SOLUTIONS TO EXERCISES

Ex 5.1 a. Adequate disclosure

b. Liquidity
c. Nominal accounts
d. Real accounts
e. After-closing trial balance
f. Dividends
g. Closing entries
h. None (This is an example of a "correcting entry.")

Ex. 5.2
a.
GREEN LAWNS, INC.
Income Statement
For the Year Ended December 31, Current Year
Revenues:
Lawn care revenue earned $ 230,400

Expenses:
Salary expense $ 124,800
Supply expense 2,880
Advertising expense 720
Depreciation expense: equipment 2,400 130,800
Income before taxes $ 99,600
Income taxes expense 27,840
Net income $ 71,760

GREEN LAWNS, INC.

Statement of Retained Earnings
For the Year Ended December 31, Current Year
Retained earnings (1/1) $ 108,000
Add: Net Income 71,760
Less: Dividends 4,800
Retained earnings (12/31) $ 174,960

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Ex. 5.2 (concluded)

GREEN LAWNS, INC.

Balance Sheet
December 31, Current Year
Assets
Cash $ 218,640
Accounts receivable 10,800
Supplies 720
Equipment $ 28,800
Less: Accumulated depreciation: equipment 12,000 16,800
Total assets $ 246,960

Liabilities
Accounts payable $ 3,600
Income taxes payable 8,400
Total liabilities $ 12,000

Stockholders' Equity
Capital stock $ 60,000
Retained earnings 174,960
Total stockholders' equity $ 234,960

Total liabilities and stockholders' equity $ 246,960

b. The company appears to be extremely liquid. Cash and accounts receivable comprise 93%
of total assets. Together, these highly liquid assets total $229,440, compared to only
$12,000 in liabilities coming due. In other words, the combined total of cash and accounts
receivable are 19 times the obligations coming due in the near future.

c. The $108,000 credit Retained Earnings balance reported in the company’s adjusted trial
balance is its beginning balance. In order to have retained $108,000 in earnings, in excess
of any prior years' dividends, the company must have been profitable in the past.

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Ex. 5.7 a. Counseling Revenue………………………………………… 270,000
Income Summary…………………………………… 270,000
To close counseling revenue earned.
Close all expenses to the Income summary account:
Income Summary……………………………………………… 204,480
Advertising Expense………………………………… 2,160
Salaries Expense……………………………………… 112,800
Office Supplies Expense………………………… 1,440
Utilities Expense……………………………………… 1,020
Malpractice Insurance Expense…………………… 7,200
Office Rent Expense…………………………………. 28,800
Continuing Education Expense………………… 3,180
Depreciation Expense: Fixtures…………………… 5,400
Miscellaneous Expense……………………………… 7,200
Income Taxes Expense…………………………… 35,280
To close all expense accounts.
Income Summary………………………………………… 65,520
Retained Earnings…………………………………… 65,520
To transfer net income earned in Current Year
($270,000 - $204,480) to Retained Earnings.

Retained Earnings………………………………………… 7,200

Dividends…………………………………………….. 7,200
To close dividends declared in Current Year to
Retained Earnings.

b. Retained Earnings, January 1, Current Year $ 110,400

Plus: Net Income 65,520
$ 175,920
Less: Dividends Declared in Current Year (7,200)
Retained Earnings, December 31, Current Year $ 168,720

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Ex. 5.8 a. Consulting Revenue - Individual Clients…………….. 60,000
Consulting Revenue - Corporate Clients…………….. 240,000
Income Summary…………………………………………. 300,000
To close revenue accounts to income summary.
Income Summary……………………………………………….. 412,500
Advertising Expense………………………………… 24,000
Depreciation Expense: Computers...………….. 36,000
Rent Expense……………………………………. 14,400
Office Supplies Expense………………………… 6,600
Travel Expense………………………………….. 86,700
Utilities Expense………………………………… 4,950
Telephone and Internet Expense……………… 2,850
Salaries Expense……………………………….. 233,250
Interest Expense……………………………….. 3,750
To close expense accounts to income summary.
Retained Earnings………………………………………. 112,500
Income Summary………………………………… 112,500
To transfer a net loss for the period to retained earnings.

Retained Earnings……………………………………………… 37,500

Dividends…………………………………………….. 37,500
To close dividends to retained earnings.

b. Retained Earnings, (January 1, Current Year)………...…… $ 450,000

Less: Net loss in Current Year………………………………. (112,500)
Dividends in Current Year………………………………. (37,500)
Retained Earnings, December 31, Current Year $ 300,000

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 SOLUTIONS TO PROBLEMS SET A
20 Minutes, Easy PROBLEM 5.1A
PARTY WAGON, INC.
a.
PARTY WAGON, INC.
Income Statement
For the Year Ended December 31, Current Year
Revenues:
Party revenue earned $ 156,000

Expenses:
Insurance expense $ 2,160
Office rent expense 14,400
Supplies expense 1,440
Salary expense 90,000
Depreciation expense: van 9,600
Depreciation expense: equipment & music 8,400
Repair & maintenance expense 2,400
Travel expense 7,200
Miscellaneous expense 4,320
Interest expense 5,280 145,200
Income before taxes $ 10,800
Income taxes expense 2,400
Net income $ 8,400

PARTY WAGON, INC.

