Party Wagon Inc provides musical entertainment at

weddings dances and

Party Wagon, Inc., provides musical entertainment at weddings, dances, and various other
functions. The company performs adjusting entries monthly, but prepares closing entries
annually on December 31. The company recently hired Jack Armstrong as its new accountant.
Jack's first assignment was to prepare an income statement, a statement of retained earnings,
and a balance sheet using an adjusted trial balance given to him by his predecessor, dated
December 31, current year.

From the adjusted trial balance, Jack prepared the following set of financial statements.

PARTY WAGON, INC.

STATEMENT OF RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR

Retained earnings (per adjusted trial balance).................................$18,000

Add: Income ..........................................................................4,080

Less: Income taxes expense ........................................................ 2,400

Retained earnings Dec. 31, current year .......................................$19,680

Instructions

a. Prepare a corrected set of financial statements dated December 31, current year. (You may
assume that all of the figures in the company's adjusted trial balance were reported correctly
except for Interest Payable of $240, which was mistakenly omitted in the financial statements
prepared by Jack.)

b. Prepare the necessary year-end closing entries.

c. Using the financial statements prepared in part a, briefly evaluate the company's profitability
and liquidity. (No transactions affected the capital stock account during the year.)

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