FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

Exercise 5.2 (Financial Statement Preparation)

Tutors for Rent, Inc., performs adjusting entries every month, but closes its accounts only at year end. The companys year end adjusted trial balance dated December 31, 2005, was:

TUTORS FOR RENT, INC. Adjusted Trial Balance December 31, 2005 (Rs.)
Cash Accounts receivables Supplies Equipment Accumulated deprecation: equipment Accounts payable Income taxes payable Capital stock Retained earnings Dividends Tutoring revenue earned Salary expense Supply expense Advertising expense Deprecation expense: equipment Income taxes expense 91,100 4,500 300 12,000 5,000 1,500 3,500 25,000 45,000 2,000 96,000 52,000 1,200 300 1,000 11,600 176,000

(Rs.)

_______ 176,000

a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2005. Also prepare the companys balance sheet dated December 31, 2005. b. Does the company appear to be liquid? Defend your answer. c. Has the company has profitable in the past? Explain. Exercise 5.3 (Financial Statement Preparation) Wilderness Guide Service, Inc., performs adjusting entries every month, but close its accounts only at year end. The companys year end adjusted trial balance dated December 31, 2005. WILDRNESS GUIDE SERVICES, INC. Adjusted Trial Balance December 31, 2005 (Rs.) (Rs.)
Cash Accounts receivable Camping supplies Unexpired insurance policies Equipment Accumulated depreciation: equipment Notes payable (due 4/1/06) Accounts payable Capital stock Retained earnings Dividends Guide revenue earned Salary expense Camping supply expense Insurance expense Depreciation expense: equipment Interest expense Page 1 of 6 12,200 31,000 7,900 2,400 70,000 60,000 18,000 9,500 25,000 15,000 1,000 102,000 87,500 1,200 9,600 5,000 1,700 229,500

_______ 229,500

FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

a. b. c.

Prepare an income statement and statement of retained earnings for the year ended December 31. 2005. Also prepare the company's balance sheet dated December 31. 2005. (Hint: Unprofitable companies have no income taxes expense.) Does the company appear to be liquid? Defend your answer. Has the company been profitable in the past? Explain.

Exercise 5.6 (Preparing Closing Entries) Gerdes Psychological Services, Inc., closes its temporary owners' equity accounts once each year on December 31. The company recently issued the following income statement as part of its annual report: GERDES PSYCHOLOGICAL SERVICES, INC. Income Statement For the Year Ended December 31, 2005 (Rs.)
Revenue: Counseling revenue Expenses: Advertising expense Salaries expense Office supplies expense Utilities expense Malpractice insurance expense Office rent expense Continuing education expense Depreciation expense: fixtures Miscellaneous expense Income taxes expense Net income

(Rs.)
225,000

1,800 94,000 1,200 ,850 6,000 24,000 2,650 4,500 6,000 29,400

170,400 54,600

The firm's statement of retained earnings indicates ;hat a 56,000 cash dividend was declared and paid during 2005. a. b. Prepare the necessary closing entries on December 31, 2005. If the firm's Retained Earnings account had a Rs. 92,000 balance on January 1, 2005, at what amount should Retained Earnings be reported in the firm's balance sheet dated December 31, 2005?

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FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

Problem 5.2

(Preparing Financial Statements and Closing Entries of a Profitable Company)

Lawn Pride, Inc., provides lawn mowing services to both commercial and residential customers. The company performs adjusting entries on a monthly basis, whereas closing entries arc prepared annually at December 31. An adjusted trial balance dated December 31, 2005, follows. LAWN PRIDE, INC. Adjusted Trial Balance December 31, 2005 Debits (Rs.)
Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Trucks Accumulated depreciation: trucks Mowing equipment Accumulated depreciation: mowing equipment Accounts payable Notes payable Salaries payable Interest payable Income taxes payable Unearned mowing revenue Capital stock Retained earnings Dividends Mowing revenue earned Insurance expense Office rent expense Supplies expense Salary expense Depreciation expense: trucks Depreciation expense: mowing equipment Repair and maintenance expense Fuel expense Miscellaneous expense Interest expense Income taxes expense 58,525 4,800 8,000 3,000 1,075 150,000 120,000 20,000 12,000 1,500 50,000 900 150 1,050 900 20,000 30,000 50,000 170,000 2,400 36,000 5,200 60,000 30,000 4,000 3,000 1,500 5,000 3,000 60,000 406,500

Credits (Rs.)

______ 406,500

Instructions a. b. c. d. Prepare an income statement and statement of retained earnings for the year ended December 31, 2005. Also prepare the company's balance sheet dated December 31, 2005. Prepare the necessary year-end closing entries. Prepare an after-closing trial balance. Using the financial statements prepared in part a. briefly evaluate the company's profitability and liquidity.

