Q25E - Horngren'S Financial And Managerial Accounting

Question

Mark’s Bowling Alley’s adjusted trial balance as of December 31, 2018, is presented below:

Requirements 

1. Prepare the closing entries for Mark’s Bowling Alley. 

2. Prepare a post-closing trial balance. 

3. Compute the current ratio for Mark’s Bowling Alley

Step-by-Step Solution

Answer

(1) Closing entries are mentioned in Step 1. 

(2) Post closing trial balance is mentioned in Step 4. 

(3) Current ratio equals to 2.40.

Step 1: Closing entries for the period

(1) Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$85,000
	Income Summary		$85,000
	To close revenue.
Dec. 31	Income Summary	$77,625
	Insurance Expense		$26,000
	Salaries Expense		$28,000
	Supplies Expense		$1,300
	Utilities Expense		$15,000
	Depreciation Expense—Equipment		$7,000
	Depreciation Expense—Building		$325
	To close expenses.
Dec. 31	Income Summary	$7,375
	Retained Earnings		$7,375
	To close Income Summary
Dec. 31	Retained Earnings	$31,000
	Dividends		$31,000
	To close Dividends

Step 2: Calculation of net income

Net income is calculated as follows: 

$$\begin{gathered} \mathbf{Net}\mathbf{ }\mathbf{Income}\mathbf{=}\mathbf{Total}\mathbf{ }\mathbf{Revenues}-\mathbf{Total}\mathbf{ }\mathbf{Expenses} \\ \mathbf{=}\mathbf{\$}\mathbf{85}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{77}\mathbf{,}\mathbf{625} \\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{375} \end{gathered}$$

Step 3: Calculation of ending balance of retained earnings

Ending balance of retained earnings is calculated as follows: 

$$\begin{gathered} \mathbf{EndingBalance}\mathbf{=}\mathbf{BeginningBalance}+\mathbf{NetIncome}-\mathbf{Dividends} \\ \mathbf{=}\mathbf{\$}\mathbf{114}\mathbf{,}\mathbf{250}+\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{375}-\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{625} \end{gathered}$$

Step 4: Post-Closing trial balance

(2) Post-closing trial balance is shown as follows: 

MARK'S BOWLING ALLEY
Post-Closing Trial Balance
December 31, 2018
	Balance
Account Title	Debit	Credit
Cash	$20,000
Accounts Receivable	2,900
Prepaid Insurance	2,700
Office Supplies	1,150
Land	20,000
Building	145,000
Accumulated Depreciation—Building		$7,000
Equipment	43,000
Accumulated Depreciation—Equipment		20,000
Accounts Payable		4,800
Utilities Payable		625
Salaries Payable		3,800
Unearned Revenue		1,900
Common Stock		106,000
Retained Earnings		90,625
Total	$234,750	$234,750

Step 5: Calculation of current ratio

(3) Current ratio is calculated as follows: 

$$\begin{gathered} \mathbf{CurrentRatio}\mathbf{=}\frac{\mathbf{Cash}\mathbf{+}\mathbf{AccountsReceivable}\mathbf{+}\mathbf{PrepaidInsurance}\mathbf{+}\mathbf{OfficeSupplies}}{\mathbf{AccountsPayable}\mathbf{+}\mathbf{UtilitiesPayable}\mathbf{+}\mathbf{SalariesPayable}\mathbf{+}\mathbf{UnearnedRevenue}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{900}\mathbf{+}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{700}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{150}}{\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{625}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{900}} \\ \mathbf{=}\mathbf{2}\mathbf{.}\mathbf{40} \end{gathered}$$