Question

As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2017

SMC, Inc.

Balance Sheet

December 31, 2017

Assets

Cash .................. $34,500

Accounts receivable ................................................................................ 25,000

Inventory .................................................................................................. 10,000

Supplies ...................................................................................................   200

Total assets.............................................................................................. $69,700
Liabilities and Stockholders’ Equity
Liabilities:

Accounts payable ............................................................................. $12,000

Salaries payable ............................................................................... 1,000

Income taxes payable ......................................................................    3,675

Total liabilities........................ $16,675

Stockholders’equity:

Capital stock (10,000 shares outstanding).................................... $25,000

Retained earnings ............................................................................   28,025

Total stockholders’ equity .......................................................................   53,025

Total liabilities and stockholders’ equity................................................ $69,700  

SMC, Inc.

Income Statement

For the Year Ended December 31, 2017

Sales revenue .......................................................................................... $110,000

Rent revenue ...........................................................................................   1,000

Total revenues ......................................................................................... $111,000

Less cost of goods sold...........................................................................      60,000

Gross margin ........................................................................................... $ 51,000

Less operating expenses:

Supplies expense ............................................................................. $ 400

Salaries expense .............................................................................. 22,000

Miscellaneous expense ...................................................................   4,100   

26,500 Income before taxes................................................................................ $ 24,500

Less income taxes...................................................................................    3,675

Net income............................................................................................... $ 20,825

Earnings per share ( $20,825 / 10,000 shares) $   2.08

SMC, Inc.

Post-Closing Trial Balance

December 31, 2017  

                                                                                                                    Debits                             Credits
Cash ......................................................................................................... $34,500

Accounts Receivable ............................................................................... 25,000

Inventory .................................................................................................. 10,000

Supplies ................................................................................................... 200

Accounts Payable ....................................................................................                                             $12,000

Salaries Payable ......................................................................................                                           1,000

Income Taxes Payable.............................................................................                                            3,675

Capital Stock............................................................................................                                             25,000

Retained Earnings ...................................................................................                                           28,025

Totals........................................................................................................ $69,700                               $69,700
You are also given the following information that summarizes the business activity for the current year, 2018

a. Issued 10,000 additional shares of common stock for $25,000 cash on January 1st.

b. Borrowed $10,000 onMarch 1,2018,from Downtown Bank as a long-term loan. The interest rate on the loan is 5%and Interest for the year is payable on January 1, 2019.

c. Paid $9,000 cash on April1 to lease a building for one year.

d. Received $4,800 on May 1 from a tenant for one year’s rent.

e. Paid $3,600 on June 1 for a one-year insurance policy.

f. Purchased $2,200 of supplies for cash on June 15th.

g. Purchased inventory for $100,000 on account on July 1.

h. August 1, sold inventory for $170,000 on account; cost ofthe merchandise sold was $90,000.

i. Collected $110,000 cash from customers’ accounts receivable onAugust 20th.

j. September 1,Paid $85,000 cash for inventories purchased earlier during the year.

k. September 20th paid $31,000 for sales reps’ salaries, including $1,000 owed atthe beginning of2018.

l. Dividends for $9,500 were paid onOctober 20th.

m. The income taxes payable for the year of 2017 were paid on November 15th.

n. For adjusting entries, all prepaid expenses are initially recorded asassets, andall unearned revenues are initially recorded as liabilities (this is just informational).

o. At year-end, $850 worth of supplies are on hand.

p. At year-end, an additional $6,500 of sales salaries are owed, but have not yet been paid.

q. Prepare an adjusting entry to recognize the taxes owed for 2018. The corporate tax rate is 25% of the income before income taxes.

You are asked to do the following on an excel spreadsheet:

Set up T-accounts and enter the beginning balances from the December 31, 2017, post-closing trial balance for SMC. Post all current year journal entries to the T-accounts. 3. Journalize and post any necessary adjusting entries at the end of 2018. (Hint: Items b, c, d, e, o, p, and q require adjustment.) 4. After the adjusting entries are posted, prepare an adjusted trial balance, an income statement, statement ofretained earnings and a balance sheet for 2018. (Hint: Income before income taxes should equal xxxx). The format of your statements should mirror those prepared by the company in 2017. 5. Journalize and post-closing entries for 2018 and prepare a post-closing trial balance. 6. Compute the Current Ratio and Debt to Total Equity Ratio for 2017 and 2018 7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?

Answer 1