Q36PSB - Horngren'S Financial And Managerial Accounting

Question

The adjusted trial balance of Bradley Irrigation System at December 31, 2018, follows: BRADLEY IRRIGATION SYSTEM Adjusted Trial Balance December 31, 2018   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 \( 12,000 \) 202,100 \( 202,100 21,000 \) 25,300 57,300 40,700 3,500 2,000 1,800 13,000 51,000 28,300 4,700 6,800 21,000 3,200 56,000 32,000 1,200 16,200 1,400 2,000 1,200 2,600 Interest Expense Depreciation Expense—Building Depreciation Expense—Equipment Total  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 Bradley Irrigation System. 5. Compute the company’s current ratio at December 31, 2018. At December 31, 2017, the current ratio was 1.7. 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 $31,400. 

(2) In statement of retained earnings, ending balance is $60,200.

(3) In balance sheet, total assets and total liabilities & stockholders’ equity equals $142,200.

(4) Closing entries are mentioned in Step 4. 

(5) Current ratio is 2. 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: 

BRADLEY IRRIGATION SYSTEM
Income Statement
Year Ended  December 31, 2018
Revenues
Service Revenue		$56,000
Expenses
Insurance Expense	$1,200
Salaries Expense	16,200
Supplies Expense	1,400
Interest Expense	2,000
Depreciation Expense—Building	1,200
Depreciation Expense—Equipment	2,600
Total Expenses		24,600
Net Income		$31,400

Step 2: Statement of Retained Earnings

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

BRADLEY IRRIGATION SYSTEM
Statement of Retained Earnings
Year Ended  December 31, 2018
Retained Earnings, Beginning Balance	$32,000
Net Income for the year	31,400
	63,400
Dividends	(3,200)
Retained Earnings,  November 30, 2018	$60,200

Step 3: Classified Balance Sheet

(3) Balance Sheet is shown as follows:

BRADLEY IRRIGATION SYSTEM
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash		$12,000
Accounts Receivable		51,000
Office Supplies		28,300
Prepaid Insurance		4,700
Total Current Assets			$96,000
Property, Plant, and Equipment:
Building	$57,300
Less: Accumulated Depreciation- Building	(25,300)	32,000
Equipment	21,000
Less: Accumulated Depreciation- Equipment	(6,800)	14,200
Total Property, Plant, and Equipment:			46,200
Total Assets			$142,200
Liabilities
Current Liabilities:
Accounts Payable		40,700
Interest Payable		2,000
Salaries Payable		3,500
Unearned revenue		1,800
Total Current Liabilities:			$48,000
Long-term Liabilities
Notes Payable			21,000
Total Liabilities			69,000
Stockholders’ Equity
Common Stock			13,000
Retained Earnings			60,200
Total Stockholders’ Equity			73,200
Total Liabilities and Stockholders’ Equity			$142,200

Step 4: Closing entries for the period

(4) Closing entries are as follows:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Service Revenue	$56,000
	Income Summary		$56,000
	To close revenue.
Dec. 31	Income Summary	$24,600
	Insurance Expense		$1,200
	Salaries Expense		$16,200
	Supplies Expense		$1,400
	Interest Expense		$2,000
	Depreciation Expense—Equipment		$1,200
	Depreciation Expense—Building		$2,600
	To close expenses.
Dec. 31	Income Summary	$31,400
	Retained Earnings		$31,400
	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: 

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{Current}\mathbf{ }\mathbf{Ratio}\mathbf{=}\frac{\mathrm{Current} \mathrm{Assets}}{\mathrm{Current} \mathrm{Liabilities}}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{96},\mathbf{000}}{\$48,000}\\ =2\end{array}$