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Wilderness Guide Services Inc. Income Statement For the year Ending December 31 |
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| Particulars | Amount | |
| Revenues | ||
| Guide revenue earned | $102,000 | |
| Less: Expenses | ||
| Salary expense | $87,500 | |
| Camping Supply expense | $1,200 | |
| Insurance Expense | $9,600 | |
| Interest expense | $1,700 | |
| Depreciation expense | $5,000 | |
| Total expenses | $105,000 | |
| Net Loss | ($3,000) | |
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Wilderness Guide Services Inc. Statement of Shareholder’s Equity For the year Ending December 31 |
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| Particulars | Amount |
| Retained earnings (January 1) | $15,000 |
| Less: Net Loss | ($3000) |
| Less: Dividends | ($1000) |
| Retained earnings (December 31) | $11,000 |
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Wilderness Guide Services Inc. Balance Sheet As on December 31 |
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| Assets | Amount | |
| Cash | $12,200 | |
| Accounts receivable | $31,000 | |
| Camping Supplies | $7,900 | |
| Unexpired insurance policies | $2,400 | |
| Equipment | $70,000 | |
| Less; Accumulated Depreciation | ($60,000) | $10,000 |
| Total assets | $63,500 | |
| Liabilities and Stockholder’s equity | ||
| Liabilities | ||
| Notes payable | $18,000 | |
| Accounts payable | $9,500 | |
| Total Liabilities | ||
| Stockholder’s equity | ||
| Capital stock | $25,000 | |
| Retained Earnings | $11,000 | |
| Total stockholder’s equity | $36,000 | |
| Total Liabilities and Stockholder’s equity | $63,500 | |
b. The liquidity of the company can be determined through calculation of the liquidity ratio.
Liquidity ratio = (Cash + Accounts receivables)/ current liabilities
Liquidity ratio = ($12,000 + $31,000) / $9,500
Liquidity ratio = 4.54: 1
The liquid ratio of 4.54: 1 indicates that the company is liquid and it can pay its current liabilities by 4.54 times from its liquid assets.
c. The company must have been profitable in the past but has not been profitable in the current year. This can be seen through the net loss of $3,000 experienced in the current year. However, the opening balance of retained earnings of the company was $15,000 on January and was the adjusted trial balance. It can thus be concluded that the company was profitable in the past.
Exercise 5.5, page 220
Refer to the adjusted trial balance of Wilderness Guide Services Inc.
Prepare all necessary closing entries at December 31, 2007.
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Wilderness Guide Services, Inc. General Journal December 31, 2007 |
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(1) |
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| Dec. 31 | Guide Revenue Earned | 102,00 | |
| Income Summary | 102,00 | ||
| To close Guide Revenue Earned. | |||
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(2) |
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| Dec 31 | Income Summary | ||
| Salary Expense | |||
| Camping Supply Expense | |||
| Insurance Expense | |||
| Interest Expenses | |||
| Depreciation Expense: Equipment | |||
| To close all expense accounts | |||
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(3) |
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| Dec 31 | Retained Earnings | $3,000 | |
| Income Summary | $3,000 | ||
| To transfer net loss incurred in 2007 to the retained Earnings account ($102,000 - $105,000 = $3,000 loss). | |||
| Dec 31 | Retained Earnings | $1,000 | |
| Dividends | $1,000 | ||
| To transfer dividends declared in 20007 to the Retained Earnings account. | |||
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Wilderness Guide Services, Inc. After-closing Trial Balance December 31, 2007 |
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| Cash | $12,200 | ||
| Accounts receivable | 31,000 | ||
| Camping supplies | 7,900 | ||
| Unexpired insurance policies | 2,400 | ||
| Equipment | 70,000 | ||
| Accumulated depreciated: equipment | $60,000 | ||
| Notes payable (due 4/1/12) | 18,000 | ||
| Accounts payable | 9,500 | ||
| Capital stock | 25,000 | ||
| Retained earnings | 11,000 | ||
| Dividends | 1,000 | ||
| Guide revenue earned | 102,000 | ||
| Salary expense | 87,500 | ||
| Camping supply expense | 1,200 | ||
| Insurance expense | 9,600 | ||
| Depreciation expense: equipment | 5,000 | ||
| Interest expense | 1,700 | ||
| Total | $229,500 | $229,500 | |
c. The $11,000 retained earnings balance reported in the after-closing balance is $4,000 less than the $15,000 balance reported in the unadjusted trial balance. This arrived at by subtracting both the net loss and dividends from the retained earnings balance $15,000 - $3,000 - $1,000 = $11,000.
