(continued) P 3-65A
Req. 1 (continued)
*Retained earnings = $93,000 − $36,300 − $5,300 = $51,400
OR
*Retained earnings, January 31, 2015 ………………………….
$13,300
$51,400
Req. 2
2016 2015
Net working
capital
=
Total current assets –
current liabilities
$43,800−
$20,300
=
$23,500 $22,600
Current ratio
=
Total current assets
=
$43,800
=
2.16
1.90
Total current liabilities
$20,300
The increase in both working capital and the current ratio indicate that
the ability to pay current liabilities with current assets improved during
2016.
2016 2015
$36,300
$93,000
(45-60 min.) P 3-66A
Req. 1
(All amounts in millions)
Current ratio
=
Total current assets
=
$15.4
=
1.79
Total current liabilities
$8.6
Req. 2
Current Ratio
Debt Ratio
a.
$15.4 + $2.5
=
2.08
$14.4
=
0.42
$8.6
$31.4 + $2.5
$15.4 + $3.0
=
2.14
$14.4 + $3.0
=
0.51
$8.6
$31.4 + $3.0
c.
$15.4 − ($8.6 × 1/2)
=
2.58
$14.4 − ($8.6 × 1/2)
=
0.37
($8.6 × 1/2)
$31.4 − ($8.6 × 1/2)
=
1.44
$14.4
=
0.51
$8.6
e.
$15.4
=
1.62
$14.4 + $0.9
=
0.49
$8.6 + $0.9
$31.4
f.
$15.4 − $1.8
=
1.58
$14.4 + $2.8
=
0.50
$8.6
$31.4 + $4.6 − $1.8
=
1.79
=
$8.6
(continued) P 3-66A
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
(20-30 min.) P 3-67B
Req. 1
Whittaker Consulting
Amount of Revenue (Expense) for July
Date
Cash Basis
Accrual Basis
July
1
Expense
$ (750)
Expense
$ 0
4
Expense
(3,500)
Expense
0
5
Revenue
1,200
Revenue
1,200
8
Expense
(200)
Expense
(200)
11
Revenue
0
Revenue
3,300
19
Expense
0
Expense
0
24
Revenue
3,300
Revenue
0
26
Expense
Expense
0
Expense
Expense
31
Expense
0
31
Revenue
0
Revenue
Req. 2
Income (loss)
before tax
$(3,950)
Income before tax
$2,690
Req. 3
The accrual-basis measure of net income is preferable because it accounts
for revenues and expenses when they occur, not when they are received or
paid in cash. For example, on July 11, the company earned $3,300 of
revenue and increased its wealth as a result. The accrual basis records this
(10-20 min.) P 3-68B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec.
31
a. Insurance Expense ………………………
5,100*
Prepaid Insurance ……………………
5,100
To record insurance expense
31
4,720
4,720
To accrue salary expense.
31
c. Interest Receivable ……………………….
Interest Revenue ……………………..
To accrue interest revenue.
31
d. Supplies Expense …………………………
6,900**
Supplies ………………………………….
6,900
To record supplies expense.
31
e. Unearned Service Revenue
($11,500 × 70%) …………………………….
8,050
Service Revenue ……………………..
8,050
To record revenue that was collected
in advance.
Office Furniture …………………..
Equipment …………………………. .
To record depreciation expense.
(45-60 min.) P 3-69B
Req. 1
Edison, Inc.
Trial Balance Worksheet
December 31, 2016
TRIAL BALANCE
ADJUSTMENTS
ADJUSTED
TRIAL BALANCE
ACCOUNT TITLE
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
Cash
8,600
8,600
Accounts receivable
1,300
(a) 2,780
4,080
Prepaid rent
3,000
(b) 1,000*
2,000
Supplies
1,800
470
Furniture
81,000
Accumulated depreciation
3,900
(d) 1,350**
Accounts payable
3,500
Common stock
10,000
10,000
Retained earnings
65,390
65,390
Dividends
4,500
4,500
Service revenue
21,400
(a) 2,780
24,180
Salary expense
3,500
(e) 8,400***
11,900
Rent expense
(b) 1,000*
1,000
Utilities expense
490
490
Depreciation expense
(d) 1,350**
1,350
Supplies expense
104,190
104,190
(continued) P 3-69B
Req. 2 (continued)
Edison, Inc.
