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.