Q18E - Horngren'S Financial And Managerial Accounting

Question

The adjusted trial balance of Melanie O’Mallie Dance Studio Company follows:MELANIE O'MALLIE DANCE STUDIO COMPANY Trial Balance August 31, 2018 Account Title Prepaid Rent Cash Debit Credit Office Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Salaries Payable Unearned Revenue Notes Payable (long-term) Dividends Common Stock Retained Earnings Service Revenue Salaries Expense Rent Expense Depreciation Expense—Equipment Supplies Expense Utilities Expense Balance \( 16,000 \) 76,100 \( 76,100 100 \) 5,700 4,800 49,000 5,400 18,100 5,000 18,000 19,000 1,100 1,100 3,600 1,800 1,500 500 400 1,100 Requirements 1. Prepare the classified balance sheet of Melanie O’Mallie Dance Studio Company at August 31, 2018. Use the report form. You must compute the ending balance of Retained Earnings. 2. Compute O’Mallie’s current ratio at August 31, 2018. One year ago, the current ratio was 1.76. Indicate whether O’Mallie’s ability to pay current debts has improved, deteriorated, or remained the same.

Step-by-Step Solution

Answer

(1) Balance Sheet is shown as follows:

MELANIE O'MALLIE DANCE STUDIO COMPANY
Balance Sheet
August 31, 2018
Assets
Current Assets:
Cash		$16,000
Office Supplies		1,800
Prepaid Rent		1,500
Total Current Assets			$19,300
Property, Plant, and Equipment:
Equipment	$49,000
Less: Accumulated Depreciation- Equipment	(5,700)	43,300
Total Property, Plant, and Equipment:			43,300
Total Assets			$62,600
Liabilities
Current Liabilities:
Accounts Payable		$4,800
Salaries Payable		100
Unearned Revenue		5,000
Total Current Liabilities:			$9,900
Long term Liabilities
Notes Payable		5,400
Total Long-term Liabilities			5,400
Total Liabilities			$15,300
Stockholders’ Equity
Common Stock		18,000
Retained Earnings		29,300
Total Stockholders’ Equity			47,300
Total Liabilities and Stockholders’ Equity			$62,600

(2) Current ratio has improved, as it gets increased from 1.76 times to 1.95 times. 

Step 1: Calculation of Net Income

Net income is calculated as follows

$$\begin{gathered} \mathbf{NetIncome}\mathbf{=}\mathbf{ServiceRevenue}-\mathbf{SalariesExpense}-\mathbf{RentExpense}-\mathbf{DepreciationExpense}-\mathbf{SuppliesExpense}-\mathbf{UtilitiesExpense} \\ \mathbf{=}\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{100}-\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}-\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{100}-\mathbf{\$}\mathbf{400}-\mathbf{\$}\mathbf{500}-\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{100} \\ \mathbf{=}\mathbf{\$}\mathbf{11}\mathbf{,}\mathbf{400} \end{gathered}$$

Step 2: Calculation of Ending Balance of Retained Earnings

Statement of retained earnings is shown as follows: 

MELANIE O'MALLIE DANCE STUDIO COMPANY
Statement of Retained Earnings
Year Ended August 31, 2018
Retained Earnings, Beginning Balance	$19,000
Net income for the year	11,400
	30,400
Dividends	(1,100)
Retained Earnings, Ending Balance	$29,300

Step 3: Calculation of Current Ratio

Current ratio is calculated as follows: 

$$\begin{gathered} \mathbf{CurrentRatio}\mathbf{=}\frac{\mathbf{CurrentAssets}}{\mathbf{CurrentLiabilities}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{19}\mathbf{,}\mathbf{300}}{\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{900}} \\ \mathbf{=}\mathbf{1}\mathbf{.}\mathbf{95} \end{gathered}$$