Question

On December 1, 2015 John Trap created a new travel agency, Trap Adventures, Inc. providing exclusive adventure trips. The following transactions occurred during December 2015. (NOTE: There are no beginning balances – this is a new company.) Dec 1 John Trap invested $60,000 cash in the company for common stock. 2 Purchase office equipment for $17,500 cash. 2 The company rented furnished office space by paying $18,000 cash for the first six months (December 2015 - May 2016) rent. 3 The company purchased $1,500 of office supplies on account. 10 The company paid $3,600 cash for the premium on a 12-month insurance policy. 14 The company paid $10,750 cash for two weeks' salaries earned by employees. 24 The company collected $54,000 cash on commissions from airlines on tickets obtained for customers. 28 The company paid $12,125 cash for two weeks' salaries earned by employees. 29 The company paid $350 cash for minor repairs to the company's computer. 30 The company paid $450 cash for this month's telephone bill. 30 Dividends of $3,000 cash were paid. Final Project Requirements Using the spreadsheet found here and information above, complete the following: Adjustment Data: One month's insurance coverage has expired. The company occupied the office space for the month of December. At the end of the month, $600 of office supplies are still available. Create journal entries to record the transactions that occurred during the month of December. (Completed in Unit 3) Prepare an unadjusted trial balance (Completed in Unit 3) Create adjusting journal entries at the end of the year, December 31 based on the adjustment data. Prepare an adjusted trial balance. Prepare an income statement, statement of stockholders' equity, and classified balance sheet. Create closing journal entries to close all temporary accounts. Prepare post-closing trial balance. In addition, answer TWO of the questions below in 1-2 fully developed paragraphs. A fully developed paragraph should have a major point with 3 to 5 support sentences. One or two sentences is not acceptable or does not discuss the question. Be sure to show what you know!!! Trap Adventures, Inc. is looking for an accountant. In your own words, explain to Trap's hiring team the role of accountant and accounting within business. Provide examples of the expectations of the accountant. Discuss the financial position of Trap Adventures, Inc. using the following ratios: Current ratio Return on equity: For each ratio, provide the calculation and an explanation of the meaning. Is this a positive or negative result for the Trap Adventures, Inc.? Using Trap Adventures, Inc.'s income statement, evaluate the operations for the month of December. Complete a common-size income statement using sales as the base number. What is the largest percentage? What is the smallest percentage? What recommendations could be made to increase Trap's net income? Currently, Trap Adventures, Inc. does not own any loans or bank notes (long-term liabilities). What would happen if Trap decides to obtain a bank loan for $25,000 to fund daily operations? How would this transaction impact the financial statements - which accounts would be affected? What is the debt to equity ratio? What does the debt to equity ratio

Answer 1

Date	Account Title	Debit	Credit
1-Dec	Cash	60000
	Common stock		60000
2	Office equipment	17500
	Cash		17500
2	Rent expense	18000
	Cash		18000
3	Office supplies	1500
	Accounts payable		1500
10	Insurance expense	3600
	Cash		3600
14	Salaries expense	10750
	Cash		10750
24	Cash	54000
	Commission fees revenue		54000
28	Salaries expense	12125
	Cash		12125
29	Repair expense	350
	Cash		350
30	Utility expense	450
	Cash		450
30	Dividend expense	3000
	Cash		3000
		181275	181275

	LEDGER ACCOUNTS			Net Ledger balances
Date	Account Title	Debit	Credit	Debit	Credit
3	Accounts payable		1500		1500
1-Dec	Cash	60000
2	Cash		17500
2	Cash		18000
10	Cash		3600
14	Cash		10750
24	Cash	54000
28	Cash		12125
29	Cash		350
30	Cash		450
30	Cash		3000	48225
24	Commission fees revenue		54000		54000
1-Dec	Common stock		60000		60000
30	Dividend expense	3000		3000
10	Insurance expense	3600		3600
2	Office equipment	17500		17500
3	Office supplies	1500		1500
2	Rent expense	18000		18000
29	Repair expense	350		350
14	Salaries expense	10750
28	Salaries expense	12125		22875
30	Utility expense	450		450
		181275	181275	115500	115500

