Question

Talent Learning is an e-learning business that specialises in providing online learning resources in accounting, economics, and marketing management. The adjusted trial balance of Talent Learning as at 30 June 2019 as follows.

	Debit $	Credit $
Cash at Bank	12800
Accounts Receivable	2600
Office Supplies	600
Prepaid Rent	2000
Equipment	40000
Accumulated Depreciation - Equipment		200
Furniture	18000
Accumulated Depreciation - Furniture		300
Accounts Payable		8200
Salary Payable		900
Interest Payable		100
Unearned Service Revenue		1600
Loan Payable		40000
Owner’s, Capital		12000
Owner’s, Drawings	1000
Service Revenue		17600
Rent Expense	1400
Salary Expense	1800
Supplies Expense	100
Depreciation Expense - Building	200
Depreciation Expense - Furniture	300
Interest Expense	100
	80900	80900

Required:

a)     Prepare Talent Learning’s Income Statement for the year ended 30 June 2019.

b)    Prepare Talent Learning’s Statement of Changes in Equity for the year ended 30 June 2019.

c)     Calculate Talent Learning’s Profit Margin and Return on Assets ratios (the total assets at 30 June 2018 was $71,000) (Show all calculations, Round off the answers to the nearest 2 decimal places).

d)    (i) Calculate Talent Learning’s Current ratio and the Debt-to-total assets ratio at 30 June 2019. (Show all calculations, Round off the answers to the nearest 2 decimal places).

(ii) Discuss Talent Learning’s liquidity and solvency positions at 30 June 2019 as compared to 2018 (the Current ratio was 1.81:1 and the Debt-to-total assets ratio was 52.5% at 30 June 2018). (Total 20 Marks)

Answer 1

Part (a) : Talent Learning's Income Statement

Part (b) : Talent Learning's Statement of Changes in Equity

Particulars	$
Owner's Capital	12000
Add: Net Income	13700
Less: Owner's Drawings	(1000)
Owner's Equity	24700

Part (c) : Talent Learning's Profit Margin and Return on Assets

(i) Profit Margin

Profit Margin = Net Income / Revenue * 100

Net Income = $13700

Revenue = $17600

Profit Margin = $13700 / $17600 * 100 = 77.84%

(ii) Return on Assets

Return on Assets = Net Income / Average assets * 100 Average Assets = (Beginning Assets + Ending assets) / 2

Net Income = $13700

Beginning assets = $71000

Ending assets:

Particulars	$	$
Cash at Bank		12800
Accounts Receivable		2600
Office Supplies		600
Prepaid Rent		2000
Equipment	40000
Less: Accumulated Depreciation	(200)	39800
Furniture	18000
Less: Accumulated Depreciation	(300)	17700
Total Assets		75500

Average Assets = ($71000 + $75500) / 2 = $73250

Return on Assets = $13700 / $73250 * 100 = 18.70%

Part (d)

(i) Current Ratio

Current Ratio = Current Assets / Current Liabilities

Current Assets

Particulars	$
Cash at Bank	12800
Accounts Receivable	2600
Office Supplies	600
Prepaid Rent	2000
Current Assets	18000

Current Liabilities

Particulars	$
Accounts Payable	8200
Salary Payable	900
Interest Payable	100
Unearned Service Revenue	1600
Current Liabilities	10800

Current Ratio = $18000 / $10800 = 1.67 : 1

(i) Debt to total assets

Debt to total assets = Total Liabilities / Total Assets

Total Liabilities

Particulars	$
Accounts Payable	8200
Salary Payable	900
Interest Payable	100
Unearned Service Revenue	1600
Loan Payable	40000
Total Liabilities	50800

Total Assets

Particulars	$	$
Cash at Bank		12800
Accounts Receivable		2600
Office Supplies		600
Prepaid Rent		2000
Equipment	40000
Less: Accumulated Depreciation	(200)	39800
Furniture	18000
Less: Accumulated Depreciation	(300)	17700
Total Assets		75500

Debt to total assets = $50800 / $75500 * 100 = 67.28%

(ii)

Particulars	2019	2018
Current Ratio	1.67 : 1	1.81 : 1
Debt to total assets	67.28%	52.50%

Talent Learning's current ratio has worsen from 1.81 in 2018 to 1.67 in 2019.

Talent Learning's Debt to total assets has worsen from 52.50% in 2018 to 67.28% in 2019. Talent learnings owns liabilities more than the assets.

All the best...