Question

Drs. Glenn Feltham and David Ambrose began operations of their physical therapy clinic, called Northland Physical Therapy, on January 1, 2017. The annual reporting period ends December 31. The trial balance on January 1, 2018, was as follows (the amounts are rounded to thousands of dollars to simplify):

Account Titles	Debit			Credit
Cash	$	6
Accounts Receivable		2
Supplies		2
Equipment		10
Accumulated Depreciation				$	3
Software		8
Accumulated Amortization					3
Accounts Payable					5
Notes Payable (short-term)					0
Salaries and Wages Payable					0
Interest Payable					0
Income Taxes Payable					0
Deferred Revenue					0
Common Stock					16
Retained Earnings					1
Service Revenue					0
Depreciation Expense		0
Amortization Expense		0
Salaries and Wages Expense		0
Supplies Expense		0
Interest Expense		0
Income Tax Expense		0
Totals	$	28		$	28

Transactions during 2018 (summarized in thousands of dollars) follow:

1. Borrowed $26 cash on July 1, 2018, signing a six-month note payable.
2. Purchased equipment for $29 cash on July 2, 2018.
3. Issued additional shares of common stock for $6 on July 3.
4. Purchased software on July 4, $2 cash.
5. Purchased supplies on July 5 on account for future use, $8.
6. Recorded revenues on December 6 of $60, including $9 on credit and $51 received in cash.
7. Recognized salaries and wages expense on December 7 of $34; paid in cash.
8. Collected accounts receivable on December 8, $8.
9. Paid accounts payable on December 9, $9.
10. Received a $2 cash deposit on December 10 from a hospital for a contract to start January 5, 2019.

Data for adjusting journal entries on December 31:

11. Amortization for 2018, $3.
12. Supplies of $2 were counted on December 31, 2018.
13. Depreciation for 2018, $3.
14. Accrued interest of $1 on notes payable.
15. Salaries and wages incurred but not yet paid or recorded, $4.
16. Income tax expense for 2018 was $3 and will be paid in 2019.

1. 9-a. How much net income did the physical therapy clinic generate during 2018? What was its net profit margin?

2. 9-b. Is the business financed primarily by liabilities or stockholders’ equity?

3. 9-c. What is its current ratio?

Answer 1

9-a)

Income Statement
At the end of December 31, 2018 (in thousands)
Service Revenue	$60
Less: Expenses:
Salaries and wages expense ($34 + $4)	($38)
Amortization expense	($3)
Supplies expense ($2 + $8 - $2)	($8)
Depreciation expense	($3)
Interest expense	($1)
Income tax expense	($3)
Net Income	$4

Therefore, net income earned in 2018 is $4,000.

Net profit margin = $4/$60*100

= 6.67%

Therefore, net profit margin is 6.67%

9-b)

Whether business is financed by liabilities or stockholders' equity is measure by the debt to equity ratio -

Debt-to-equity ratio = Total Liabilities / Total Shareholders' Equity

= $40 / $27

= 1.48

Therefore, the business is primarily financed by liabilities as the debt-to-equity ratio is 1.48 times.

9-c)

Current ratio = Total current assets / Total current liabilities

= $30 / $40

= 0.75

Therefore, current ratio is 0.75.

Supporting working notes:

Retained Earnings Statement
At the end of December 31, 2018
Beginning balance of retained earnings	$1
Add: Net income	$4
Less: Dividends	$0
Ending balance of retained earnings	$5
Balance Sheet
As on March 31, 2020
Assets
Current Assets:
Cash ($6 + $26 - $29 + $6 - $2 + $51 - $34 + $8 - $9 + $2)	$25
Accounts Receivable ($2 + $9 - $8)	$3
Supplies ($2 + $8 - $8)	$2
Total current assets		$30
Property, plant and equipment:
Equipment ($10 + $29)	$39
Less: Accumulated depreciation - equipment ($3 + $3)	($6)
Equipment, net		$33
Software ($8 + $2)	$10
Less: Accumulated amortization - software ($3 + $3)	($6)
Software, net		$4
Total Assets		$67
Liabilities and Shareholder's Equity
Liabilities
Current Liabilities:
Accounts Payable ($5 + $8 - $9)	$4
Notes payable (short-term)	$26
Salaries and wages payable	$4
Interest payable	$1
Income tax payable	$3
Deferred revenue	$2
Total current liabilities		$40
Long-term liabilities:		$0
Total Liabilities		$40
Shareholders' Equity
Common stock ($16 + $6)	$22
Retained earnings	$5
Total shareholder's equity		$27
Total Liabilities and Shareholders' Equity		$67