Question

Recording Transactions (Including Adjusting and Closing Entries), Preparing Financial Statements, and Performing Ratio Analysis Ben and Kelly Perry began operations of their Roof repair company (Perry Roofing, Inc.) on January 1, 2015. The annual reporting period ends December 31. The trial balance on January 1, 2016, was as follows:

	Debit	Cash
Cash	12,000
Accounts receivable	4,000
Supplies	8,000
Equipment
Accumulated Depreciation (on equipement)
Other assets (not detailed to simplify)	9,000
Accounts Payable		14,000
Notes Payable
Wages Payable
Interest Payable
Income Taxes Payable
Unearned Revenue
Common Stock (60,000 shares, 0.10 par value)		6,000
Additional Paid-in Capital		9,000
Retained Earnings		4,000
Service Revenue
Depreciation Expense
Supplier Expense
Wage Expense
Interest Expense
Income Tax Expense
Remaining Expense (not detailed to simplify)
Totals	33,000	33,000

Transactions during 2016 follow:

a. Borrowed $28,000 cash on July 1, 2016, signing a one-year, 10 percent note payable.

b. Purchased equipment for $18,000 cash on July 1, 2016.

c. Sold 10,000 additional shares of capital stock for cash at $0.50 market value per share at the beginning of the year.

d. Earned $75,000 in revenues for 2016, including $16,000 on credit and the rest in cash.

e. Incurred remaining expenses of $35,000 for 2016, including $7,000 on credit and the rest paid with cash.

f. Purchased $3,000 of supplies on cash.

g. Collected accounts receivable, $8,000.

h. Paid accounts payable, $11,000.

i. Purchased $10,000 of supplies on account.

j. Received a $3,000 deposit on work to start January 15, 2017.

k. Declared and paid a cash dividend, $10,000.

Data for adjusting entries:

l. Supplies of $9,000 were counted on December 31, 2016.

m. Depreciation for 2016, $2,000.

n. Interest accrued on notes payable (to be computed).

o. Wages earned since the December 24 payroll but not yet paid, $3,000.

p. Income tax expense was $4,000, payable in 2017.

QUESTIONS TO ANSWER:

1. Set up T-accounts for the accounts on the trial balance and enter beginning balances.

2. Prepare journal entries for transactions (a) through (k) and post them to the T-accounts.

3. Journalize and post the adjusting entries (l) through (p).

4. Prepare an income statement (including earnings per share), statement of stockholders' equity, and balance sheet.

5. Identify the type of transaction for (a) through (k) for the statement of cash flows (O for operating, I for investing, F for financing), and the direction and amount of the effect.

6. Journalize and post the closing entry.

7. Compute the following ratios for 2016 and explain what the results suggest about the company:

a. Current ratio

b. Total asset turnover

c. Net profit margin

Answer 1

2. & 3 :

Transaction / Event	Account Titles	Debit	Credit
		$	$
a.	Cash	28,000
	Notes Payable		28,000
b.	Equipment	18,000
	Cash		18,000
c.	Cash	5,000
	Common Stock ( 10,000 x $ 0.10 )		1,000
	Additional Paid-in Capital		4,000
d.	Cash	59,000
	Accounts Receivable	16,000
	Service Revenue		75,000
e.	Remaining Expenses	35,000
	Accounts Payable		7,000
	Cash		28,000
f.	Supplies	3,000
	Cash		3,000
g.	Cash	8,000
	Accounts Receivable		8,000
h.	Accounts Payable	11,000
	Cash		11,000
i.	Supplies	10,000
	Accounts Payable		10,000
j.	Cash	3,000
	Unearned Revenue		3,000
k.	Dividends	10,000
	Cash		10,000
Adjusting Entries
l.	Supplies Expense	12,000
	Supplies		12,000
m.	Depreciation Expense	2,000
	Accumulated Depreciation: Equipment		2,000
n.	Interest Expense	2,800
	Interest Payable		2,800
o.	Wage Expense	3,000
	Wages Payable		3,000
p.	Income Tax Expense	4,000
	Income Taxes Payable		4,000

4.

Income Statement For the year ended December 31, 2016
Service Revenue		$ 75,000
Expenses
Depreciation Expense	2,000
Wage Expense	3,000
Supplies Expense	12,000
Interest Expense	1,400
Income Tax Expense	4,000
Remaining Expenses	35,000
Total Expenses		57,400
Net Income		$ 17,600
Common Shares Outstanding		70,000
Earnings per Share		$ 0.25

Statement of Stockholders Equity For the year ended December 31, 2016
	Common Stock	Additional Paid-in Capital	Retained Earnings	Total Stockholders Equity
Balance, January 1	$ 6,000	$ 9,000	$ 4,000	$ 19,000
Common stock issued during the year	1,000	4,000		5,000
Net Income			17,600	17,600
Dividends			(10,000)	(10,000)
Balance, December 31	$ 7,000	$ 13,000	$ 11,600	$ 31,600

Balance Sheet December 31, 2016
Assets			Liabilities and Stockholders Equity
Cash	45,000		Accounts Payable	20,000
Accounts Receivable	12,000		Wages Payable	3,000
Supplies	9,000		Income Taxes Payable	4,000
Total Current Assets		66,000	Interest Payable	1,400
Equipment	18,000		Unearned Revenue	3,000
Accumulated Depreciation : Equipment	(2,000)		Notes Payable	28,000
Equipment, net		16,000	Total Liabilities		59,400
Other Assets		9,000	Common Stock	7,000
			Additional Paid-in Capital	13,000
			Retained Earnings	11,600
			Total Stockholders Equity		31,600
Total Assets		91,000	Total Liabilities and Stockholders Equity		91,000