Question

Pope's Garage had the following accounts and amounts in its financial statements on December 31, 2019. Assume that all balance sheet items reflect account balances at December 31, 2019, and that all income statement items reflect activities that occurred during the year then ended. 

$$ \begin{array}{lr} \text { Accounts receivable } & 531,900 \\ \text { Depreciation expense } & 10,000 \\ \text { Land } & 27,000 \\ \text { Cost of goods sold } & 89,500 \\ \text { Retained earnings } & 62,800 \\ \text { Cash } & 11,600 \\ \text { Equipnent } & 68,500 \\ \text { Supplies } & 5,900 \\ \text { Accounts payable } & 22,500 \\ \text { Service revenue } & 28,200 \\ \text { Interest expense } & 1,100 \\ \text { Connon stock } & 8,000 \\ \text { Income tax expense } & 12,096 \\ \text { Accumulated depreciation } & 45,600 \\ \text { Long-term debt } & 37,000 \\ \text { Supplies expense } & 14,600 \\ \text { Merchandise inventory } & 30,400 \\ \text { Net sales } & 144,600 \end{array} $$

Required: 

a. Calculate the total current assets at December 31, 2019 

b. Calculate the total liabilities and stockholders' equity at December 31, 2019 

c. Calculate the earnings from operations (operating income) for the year ended December 31, 2019. 

d. Calculate the net income (or loss) for the year ended December 31, 2019. 

e. What was the average income tax rate for Pope's Garage for 2019? 

f. If $17,000 of dividends had been declared and paid during the year, what was the January 1, 2019, balance of retained earnings?

Answer 1

Answer a.

Total Current Assets = Accounts Receivable + Cash + Supplies + Merchandise Inventory
Total Current Assets = $31,900 + $11,600 + $5,900 + $30,400
Total Current Assets = $79,800

Answer b.

Property, Plant and Equity = Land + Equipment - Accumulated Depreciation
Property, Plant and Equity = $27,000 + $68,500 - $45,000
Property, Plant and Equity = $50,500

Total Assets = Total Current Assets + Property, Plant and Equity
Total Assets = $79,800 + $50,500
Total Assets = $130,300

Total Liabilities and Stockholders’ Equity = Total Assets
Total Liabilities and Stockholders’ Equity = $130,300

Answer c.

Operating Income = Net Sales + Service Revenue - Cost of Goods Sold - Depreciation Expense - Supplies Expense
Operating Income = $144,000 + $28,200 - $89,500 - $10,000 - $14,000
Operating Income = $58,700

Answer d.

Taxable Income = Operating Income - Interest Expense
Taxable Income = $58,700 - $1,100
Taxable Income = $57,600

Net Income = Taxable Income - Income Tax Expense
Net Income = $57,600 - $12,096
Net Income = $45,504

Answer e.

Income Tax Rate = Income Tax Expense / Taxable Income
Income Tax Rate = $12,096 / $57,600
Income Tax Rate = 21%

Answer f.

Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
$62,800 = Beginning Retained Earnings + $45,504 - $17,000
Beginning Retained Earnings = $34,296