Problem 5.2A, page 226
Law Pride, In., provides lawn-mowing services to both commercial and residential customers. The company performs adjusting entries on a monthly basis.
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Law Pride, Inc. Income Statement For the period December 31, 2007 |
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| Revenue | Amounts | |
| Mowing revenue | $170,000 | |
| Expenses: | ||
| Insurance expenses | 2,400 | |
| Office rent expenses | 36,000 | |
| Supplies expenses | 5,200 | |
| Salary expenses | 60,000 | |
| Depreciation expenses-truck | 30,000 | |
| Depreciation expenses-equipment | 4,000 | |
| Repair expenses | 3,000 | |
| Fuel expenses | 1,500 | |
| Misc. expenses | 5,000 | |
| Interest expenses | 3,000 | |
| Total expenses | (150,100) | |
| Income before tax | $19,900 | |
| Less- Income tax | (6,000) | |
| Net income | $13,900 | |
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Law Pride, Inc. Statement of retained earningsFor period December 31, 2007 |
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| Opening balance | $30,000 |
| Add- Net income | 13,900 |
| Less- Dividend | (5,000) |
| Closing balance | 38,900 |
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Lawn Pride, Inc. Balance Sheet As on December 31, 2007 |
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| Assets | Amount ($) | Liabilities | Amount ($) |
| Cash | $58,525 | Accounts payable | $1,500 |
| Accounts receivable | 4,800 | Interest payable | 150 |
| Prepaid rent | 3,000 | Salaries payable | 900 |
| Unexpired insurance | 8,000 | Income tax payable | 1,050 |
| Supplies | 1,075 | Notes payable | 50,000 |
| Equipment 20,000 | 8,000 | Unearned party revenue | 900 |
| Less: Depreciation (12,000) | |||
| Trucks 150,000 | 30,000 | Owner’s equity: | |
| Less: Depreciation (120,000) | |||
| Capital stock | 20,000 | ||
| Retained earnings | 38,900 | ||
| Total | $113,400 | Total | $113,400 |
Closing entries
| Date | Particulars | Ref .no | Debit ($) | Credit ($) |
| Income summary |
$156,100 |
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| Insurance expenses | 2,400 | |||
| Office rent expenses | 36,000 | |||
| Supplies expenses | 5,200 | |||
| Salary expenses | 60,000 | |||
| Depreciation expenses-Truck | 30,000 | |||
| Depreciation expenses-equipment | 4,000 | |||
| Repair expenses | 3,000 | |||
| Fuel expenses | 1500 | |||
| Misc. expenses | 5000 | |||
| Interest expenses | 3000 | |||
| Income tax | 6000 | |||
| [To close the expense accounts] | ||||
| Mowing revenue | 170,000 | |||
| Income summary | 170,000 | |||
| [To close the revenue account] | ||||
| Income summary | 13,900 | |||
| Retained earnings | 13,900 | |||
| [To close the Income summary] | ||||
| Dividend | 5,000 | |||
| Retained earnings | 5,000 | |||
| [To close the dividend account] |
After closing trial balance
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Lawn Pride, Inc. After-closing Trial Balance December 31, 2007 |
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| Particulars | Debits | Credits | |
| Cash | $58,525 | ||
| Accounts receivable | 4,800 | ||
| unexpired insurance | 8,000 | ||
| Prepaid rent | 3,000 | ||
| Supplies | 1,075 | ||
| Trucks | 150,000 | ||
| Accumulated Depreciation -truck | 120,000 | ||
| Mowing equipment | 20,000 | ||
| Accumulated Depreciation -equipment | 12,000 | ||
| Accounts payable | 1,500 | ||
| Notes payable | 50,000 | ||
| Salaries payable | 900 | ||
| Interest payable | 150 | ||
| Income tax payable | 1,050 | ||
| Unearned revenue | 900 | ||
| Capital stock | 20,000 | ||
| Retained earnings | 38,900 | ||
| Total | $245,400 | $245,400 | |
The liquidity is measured by the current ratio:
Current ratio = current assets/current liabilities = $75,400 / $4,500 = 16.75
The current ratio is high indicating that the company is highly liquid.