Income Statement
Month Ended December 31, 2016
Revenues:
Service revenue
$24,180
Expenses:
Salary expense
$11,900
Depreciation expense, furniture
1,350
Supplies expense
Rent expense
Utilities expense
Total expenses
Net income
Edison, Inc.
Statement of Retained Earnings
Month Ended December 31, 2016
Retained earnings, December 1, 2016
$65,390
Add: Net income
8,110
Subtotal
Less: Dividends declared
(continued) P 3-69B
Req. 2 (continued)
Edison, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current assets:
Current liabilities:
Cash
$ 8,600
Accounts payable
$ 3,500
Accounts receivable
4,080
Salary payable
8,400
Prepaid rent
2,000
Total current liabilities
11,900
Supplies
470
Total current assets
15,150
Furniture $81,000
STOCKHOLDERS’ EQUITY
Less: Accum.
Common stock
10,000
Retained earnings
Total liabilities and
Total assets
(10-20 min.) P 3-70B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
June
30
Accounts Receivable ($6,880 – $6,300) …………..
580
Rental Revenue ……………………………………….
580
To accrue rental revenue.
30
Interest Receivable ($200 − $0) ………………………
30
Supplies Expense ($600 − $0) ………………………..
To record supplies expense.
30
Insurance Expense ($1,400 − $0) ……………………
1,400
Prepaid Insurance ($2,800 − $1,400) ………….
1,400
To record insurance expense.
30
Depreciation Expense−Building ($1,500 − $0) …
1,500
Accumulated Depreciation−Building
($10,000 − $8,500) …………………………..………..
1,500
To record depreciation expense.
30
Wages Payable ($1,190 − $0) …………………….
To accrue salary expense.
30
Unearned Rental Revenue ($2,200 − $1,900) …..
300
Rental Revenue* ………………………………………
(continued) P 3-70B
Req. 2
Total assets
=
$79,780 ($8,300 + $6,880 + $200 + $4,100 +
$900 + $1,400 + $68,000 − $10,000)
Total liabilities
=
$10,290 ($7,200 + $1,190 + $1,900)
Net income
=
$ 7,290 ($13,380 + $1,100 − $1,500 − $600 –
$400 – $2,690 − $600 − $1,400)
Total equity
=
(20-30 min.) P 3-71B
Req. 1
Schneider Corporation
Income Statement
Year Ended December 31, 2016
Revenues:
Service revenue
$91,500
Expenses:
Salary expense
$39,800
Rent expense
10,400
Insurance expense
3,800
Interest expense
3,500
Supplies expense
2,700
Depreciation expense, equipment
Income before tax
Income tax expense
Net income
Schneider Corporation
Statement of Retained Earnings
Year Ended December 31, 2016
Retained earnings, December 31, 2015
$ 3,000
Add: Net income
22,300
Subtotal
25,300
Less: Dividends declared
Retained earnings, December 31, 2016
(continued) P 3-71B
Req. 1 (continued)
Schneider Corporation.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Cash
$12,400
Accounts payable
$ 8,700
Accounts receivable
19,500
Unearned service
Supplies
2,300
revenue
800
Prepaid rent
1,200
Interest payable
800
Income tax payable
Equipment
Note payable
Less: Accum.
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock
16,000
Retained earnings
20,300
Total stockholders’ equity
36,300
Total liabilities and
Total assets
$67,300
stockholders’ equity
$67,300
Req. 2
(20 min.) P 3-72B
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Closing Entries
Jan.
31
Service Revenue ………………………………..
94,100
Retained Earnings ………………………….
94,100
31
Retained Earnings ……………………………..
45,200
Salary Expense ………………………………
27,700
Supplies Expense …………………………..
Advertising Expense ………………………
10,800
Depreciation Expense, equipment ……
Interest Expense …………………………….
31
Retained Earnings ……………………………..
15,000
Dividends……………………………………….
Req. 2
Retained Earnings
Jan. 31, 2016 Expenses
45,200
Jan. 31, 2015 Bal.
13,700
Jan. 31, 2016 Dividends
15,000
Jan. 31, 2016 Revenues
94,100
Jan. 31, 2016 Bal.
47,600
Req. 3
(30-40 min.) P 3-73B
Req. 1
Spa View Service, Inc.
Balance Sheet
January 31, 2016
ASSETS
Current assets:
Cash …………………………………………………………….
$17,500
Accounts receivable ………………………………………
16,600
Prepaid expenses ………………………………………….
5,800
Supplies ……………………………………………………….
3,300
Total current assets …………………………………..