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FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

Problem 5.3

(Preparing Financial Statements and Closing Entries of an Unprofitable Company)

Mystic Masters, Inc., provides fortune-telling services over the Internet. In recent years the com pany has experienced severe financial difficulty. Its accountant prepares adjusting entries on a monthly basis, and closing entries on an annual basis, at December 31. An adjusted trial balance dated December 31, 2005, follows. MYSTIC MASTERS, INC. Adjusted Trial Balance December 31,2005 Debits (Rs.)
Cash Accounts receivable Unexpired insurance Prepaid rent Supplies Furniture and fixtures Accumulated depreciation: furniture and fixtures Accounts payable Notes payable Salaries payable interest payable Unearned client revenue Capital stock Retained earnings Client revenue earned Insurance expense Office rent expense Supplies expense Salary expense: Depreciation expense: furniture and fixtures Office and telephone expense Internet service expense Legal expense Interest expense Miscellaneous expense 960 300 2,000 1,500 200 8,400 5,200 6,540 24,000 1,700 360 200 4,000 2,600 52,000 6,000 9,000 440 48,000 1,400 3,000 4,900 1,500 4,000 5,000 96,600

Credits (Rs.)

_____ 96,600

Instructions a. b. c. d. e. Prepare an income statement and statement of retained earnings for the year ended December 31, 2005. Also prepare the company's balance sheet dated December 31, 2005. (Hint: The Company incurred no income taxes expense in 2005.) Prepare the necessary year-end closing entries. Prepare an after-closing trial balance. Using the financial statements prepared in part a, briefly evaluate the company's performance. Identify information that the company is apt to disclose in the notes that accompany the financial statements prepared in part a.

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FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

Problem 5.5

(Short Comprehensive Problem Including Both Adjusting and Closing Entries)

Brushstroke Art Studio, Inc., provides quality instruction to aspiring artists. The business adjusts its accounts monthly, but performs closing entries annually on December 31. This is the studio's unadjusted trial balance dated December 31, 2005. BRUSHSTROKE ART STUDIO, INC. Unadjusted Trial Balance December 31, 2005

Debits (Rs.)
Cash Client fees receivable Supplies Prepaid studio rent Studio equipment Accumulated depreciation: studio equipment Accounts payable Note payable Interest payable Unearned client lees Income taxes payable Capital stock Retained earnings Client lees earned Supply expense Salary expense Interest expense Studio rent expense Utilities expense Depreciation expense: studio equipment Income taxes expense 22,380 71,250 6,000 2,500 96,000

Credits (Rs.)

52,000 6,420 24,000 480 8,000 5,000 50,000 20,000 82,310 4,000 17,250 480 11,250 3,300 8,800 5,000 248,210

_______ 248,210

Other Data 1. Supplies on hand al December 31, 2005, total S1,000. 2. The studio pays rent quarterly (every 3 months). The last payment was made November 1, 2005. The next payment will be made early in February 2006. 3. Studio equipment is being depreciated over 120 months (10 years). 4. On October 1, 2005, the studio borrowed Rs. 24.000 by signing a 12-monlh, 12 percent, note payable. The entire amount, plus interest, is due on September 30, 2006. 5. Al December 31, 2005, Rs. 3,000 of previously unearned client fees had been earned. 6. Accrued, but unrecorded and uncollected client fees earned total Rs. 690 at December 31, 2005. 7. Accrued, but unrecorded and unpaid salary expense totals Rs. 750 at December 31, 2005. 8. Accrued income taxes payable for the entire year ending December 31, 2005, total Rs. 7,000. The full amount is due early in 2006. Instructions a. Prepare the necessary adjusting journal entries on December 31. 2(K)5. Prepare also an adjusted trial balance dated December 31. 2005. b. From the adjusted trial balance prepared in part a. prepare an income statement and statement of retained earnings for the year ended December 31, 2005. Also prepare the company's balance sheet dated December 31, 2005. c. Prepare the necessary year-end closing entries. d. Prepare and after closing balance. e. Has the studios monthly office rent remained the same throughout the year? If not, has it gone up or down? Explain. Page 5 of 6

FINANCIAL ACCOUNTING (CHAPTER # 5) EXERCISE & PROBLEMS

Problem 5.9 (Evaluating Profitability and Liquidity) A recent annual report issued by Circuit, City revealed the flowing data: End of Year (Rs.)
Current assets Current liabilities Stockholders equity 3.08 billion 1.42 billion 2.56 billion

Beginning of Year (Rs.)

2.85 billion 1.29 billion 2.36 billion

The companys income statement reported total annual revenue of Rs. 13.4 billion, and net income for the year of Rs. 191 million. Instructions a. b. c. Evaluate Circuit Citys profitability by computing its net income percentage and its return on equity for the year. Evaluate Circuit Citys liquidity by computing its working capital and its current ratio at the beginning of the year and at the end of the year. Does Circuit City appear to be both profitable and liquid? Explain.

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