Q12E - Intermediate Accounting (Kieso)

Question

Santo Design was founded by Thomas Grant in January 2011. Presented below is the adjusted trial balance as of December 31, 2017.

SANTO DESIGN                               ADJUSTED TRIAL BALANCE                                     DECEMBER 31, 2017
	Dr.	Cr.
Cash	\( 11,350
Accounts Receivable	21,500
Supplies	5,000
Prepaid Insurance	2,500
Equipment	60,000
Accumulated Depreciation—Equipment		\) 35,000
Accounts Payable		5,000
Interest Payable		150
Notes Payable		5,000
Unearned Service Revenue		5,600
Salaries and Wages Payable		1,300
Common Stock		10,000
Retained Earnings		3,500
Service Revenue		61,500
Salaries and Wages Expense	11,300
Insurance Expense	850
Interest Expense	150
Depreciation Expense	7,000
Supplies Expense	3,400
Rent Expense	4,000
	\(127,050	\)127,050

 

Instructions 

a. Prepare an income statement and a statement of retained earnings for the year ending December 31, 2017, and an unclassified balance sheet at December 31. 

b. Answer the following questions.                                                                                                 

1.If the note has been outstanding for 6 months, what is the annual interest rate on that note?                                                                                                                                               

2.If the company paid $17,500 in salaries in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?

Step-by-Step Solution

Answer

1. Net income is $34,800, and ending retained earnings equals $38,300
2. (1) Interest rate is 6%

(2) Salaries and wages payableare $7,500.

Step 1: Meaning of Income Statement

The income statement, also known as a profit and loss statement, may be a record made by the management of a company that records the company's income, expenses, and net gain or loss for a specific period. One of the four key financial statements that businesses distribute is the income statement: the others are the balance sheet, owner's equity statement, and cash flow statement.

Step 2: (a) Preparing Income statement

 

SANTO DESIGN                                 Income Statement                           For the year ended December 31, 2017
Revenues
Service revenue	$61,500
Expense
Salaries and wages expense                            $11,300
Depreciation expense                                              7,000
Rent expense                                                            4,000
Supplies expense                                                  3,400
Insurance expense                                                      850
Interest expense                                                          150
Total expenses	26,700
Net Income	$34,800

 

SANTO DESIGN Retained Earning Statement For the year ended December 31, 2017
Retained earnings, January 1	$3,500
Add: Net income	34,800
Retained earnings, December 31	$38,300

 

SANTO  DESIGN Balance  sheet December  31, 2017
Assets
Cash	$11,350
Accounts receivables	21,500
Supplies	5,000
Prepaid insurance	2,500
Equipment                                                                     $60,000
Less: Accumulated depreciation-equipment35,000	25,000
Total assets	$65,350
Liabilities and stockholders’ equity
Liabilities
Notes payable                                                         $5,000
Accounts payable                                                      5,000
Interest payable                                                            150
Unearned service revenues                                       5,600
Salaries and wages payable                                   1,300
Total liabilities	$17,050
Stockholder’s equity
Common stock                                                       $10,000
Retained earnings                                                    38,300	48,300
Total liabilities and stockholder’s equity	$65,350

 

 

Step 3: (b) Explaination on interest rate and salaries and wages payable balance

1. Interest is calculated at $25 per month ($150 divided by six months), or 0.5 percent of the principal balance, and is due by December 31, 2020. The annual interest rate is 6 percent (0.5 percent X 12).
2. Salaries and wages for current year equals $11,300, out which $1,300 are outstanding, which means $10,000 ($11,300-$1,300) is paid by the company. The total payment is $17,500, out of which $10,000 belongs to the current year, hence it means $7,500 ($17,500-$10,000), indicates the salaries and wages payable as on December 31,2016.