Calculations:
| Particulars | Amount ($) |
| Cash | $58,525 |
| Accounts receivable | 4,800 |
| unexpired insurance | 8,000 |
| Prepaid rent | 3,000 |
| Supplies | 1,075 |
| Total current assets | 75,400 |
| Accounts payable | 1,500 |
| Salaries payable | 900 |
| Interest payable | 150 |
| Income tax payable | 1,050 |
| Unearned revenue | 900 |
| Total Current assets | 4,500 |
Profitability ratio:
Profitability ratio = Net income / Revenue = $13,9 / $170,000 = 8.17%
The company has a good profitability
Appendix C, Problem C.1, pages C-22–C-23
E-Z Manufacturing Company is a partnership among Yolando Gonzales, Willie Todd, and Linda Yeager.
The net income for each partner is $60,00 and the contract states that the profits will be split equally.
Partners have to include their share of income from the partnership firm in their tax returns. The income is liable to income tax and is taxable to the partners individually in the year which they earned the income. Capital withdrawals do not have any tax effect on the individual tax returns of the partners.
Statement of Partners’ equity
| Yolando Gonzales | Willie Todd | Linda Yeager | Totals | |
| Beginning Capital | $50,000 | $60,000 | $40,000 | $150,000 |
| Net Income | $60,000 | $60,000 | $60,000 | $180,000 |
| Withdrawals | $-25,000 | $-23,000 | $-30,000 | $-78,000 |
| End Capital | $85,000 | $97,000 | $70,000 | $252,00 |
Appendix C, Problem C.3, page C23
Guenther and Firmin, both of whom are CPAs, form a partnerhip with Guenther investing $100,000 and Firmin, $80,000.
Division of Net Income |
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| Guenther | Firmin | Net Income | |
| Net income to be divided | $247,000 | ||
| Less: Salary allowance to partners | $80,000 | $50,000 | (130,000) |
| Income after salary allowance | $117,000 | ||
| Interest allowances on beginning capital | |||
| Guenther (100,000 x 15%), Firmin (80,000 x 15%) | $15,000 | $12,000 | |
| Total allocated as interest allowances | $27,000 | ||
| Remaining income after interest allowances | $220,00 | ||
| Allocated in a fixed ratio: | |||
| Guenther(60%*$90,000) | $54,000 | ||
| Firmin (40%*$90,000) | $36,000 | ($90,000) | |
| Total share to each partner | $149,000 | $98,000 | 0.00 |
Appendix C, Problem C.9, page C25
The partnership of Avery and Kirk was formed on July 1, when George Avery and Dinah Kirk agreed to invest equal amounts to share profits and losses equally.
Entries in Journal form
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Ref No. |
Debit |
Credit | |
| Cash |
30,000 |
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| Inventory |
56,000 |
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| George Avery, Capital |
86,000 |
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| To record the investment by George Avery in the partnership of Avery and Kirk. | |||
| Cash |
9,400 |
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| Accounts Receivable |
79,600 |
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| Inventory |
12,800 |
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| Office Equipment (net) |
9,000 |
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| Accounts Payable |
24,800 |
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| Dinah Kirk, Capital |
86,000 |
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To record the investment by Dinah Kirk in the partnership of Avery and Kirk. |
Balance sheet
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AVERY & KIRK |
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| BALANCE SHEET | ||
| JUNE 30 | ||
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Assets |
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| Cash |
$39,400 |
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| Accounts receivable | 79,600 | |
| Inventory | 68,800 | |
| Office Equipment (net) | 9,000 | |
| Total Assets |
$196,800 |
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| Liabilities & Stockholders' Equity | ||
| Liabilities: | ||
| Accounts payable | $ 24,800 | |
| Total liabilities |
$24,800 |
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| Stockholders' equity: | ||
| Capital stock |
172,000 |
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| Retained earnings |
0 |
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| Total stockholders' equity |
$172,000 |
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| Total liabilities and stockholders' equity |
$196,800 |
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c. Journal entries to close the income summary account and the drawing accounts at June 30.
| Income Summary | 74,000 | |
| George Avery, Capital | 37,000 | |
| Dinah Kirk, Capital | 37,000 | |
| To divide net income for the year in accordance with partnership agreement to share profits equally. |
| George Avery, Capital |
31,000 |
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| Dinah Kirk, Capital |
31,000 |
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| George Avery, Drawing |
31,000 |
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| Dinah Kirk, Drawing |
31,000 |
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| To transfer debit balances in partners' drawing accounts to |
