasset

Substitute $28,890 for net income, and $162,350 for total average asset in the above formula,

ReturnonAsset=$28,890$162,350=0.178

Working Note:

Total average assets

Totalaverageasset=Openingtotalasset+Closingtotalasset2=$160,000+$164,7002=$162,350

Thus, return on asset of the company is 0.178.

b.

To determine

Debt ratio.

b.

Expert Solution
Check Mark

Explanation of Solution

Calculated info (refer part 1),

Total debt capital is $40,000.

Total assets are $164,000.

Formula to calculate debt ratio:

Debtratio=TotaldebtcapitalTotalassets

Substitute $40,000 for total debt capital, and $164,700 for total assets in the above formula,

Debtratio=$40,000$164,700=0.24

Thus, debt ratio of the company is 0.24.

c.

To determine

Profit margin ratio.

c.

Expert Solution
Check Mark

Explanation of Solution

Calculated info (refer part 1),

Net income is $28,890.

Total revenue is $66,420.

Formula to calculate profit margin:

Profitmargin=NetincomeTotalrevenue×100

Substitute $28,890 for net income, and $66,420 for total revenue in the above formula,

Profitmargin=$28,890$66,420×100=43.396%

Thus, profit margin of the company is 43.396%.

d.

To determine

Current ratio.

d.

Expert Solution
Check Mark

Explanation of Solution

Calculated info (refer part 1),

Total current liabilities are $11,010.

Total current assets are $24,200.

Formula to calculate current ratio:

Currentratio=CurrentliabilitiesCurrentassets

Substitute $11,010 for total liabilities, and $24,200 for current assets in the above formula,

Currentratio=$11,010$24,200=0.45

Thus, current ratio of the company is 0.45.

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Chapter 3 Solutions

Financial and Managerial Accounting: Information for Decisions

Ch. 3 - Prob. 6DQCh. 3 - Prob. 7DQCh. 3 - Prob. 8DQCh. 3 - A If a company initially records prepaid expenses...Ch. 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 - Periodic reporting C1 Choose from the following...Ch. 3 - Computing accrual and cash income C1 In its first...Ch. 3 - Identifying accounting adjustments P1 Classify the...Ch. 3 - Prob. 4QSCh. 3 - Prepaid (deferred) expenses adjustments P1 For...Ch. 3 - Prepaid (deferred) expense adjustments P1 For each...Ch. 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 - Recording and analyzing adjusting entries P1...Ch. 3 - Prob. 16QSCh. 3 - Prob. 17QSCh. 3 - Prob. 18QSCh. 3 - Prob. 19QSCh. 3 - A preparing adjusting entries P4 Cal Consulting...Ch. 3 - Preparing closing entries from the ledger P4 The...Ch. 3 - Identifying post-closing accounts P5 Identify...Ch. 3 - identifying the accounting cycle C2 List the...Ch. 3 - Classifying balance sheet items C3 The following...Ch. 3 - Identifying current accounts and computing the...Ch. 3 - Prob. 26QSCh. 3 - Prob. 27QSCh. 3 - Prob. 1ECh. 3 - Exercise 3-2 Adjusting and paying accrued expenses...Ch. 3 - Prob. 3ECh. 3 - Prob. 4ECh. 3 - Prob. 5ECh. 3 - Prob. 6ECh. 3 - Prob. 7ECh. 3 - Prob. 8ECh. 3 - Prob. 9ECh. 3 - Prob. 10ECh. 3 - Prob. 11ECh. 3 - Prob. 12ECh. 3 - Prob. 13ECh. 3 - Prob. 14ECh. 3 - Prob. 15ECh. 3 - Prob. 1PSACh. 3 - Prob. 2PSACh. 3 - Prob. 3PSACh. 3 - Prob. 4PSACh. 3 - Prob. 5PSACh. 3 - Prob. 6PSACh. 3 - Prob. 7PSACh. 3 - Prob. 8PSACh. 3 - Prob. 1PSBCh. 3 - Prob. 2PSBCh. 3 - Prob. 3PSBCh. 3 - Prob. 4PSBCh. 3 - Prob. 5PSBCh. 3 - Prob. 6PSBCh. 3 - Prob. 7PSBCh. 3 - Prob. 8PSBCh. 3 - Prob. 3SPCh. 3 - Prob. 1GLPCh. 3 - Prob. 2GLPCh. 3 - Prob. 3GLPCh. 3 - Prob. 4GLPCh. 3 - Prob. 5GLPCh. 3 - Prob. 6GLPCh. 3 - Prob. 1BTNCh. 3 - Prob. 2BTNCh. 3 - Prob. 3BTNCh. 3 - Prob. 4BTNCh. 3 - Prob. 5BTNCh. 3 - Prob. 6BTNCh. 3 - Prob. 7BTNCh. 3 - Prob. 8BTNCh. 3 - Prob. 9BTN
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