Question

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

	Debit $	Credit $
Cash at Bank	17200
Accounts Receivable	3900
Office Supplies	900
Prepaid Rent	3000
Equipment	60000
Accumulated Depreciation - Equipment		300
Furniture	27000
Accumulated Depreciation - Furniture		450
Accounts Payable		12300
Salary Payable		1350
Interest Payable		150
Unearned Service Revenue		2400
Loan Payable		60000
Owner’s, Capital		4800
Owner’s, Drawings	1500
Service Revenue		39600
Rent Expense	2100
Salary Expense	4700
Supplies Expense	150
Depreciation Expense - Building	300
Depreciation Expense - Furniture	450
Interest Expense	150
	121350	121350

Required:

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

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

c)     Calculate Wisdom Learning’s Profit Margin and Return on Assets ratios (the total assets at 30 June 2018 was $109000). (Show all calculations, Round off the answers to the nearest 2 decimal places).

d)    (i) Calculate Wisdom 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 Wisdom Learning’s liquidity and solvency positions at 30 June 2019 as compared to 2018 (the Current ratio was 1.65:1 and the Debt-to-total assets ratio was 54.75% at 30 June 2018). (Total 20 Marks)

Answer 1

a)

Income Statement of Wisdom Learning's for the year ended 30th June 2019
Particulars	Amount	Amount
Service Revenue		$39,600.00
Total Revenue		$39,600.00
Expenses
Rent Expense	$   2,100.00
Salary Expense	$   4,700.00
Supplies Expense	$      150.00
Depreciation Expense - Building	$      300.00
Depreciation Expense - Furniture	$      450.00
Interest Expense	$      150.00	$   7,850.00
Net Profit		$31,750.00

b)

Statement of Changes in Equity of Wisdom Learning's for the year ended 30th June 2019

Particulars	Amount
Owner's Capital at the beginning	$   4,800.00
(+) Net profit for the current year	$31,750.00
(-) Drawings	$   1,500.00
Closing Owner's Capital on 30th June 2019	$35,050.00

c)

Profit Margin = Net profit/Total Revenue

= $31,750/39600

= 80.18%

Return on Assets Ratio = Net Profit/Average Total Assets

Total assets as at 30th June 2019

Particulars	Amount	Amount
Current Assets
Cash at bank	$17,200.00
Accounts Receivable	$   3,900.00
Office Supplies	$      900.00
Prepaid Rent	$   3,000.00	$    25,000.00
Fixed Assets
Equipment	$60,000.00
(-) Accumulated Depreciation	$    -300.00
Furniture	$27,000.00
(-) Accumulated Depreciation	$    -450.00	$    86,250.00
Total Assets		$1,11,250.00

Total Assets as at 30th June 2018 =  $109,000

Average assets = ($111,250+$109,000)/2

= $110,125

ROA = $31,750/$110,125

= 28.83%

d)

Balance sheet of Wisdom Learning's as at 30th June 2019
Particulars	Amount	Amount
Current Assets
Cash at bank	$17,200.00
Accounts Receivable	$   3,900.00
Office Supplies	$      900.00
Prepaid Rent	$   3,000.00	$    25,000.00
Fixed Assets
Equipment	$60,000.00
(-) Accumulated Depreciation	$    -300.00
Furniture	$27,000.00
(-) Accumulated Depreciation	$    -450.00	$    86,250.00
Total Assets		$1,11,250.00
Current Liabilites
Accounts Payable	$12,300.00
Salary Payable	$   1,350.00
Interest Payable	$      150.00
Unearned Service revenue	$   2,400.00	$    16,200.00
Long Term Borrowings
Loan Payable		$    60,000.00
Owners Equity
Capital		$    35,050.00
Total Equity and Liabilites		$1,11,250.00

(i)

Current Ratio = Current Assets/Current Liabilites

= $25,000/$16,200

= 1.54

(ii) Debt to Total Assets Ratio = Total Debt/Total Assets

= $60,000/$111,250

= 53.93%

	30th June 2018	30th June 2019
Current Ratio	1.65	1.54
Debt to total Assets Ratio	54.75%	53.93%

Therefore from the above we understood that the Current assets got decreased (by comparing current ratio) debt got decreased(by comparing Debt to Assets Ratio) during the current year.