Q30PSA - Horngren'S Financial And Managerial Accounting

Question

The adjusted trial balance of Boston Irrigation System at December 31, 2018, follows BOSTON IRRIGATION SYSTEM Adjusted Trial Balance December 31, 2018 0 Account Title Office Supplies Cash Debit Credit Accounts Receivable Prepaid Insurance Building Accumulated Depreciation—Building Equipment Accumulated Depreciation—Equipment Accounts Payable Interest Payable Salaries Payable Unearned Revenue Notes Payable (long-term) Common Stock Dividends Retained Earnings Service Revenue Insurance Expense Salaries Expense Supplies Expense Balance \( 11,800 \) 211,900 \( 211,900 28,000 \) 25,000 63,000 32,100 2,600 2,200 2,100 12,000 21,000 46,000 29,500 6,300 7,700 32,700 2,200 74,500 1,100 16,400 1,100 2,200 2,500 1,800 Interest Expense Depreciation Expense—Equipment Depreciation Expense—Building Tota June 30, 2018. : Requirements 1. Prepare the company’s income statement for the year ended December 31, 2018. 2. Prepare the company’s statement of retained earnings for the year ended December 31, 2018. 3. Prepare the company’s classified balance sheet in report form at December 31, 2018. 4. Journalize the closing entries for Boston Irrigation System. 5. Compute the company’s current ratio at December 31, 2018. At December 31, 2017, the current ratio was 2.3. Did the company’s ability to pay current debts improve or deteriorate, or did it remain the same?

Step-by-Step Solution

Answer

(1) In income statement, net income is $49,400. 

(2) In statement of retained earnings, ending balance is $68,200.

(3) In balance sheet, total assets and total liabilities & stockholders’ equity equals $151,900.

(4) Closing entries are mentioned in Step 4. 

(5) Current ratio is 2.4. The ability to repay current liabilities has improved, as current ratio is higher in current year.

Step-by-Step-Solution Step 1: Income Statement

(1) Income statement is shown as follows: 

BOSTON IRRIGATION SYSTEM
Income Statement
Year Ended  December 31, 2018
Revenues
Service Revenue		$74,500
Expenses
Insurance Expense	$1,100
Salaries Expense	16,400
Supplies Expense	1,100
Interest Expense	2,200
Depreciation Expense—Building	2,500
Depreciation Expense—Equipment	1,800
Total Expenses		25,100
Net Income		$49,400

Step 2: Statement of Retained Earnings

(2) Statement of retained earnings is shown as follows: 

BOSTON IRRIGATION SYSTEM
Statement of Retained Earnings
Year Ended  December 31, 2018
Retained Earnings, Beginning Balance	$21,000
Net Income for the year	49,400
	70,400
Dividends	(2,200)
Retained Earnings,  November 30, 2018	$68,200

Step 3: Classified Balance Sheet

(3) Balance Sheet is shown as follows:

BOSTON IRRIGATION SYSTEM
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash		$11,800
Accounts Receivable		46,000
Office Supplies		29,500
Prepaid Insurance		6,300
Total Current Assets			$93,600
Property, Plant, and Equipment:
Building	$63,000
Less: Accumulated Depreciation- Building	(25,000)	38,000
Equipment	28,000
Less: Accumulated Depreciation- Equipment	(7,700)	20,300
Total Property, Plant, and Equipment:			58,300
Total Assets			$151,900

Liabilities
Current Liabilities:
Accounts Payable		32,100
Interest Payable		2,200
Salaries Payable		2,600
Unearned revenue		2,100
Total Current Liabilities:			$39,000
Long-term Liabilities
Notes Payable			32,700
Total Liabilities			71,700

Stockholders’ Equity
Common Stock			12,000
Retained Earnings			68,200
Total Stockholders’ Equity			80,200
Total Liabilities and Stockholders’ Equity			$151,900

Step 4: Closing entries for the period

(4) Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$74,500
	Income Summary		$74,500
	To close revenue.
Dec. 31	Income Summary	$25,100
	Insurance Expense		$1,100
	Salaries Expense		$16,400
	Supplies Expense		$1,100
	Interest Expense		$2,200
	Depreciation Expense—Equipment		$2,500
	Depreciation Expense—Building		$1,800
	To close expenses.
Dec. 31	Income Summary	$49,400
	Retained Earnings		$49,400
	To close Income Summary
Dec. 31	Retained Earnings	$21,000
	Dividends		$21,000
	To close Dividends

Step 5: Calculation of Current Ratio

(5) Current ratio is calculated as follows: 

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{CurrentRatio}\mathbf{=}\frac{\mathrm{CurrentAssets}}{\mathrm{CurrentLiabilities}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$93,600}{\$39,000}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{4}\end{array}$