Question

Here is the problem:

The Neon Lumber Company uses the periodic inventory method, and it has a policy of adjusting and closing its books only at year end. The following adjusted trial balance for the company was prepared after posting the normal adjusting entries on December 31, 2020:

Account Title	Debit	Credit
Cash	66,240
Accounts Receivable	140,500
Merchandise Inventory, January 1, 2020	289,620
Supplies on Hand	5,200
Prepaid Insurance	4,800
Prepaid Rent	56,000
Equipment	92,000
Accumulated Depreciation		16,460
Accounts Payable		96,800
Capital Stock		50,000
Retained Earnings, January 1, 2020		456,210
Dividends	4,000
Sales		910,120
Sales Discounts	4,220
Sales Returns and Allowances	6,530
Interest Revenue		820
Purchases	624,440
Purchase Discounts		4,650
Purchase Returns and Allowances		2,400
Transportation In	9,420
Advertising Expense	36,840
Sales Salaries Expense	120,550
Administrative Salaries Expense	60,300
Utilities Expense	9,560
Delivery Expenses (Freight Out)	2,610
Legal and Accounting Expense	3,200
Interest Expense	400
Miscellaneous Administrative Expense	1,030
Totals	1,537,460	1,537,460

The ending inventory balance at Dec. 31, 2020 was $280,000.

Required:

A. Following the example on page 242 of the textbook, prepare the income statement for the year ended December 31, 2020. Do your best to distinguish between selling expenses and administrative expenses. Both interest revenue and interest expense, of course, are non-operating items.

B. Using the example on page 249 of the textbook, prepare the statement of retained earnings for the year ended December. 31, 2020.

C. Using the example on page 250 and other locations in the textbook, prepare the balance sheet as of December. 31, 2020.

D. Prepare the closing entries as of December 31,2020

Answer 1

Income Statement for the year ended

December 31, 2020

Particulars	Amount
I. Revenue from Operations (Gross) (910,120-4,220-6,530)	899,370
II. Other Income	820
III. Total Revenue (I+II)	900,190
IV. Expenses
(a) Cost of Goods Sold (289,620+624,440-4,650-2,400-280,000	631,660
(b) Employee benefit expenses (120,550+60,300)	180,850
(c) Finance costs	400
(d) Depreciation and Amortisation expenses
(e) other expenses (9,420+36,840+9,560+2,610+3,200+1030)	62,660
V. Total Expenses	875,570
VI. Income from Operations (III-V)	24,620
VII. Tax Expenses	0
VIII. Net operating Revenue from operations (VI-VII)	24,620

Statement of Retained Earnings

as at December 31, 2020

Particulars	Amount
Capital Stock	50,000
(+) Retained earnings at January 2020	456,210
(-) Dividends Paid	4,000
(+) Net operating Revenue from operations	24,620
Retained Earnings at December 31, 2020	526,830

Balance Sheet as at

December 31, 2020

Particulars	Amount
I. LIABILITIES
(1) Owner's Equity (Capital)	526,830
(2) Non-current Liabilities
(a) Long term loans/Borrowings
(b) Other Long term Liabilities
(3) Current Liabilities
(a) Trade Payables	96,800
(b) Other current liabilities
(c) Short-term provisions-Accumulated Depreciation	16,460
Total Liabilities	640,090
II. ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets	92,000
(ii) Intangible Assets
(b) Non-Current Investments
(2) Current Assets
(a) Trade Receivables	140,500
(b) Inventories (5,200+280,000-4,650)	280,550
(c) Other current assets (4,800+56,000)	60,800
(d) Cash & Cash Equivalents	66,240
Total Assest	640,090

Closing Entries as of December 31, 2020

Particulars	Debit	Credit
Revenue from sales Account .................Dr.	899,370
Interest Revenue Account .................Dr.	820
To Income Statement		900,190
(Being incomes are transfred to statement of Profit & Loss)
Income Statement ..........................................Dr.	243,910
To Transportation In		9,420
To Advertising Expenses		36,840
To Sales salaries expenses		120,550
To Administrative salaries expenses		60,300
To Utilities expenses		9,560
To Delivery expenses		2,610
To Legal and accounting expenses		3,200
To interest expenses		400
To miscellaneous Administrative expenses		1,030
(Being expenses are transfred to statement of Profit & Loss)
Income Statement ........................................Dr.	24,620
To Retained Earnings		24,620
(Being earned profit is transfred to retained earnings)
Retained Earnings .......................................Dr.	4,000
To Dividends		4,000
(Being Dividend is adjusted against retained earnings)