Question

The information below was provided by Phil’s Retail at 31 December 2020.

Item	$
Accounts payable	45,000
Accounts receivable	24,300
Bank overdraft	19,000
Land and buildings	450,000
Cost of sales	92,200
Interest expense	9,000
Ordinary shares	200,000
Dividends	65,000
Fixtures and fittings	176,000
Inventory	43,000
Retained earnings (1 January 2020)	191,000
Mortgage payable (due in 2035)	300,000
Prepaid insurance	10,000
Other expenses	57,500
Sales revenue	232,000
Wages expense	40,000

Required:

(a) Prepare an income statement for Phil’s Retail for the year ending 31 December 2020.
(b) Prepare a balance sheet for Phil’s Retail as at 31 December 2020.
(c)Calculate the following ratios for Phil’s Retail for the year ending 31 December 2020:
(i)Profit margin
(ii) Return on assets  
Note: total assets at 31 December 2020 amounted to $650,000.

Answer 1

Income statement
sales revenue		232000
less cost of sales		92200
gross profit		139800
less expenses
wages expenses	40000
other expenses	57500
interest expense	9000
total of expenses		106500
net income		33300
Balance sheet
Assets
Current Assets
A/R	24300
Inventory	43000
prepaid insurance	10000
total of current assets		77300
land and building		450000
fixtures and fittings		176000
Suspense Assets		20000
total of assets			723300
Liabilities and shareholders equity
Liabilities
Current liabilities
A/P	45000
Bank overdraft	19000
total of current liabilities		64000
Mortgage payable		300000
total of liabilities			364000
shareholders equity
share capital		200000
retained earning		159300
beginning balance	191000
add net income of the year	33300
less dividends	65000
total of shareholders equity			359300
total of liabilities and shareholders equity			723300
Note: As there is a difference of 20000 between Debit and credit side of trial balance. Balance of debit side of trial balance is 967000 while of credit side is 987000 so this difference of 20000 is causing to mismatch the total of asset side and liabilities and shareholders equity side of balance sheet.So this difference of 20000 is considered as suspense assets to match the asset side total with total of liabilities and shareholders equity side.
c-
profit margin	net income/sales revenue	33300/232000	14.35%
return on Assets	net income/total of assets	33300/723300	4.60%