Question

Brothers Harry and Herman Hausyerday began operations of their machine shop (H & H Tool, Inc.) on January 1, 2016. The annual reporting period ends December 31. The trial balance on January 1, 2018, follows (the amounts are rounded to thousands of dollars to simplify):

Account Titles	Debit			Credit
Cash	$	4
Accounts Receivable		4
Supplies		11
Land		0
Equipment		56
Accumulated Depreciation				$	7
Software		17
Accumulated Amortization					4
Accounts Payable					6
Notes Payable (short-term)					0
Salaries and Wages Payable					0
Interest Payable					0
Income Tax Payable					0
Common Stock					68
Retained Earnings					7
Service Revenue		0
Salaries and Wages Expense		0
Depreciation Expense		0
Amortization Expense		0
Income Tax Expense		0
Interest Expense		0
Supplies Expense		0
Totals	$	92		$	92

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

Borrowed $13 cash on March 1 using a short-term note.

Purchased land on March 2 for future building site; paid cash, $7.

Issued additional shares of common stock on April 3 for $28.

Purchased software on July 4, $12 cash.

Purchased supplies on account on October 5 for future use, $17.

Paid accounts payable on November 6, $14.

Signed a $30 service contract on November 7 to start February 1, 2019.

Recorded revenues of $152 on December 8, including $36 on credit and $116 collected in cash.

Recognized salaries and wages expense on December 9, $81 paid in cash.

Collected accounts receivable on December 10, $20.

Data for adjusting journal entries as of December 31:

Unrecorded amortization for the year on software, $4.

Supplies counted on December 31, 2018, $11.

Depreciation for the year on the equipment, $7.

Interest of $2 to accrue on notes payable.

Salaries and wages earned but not yet paid or recorded, $13.

Income tax for the year was $9. It will be paid in 2019.

9-a. How much net income did H & H Tool, Inc., generate during 2018? What was its net profit margin?

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

9-c. What is its current ratio?

Answer 1

9a. Net income generated by H&H during 2018 is $19 (in thousands)

H&H Tool Inc.
Income Statement
For the Year Ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Service Revenue		152
Less: Expense
Salaries and Wages Expense	94
Supplies Expense	17
Depreciation Expense	7
Amortization Expense	4
Interest Expense	2
Income tax expense	9
		133
Net income		19

Net Profit margin is $19/$152 = 12.5%

9b. Company is financed primarily by stockholders’ equity.

9c. Current ratio is current assets divided by current liabilities which is:

$98/$46 = 2.13

Working:

H&H Tool Inc.																				H&H Tool Inc.
Trial Balance																				Trial Balance
January 1, 2018																				December 31, 2018
(in thousands)																				(in thousands)
	Debit Balances	Credit balances	Mar-01	Mar-02	Apr-03	Jul-04	Oct-05	Nov-06	Nov-07	Dec-08	Dec-09	Dec-10	Dec-31	Dec-31	Dec-31	Dec-31	Dec-31	Dec-31	Total	Debit	Credit
Cash	4		13	-7	28	-12		-14		116	-81	20							63	67
Account Receivable	4									36		-20							16	20
Supplies	11						17							-17					0	11
land	0			7															7	7
Equipment	56																		0	56
Accumulated depreciation		7													7				7		14
Software	17					12													12	29
Accumulated depreciation		4											4						4		8
Accounts payable		6					17	-14											3		9
Notes Payable		0	13																13		13
salaries and Wages payable		0															13		13		13
Interest Payable		0														2			2		2
Income tax payable		0																9	9		9
Common Stock		68			28														28		96
Retained earnings		7																	0		7
Service Revenue		0								152									152		152
Salaries and Wages Expense	0										81						13		94	94
Supplies Expense	0													17					17	17
Depreciation Expense	0														7				7	7
Amortization Expense	0												4						4	4
Interest Expense	0															2			2	2
Income tax expense	0																	9	9	9
																			0	323	323