43,200
Plant assets:
Equipment …………………………………………………….
Less: accumulated depreciation …………………….
36,500
Other assets, long-term ………………………………………
13,500
Total assets ……………………………………………………….
LIABILITIES
Current liabilities:
Accounts payable ………………………………………….
$12,700
Current portion of note payable ……………………..
1,000
Salary payable ………………………………………………
3,400
Unearned service revenue ……………………………..
Total current liabilities ……………………………….
20,800
Note payable, long-term ……………………………………..
Total liabilities ……………………………………………………
36,700
STOCKHOLDERS’ EQUITY
Common stock …………………………………………………..
8,900
Retained earnings … ………………………………………….
47,600*
Total stockholders’ equity… ……………………………….
56,500
Total liabilities and stockholders’ equity ……………..
$93,200
(continued) P 3-73B
Req. 1 (continued)
*Retained earnings = $93,200 − $36,700 − $8,900 = $47,600
Req. 2
2016 2015
Net working
capital
=
Total current assets −
current liabilities
$43,200 –
$20,800
=
$22,400 $21,600
Debt ratio
=
Total liabilities
=
$36,700
=
0.39
0.15
Total assets
$93,200
Spa View Service’s overall debt position deteriorated from 2015 to 2016;
however, the company’s overall debt position is strong because a debt
ratio of .39 is not troublesome.
(45-60 min.) P 3-74B
Req. 1
(All amounts in millions)
Current ratio
=
Total current assets
=
$15.2
=
1.77
Total current liabilities
$8.6
Debt ratio
=
=
0.46
Req. 2
Current Ratio
Debt Ratio
a.
$15.2 + $2.7
=
2.08
$14.4
=
0.43
$8.6
$31.0 + $2.7
b.
$15.2 + $7.0
=
2.58
$14.4 + $7.0
=
0.56
$8.6
$31.0 + $7.0
c.
$15.2 − ($8.6 × 1/2)
=
2.53
$14.4 − ($8.6 × 1/2)
=
0.38
($8.6 × 1/2)
$31.0 − ($8.6 × 1/2)
d.
=
$14.4
=
0.47
$8.6
e.
$15.2
=
1.63
$14.4 + $0.7
=
0.49
$8.6 + $0.7
$31.0
$8.6
$31.0 + $4.2 − $1.7
g.
$15.2
=
1.77
$14.4
=
0.47
$8.6
$31.0 − $0.3
(continued) P 3-74B
Req. 3
a. Revenues usually increase the current ratio.
b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
Challenge Exercises and Problem
(20-25 min.) E 3-75
(Dollar amounts in thousands)
December 31, 2016
Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
January 31, 2017
Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
_____
Computations of January 31, 2017 balances:
1Cash = $1,500 − $7,300 + $8,100 − $1,400 = $900
2Receivables = $5,900 + $9,000 − $8,100 = $6,800
3No change in the Inventory balance.
4Prepaid expenses = $1,000 − $700 = $300
5Accounts payable = $2,600 − $1,400 = $1,200
(60 min.) E 3-76
a.
Net income:
Service revenue:
($161,000 + $1,650 + $32,200) ………………….
$194,850
Expenses:
Salary ($37,000 + $3,500) ………………………..
$ 40,500
Depreciation – building …………………………..
2,600
Supplies ………………………………………………..
3,100
Insurance ………………………………………………
1,500
Advertising…………………………………………….
7,300
Utilities ………………………………………………….
Net income………………………………………………….
b.
Total assets:
Cash …………………………………………………………..
$ 7,300
Accounts receivable ($7,500 + $32,200) ………..
39,700
Supplies ($4,600 − $3,100) …………………………...
1,500
2,000
Building ……………………………………………………..
$110,000
Less: Accum. Depr. ($15,600 + $2,600) ………….
91,800
Total assets ……………………………………………
(continued) E 3-76
c.
Total liabilities:
Accounts payable ………………………………….
$ 6,100
Salary payable ………………………………………
Unearned service revenue
3,850
Total liabilities ……………………………………….
$ 13,450
d.
Total stockholders’ equity:
Common stock ………………………………………
$ 14,000
Retained earnings, beginning …………………
$ 46,000
137,850
Subtotal
Less: Dividends declared.……………………..
Total stockholders’ equity ……………………..
$181,850
e.
Total assets
= Total liabilities + Total stockholders’ equity
$195,300
= $13,450 + $181,850