Unadjusted Trial Balance as at Dec 31
Account Titles	Debit	Credit
Cash	48225
Office supplies	1500
Office equipment	17500
Accounts payable		1500
Common stock		60000
Commission fees revenue		54000
Insurance expense	3600
Rent expense	18000
Repair expense	350
Salaries expense	22875
Utility expense	450
Dividend expense	3000
Total	115500	115500

Adjusting Journal entries
Prepaid Insurance	3300
Insurance expense		3300
(3600/12*11)
Office supplies expense	900
Office supplies		900
(1500-600)

	Unadjusted T/B		Adjustment J/Es		Adjusted T/B
Account Titles	Debit	Credit	Debit	Credit	Debit	Credit
Cash	48225				48225
Office supplies	1500		-900		600
Prepaid insurance			3300		3300
Office equipment	17500				17500
Accounts payable		1500				1500
Common stock		60000				60000
Commission fees revenue		54000				54000
Insurance expense	3600		-3300		300
Rent expense	18000				18000
Repair expense	350				350
Salaries expense	22875				22875
Utility expense	450				450
Office supplies expense			900		900
Dividend expense	3000				3000
Total	115500	115500	0	0	115500	115500

Income Statement
For the month of Dec. 31
Commission fees revenue		54000
Less: Operating Expenses:
Insurance expense	300
Rent expense	18000
Repair expense	350
Salaries expense	22875
Utility expense	450
Office supplies expense	900
Total Operating Expenses		42875
Net Income		11125
Statement of stockholders' equity as at Dec 31
Net Income		11125
Less: Dividends		3000
Balance as at Dec 31		8125
Classified Balance Sheet
As at Dec 31
Assets
Current assets
Cash	48225
Office supplies	600
Prepaid insurance	3300
Total Current assets		52125
Fixed assets
Office equipment		17500
Total Assets		69625
Liabilities & Owner's Equity
Current Liabilities
Accounts payable		1500
Owner's Equity
Common stock	60000
Retained Earnings	8125
Total Owner's Equity		68125
Total Liabilities & Owner's Equity		69625

Closing Journal Entries
Commission fees revenue	54000
Income summary		54000
Income summary	42875
Insurance expense		300
Rent expense		18000
Repair expense		350
Salaries expense		22875
Utility expense		450
Office supplies expense		900
Income summary	11125
Retained Earnings		11125
Retained Earnings	3000
Dividend expense		3000
Post-Closing Trial Balance as at Dec 31
Account Titles	Debit	Credit
Cash	48225
Office supplies	600
Prepaid insurance	3300
Office equipment	17500
Accounts payable		1500
Common stock		60000
Retained Earnings		8125
Total	69625	69625

Current Ratio

Current Assets/Current Liabilities

Current assets=48225+600+3300=52125

Current liabilities=1500

Current Ratio=52125/1500=

34.75

Current Ratio means the capacity of the company to meet itsimmediate trade (ie. Within a year)obligations .

The normal ratio suggested is 2,ie.the current / liquid /easily-convertible-to-cash assets are normally expected to be maintained at twice the amount of current/trade liabilities incurred .

But here, it's 34 .75, way above normal.

means, the company can invest its idle cash into the business itself to eran more profits or invest outside in interest earning marketable securities

Return on Equity

Net Income/Total equity

11125/68125=

16.33%

Return on Equity means the $ dollar return as net income per $ of equity capital invested.

here, it is 0.1633 per $ of equity invested or $ 16.33 per $ 100 of equity invested.

Common size-Income Statement
For the month of Dec. 31
Commission fees revenue		54000		100.00%
Less: Operating Expenses:
Insurance expense	300		0.56%
Rent expense	18000		33.33%
Repair expense	350		0.65%
Salaries expense	22875		42.36%
Utility expense	450		0.83%
Office supplies expense	900		1.67%
Total Operating Expenses		42875		79.40%
Net Income		11125		20.60%
Largest % age
Salaries expense	42.36%
Smallest % age
Insurance expense	0.56%
Recommendations could be made to increase Trap's net income
Can earn interest income by investing the excess cash in securities of other companies.

Obtaininig a bank loan for $25,000

will affect the financial statements as follows:

Current assets --ie.Cash will increase by 25000 &

Current Liabilities-- Bank loan will increase by 25000

	Before bk.Loan	After Bk.Loan
Debt Equity ratio=
Total liabilities/Total Equity	1500/68125=	(1500+25000)/68125=
	2.20%	38.90%

With bank loan, debt increases as a % to total equity