Problem 1: Preparing an Income Statement, a Statement of Retained Earnings, and a Balance Sheet
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Problem 1: Preparing an Income Statement, a Statement of Retained Earnings, and a Balance Sheet
At the end of its first year of operations (December 31, 2012), the Acme Company released the financial data shown in Table 1 below:

Table 1: Acme Company Financial Data

Account
   Amount

Cash
   $25,000

Receivables from customers (no allowance for doubtful accounts is needed)
   $20,300

Inventory of merchandise
   $81,000

Equipment owned, at cost of $60,700 net of A/depreciation of $20,000
   $40,700

Accounts payable owed to supplies
   $66,140

Salary payable for 2012 (to be paid on January 4, 2013)
   $1,800

Total sales revenue
   $126,000

Operating expenses, including the cost of the merchandise sold
   $80,200

Income taxes expense at 30% of pretax income; all paid during 2012
   ?

Contributed capital 10,000 shares outstanding
   $87,000

Dividends declared and paid during 2012
   $20,000

Using knowledge from prior courses, work experience, textbooks, or Internet sources, as well as the financial data provided in Table 1, prepare the following financial statements for the Acme Company:
 
 Summarized income statement for the year 2012. 
 Statement of retained earnings for the year 2012. 
 Balance sheet at December 31, 2012. 
 Liquidity ratios and an explanation of what those ratios tell us.

Problem 2: Using T-Accounts, Preparing the Balance Sheet, and Computing and Interpreting the Current Ratio
Johnson Company has been operating for several years. At December 31, 2012, the accounting records reflected the following data, shown in Table 2 below:

Table 2: Johnson Company Financial Data

Account
   Amount

Cash
   $9,000

Investments (short-term)
   $4,000

Accounts receivable
   $13,000

Inventory
   $22,000

Notes receivable (long-term)
   $1,000

Equipment
   $48,000

Factory building
   $90,000

Intangibles
   $3,000

Accounts payable
   $15,000

Accrued liabilities payable
   $2,000

Notes payable (short-term)
   $7,000

Long-term notes payable
   $46,000

Contributed capital
   $90,000

Retained earnings
   $30,000

During the year 2013, Johnson Company had the following summarized activities:
 
 a. Purchased short-term investments for $10,000 cash. 
 b. Lent $8,000 to a supplier who signed a three-year note. 
 c. Purchased equipment that cost $28,000; paid $4,000 cash and signed a one-year note for the balance. 
 d. Hired a new president at the end of the year. The contract was for $110,000 per year plus options to purchase company stock at a set price based on company performance. 
 e. Issued an additional 1,000 shares of capital stock for $12,000 cash. 
 f. Borrowed $20,000 cash from a local bank, payable in three months. 
 g. Purchased a patent (an intangible asset) for $4,000 cash. 
 h. Built an addition to the factory for $45,000; paid $10,000 in cash and signed a three-year note for the balance. 
 i. Returned defective equipment to the manufacturer, receiving a cash refund of $1,000.

Using knowledge from prior courses, work experience, textbooks, or Internet sources, as well as the financial data provided above, complete the following:
 
 Create T-accounts for each of the accounts on a balance sheet and enter the balances at the end of 2012 as beginning balances for 2013. Prepare a trial balance for 12/31/12. 
 Record each of the events for 2013 in T-accounts and determine the ending balances. For each recording (posting), include the identifying letter (a through i). Prepare a trial balance for 12/31/12. 
 Explain why you did or did not record item d, the hiring of the president, in a T-account. 
 Prepare a balance sheet at December 31, 2013. Classify the balance sheet as appropriate (into current assets, fixed assets, and so on). 
 Compute the current ratio for 2013. The current ratio measures the ability of the organization to pay their current obligations. Interpret this ratio as it applies to Johnson Company at December 31, 2013, as compared to December 31, 2012.

Aarti J · Accepted Answer

Problem 1
		Acme Company
		Income Statement
		For the year 2012
		Sales revenue	126000
		Operating expenses	80200
		Income before taxes	45800
		Income tax @ 30%	13740
		Net income	32060
		Acme Company
		Retained Earnings
		For the year 2012
		Beginning Retained earnings	0
		Add: Net income	32060
		Less: Dividends paid	20000
		Ending Retained earings	12060
		Acme Company
		Balance Sheet
		For the year 2012
		Assets
		Current assets:
		Cash	25000
		Accounts receivables	20300
		Inventory	81000
		Total current assets		126300
		Equipment	60700
		Accumulated depreciation	20000	40700
		Total Assets		167000
		Liabilities and equity
		Current liabilities
		Accounts payable	66140
		Salaries payable	1800
		Total current liabilities		67940
		Equity
		Common stock	87000
		Retained earnings	12060
		Total Equity		99060
		Total liabilities and equity		167000
		Liquidity ratio =	Current assets / Current liabilities
		=	126300 / 67940
		=	1.86
		The ratio tells that the company has around 1.86 times of current assets as compared to its current liabilities. This shows that the company is able to meet up its short term obligations effectively.

Problem 1: Preparing an Income Statement, a Statement of Retained Earnings, and a Balance Sheet At the end of its first year of operations (December 31, 2012), the Acme Company released the financial...

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Account	Amount
Cash	$25,000
Receivables from customers (no allowance for doubtful accounts is needed)	$20,300
Inventory of merchandise	$81,000
Equipment owned, at cost of $60,700 net of A/depreciation of $20,000	$40,700
Accounts payable owed to supplies	$66,140
Salary payable for 2012 (to be paid on January 4, 2013)	$1,800
Total sales revenue	$126,000
Operating expenses, including the cost of the merchandise sold	$80,200
Income taxes expense at 30% of pretax income; all paid during 2012	?
Contributed capital 10,000 shares outstanding	$87,000
Dividends declared and paid during 2012	$20,000

Account	Amount
Cash	$9,000
Investments (short-term)	$4,000
Accounts receivable	$13,000
Inventory	$22,000
Notes receivable (long-term)	$1,000
Equipment	$48,000
Factory building	$90,000
Intangibles	$3,000
Accounts payable	$15,000
Accrued liabilities payable	$2,000
Notes payable (short-term)	$7,000
Long-term notes payable	$46,000
Contributed capital	$90,000
Retained earnings	$30,000