Statement of Retained Earnings
For the Year Ended December 31, Current Year
Retained earnings (1/1/Current Year) $ 18,000
Add: Net Income 8,400
Less: Dividends 1,200
Retained earnings (12/31/Current Year) $ 25,200

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 PROBLEM 5.1A
PARTY WAGON, INC. (continued)
a. (cont'd)
PARTY WAGON, INC.
Balance Sheet
December 31, Current Year

Assets
Cash $ 18,000
Accounts receivable 10,800
Unexpired insurance 5,400
Prepaid rent 2,400
Supplies 600
Van $ 48,000
Less: Accumulated depreciation: van 19,200 28,800
Equipment & music 42,000
Less: Accumulated depreciation: equipment & music 16,800 25,200
Total Assets $ 91,200

Liabilities
Accounts payable $ 8,400
Notes payable 46,800
Salaries payable 1,920
Interest payable 240
Income taxes payable 480
Unearned party revenue 2,160
Total Liabilities $ 60,000

Stockholders' Equity
Capital stock $ 6,000
Retained earnings 25,200
Total Stockholders' Equity $ 31,200

Total Liabilities and Stockholders' Equity $ 91,200

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 PROBLEM 5.1A
PARTY WAGON (concluded)
b.
PARTY WAGON, INC.
General Journal
12/31/Current Year
(1)
Dec. 31 Party Revenue Earned 156,000
Income Summary 156,000
To close Party Revenue Earned.

(2)
31 Income Summary 147,600
Insurance Expense 2,160
Office Rent Expense 14,400
Supplies Expense 1,440
Salaries Expense 90,000
Depreciation Expense: Van 9,600
Depreciation Expense: Equip. & Music 8,400
Repair & Maintenance Expense 2,400
Travel Expense 7,200
Miscellaneous Expense 4,320
Interest Expense 5,280
Income Taxes Expense 2,400
To close all expense accounts.

(3)
31 Income Summary 8,400
Retained Earnings 8,400
To transfer net income earned in Current Year to the
Retained Earnings account ($156,000 - $147,600 =
$8,400).

(4)
31 Retained Earnings 1,200
Dividends 1,200
To transfer dividends declared in Current Year to
the
Retained Earnings account.

c. For the year ended December 31, Current Year, the company generated net income of
$8,400 on $156,000 sales. Thus, net income as a percentage of sales was approximately
5.4%. Moreover, the $8,400 profit represented a 30.4% return on average stockholders’
equity ($24,000 + $31,200)/2), which is a fairly strong return on investment. The
company’s balance sheet at December 31, Current Year, reports cash and accounts
receivable totaling $28,800. It also reports various payables (liabilities) totaling $60,000.
Thus, the company may or may not currently be liquid depending on when the $46,800
note payable reported in the balance sheet is due. If this obligation is not due in the near
future, then the company appears to be solvent. If, however, this note is due shortly, the
company may experience some cash flow difficulty.

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30 Minutes, Medium PROBLEM 5.2A
AFFORDABLE LAWN CARE, INC.
a.
AFFORDABLE LAWN CARE, INC.
Income Statement
For the Year Ended December 31, Current Year
Revenues:
Mowing revenue earned $ 340,000

Expenses:
Insurance expense $ 4,800
Office rent expense 72,000
Supplies expense 10,400
Salary expense 120,000
Depreciation expense: trucks 60,000
Depreciation expense: mowing equipment 8,000
Repair & maintenance expense 6,000
Fuel expense 3,000
Miscellaneous expense 10,000
Interest expense 6,000 300,200
Income before taxes $ 39,800
Income taxes expense 12,000
Net income $ 27,800

AFFORDABLE LAWN CARE, INC.

Statement of Retained Earnings
For the Year Ended December 31, Current Year
Retained earnings (1/1/Current Year) $ 60,000
Add: Net Income 27,800
Less: Dividends 10,000
Retained earnings (12/31/Current Year) $ 77,800

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 PROBLEM 5.2A
AFFORDABLE LAWN CARE, INC. (continued)
a. (cont'd)
AFFORDABLE LAWN CARE, INC.
Balance Sheet
December 31, Current Year

Assets
Cash $ 117,050
Accounts receivable 9,600
Unexpired insurance 16,000
Prepaid rent 6,000
Supplies 2,150
Trucks $ 300,000
Less: Accumulated depreciation: trucks 240,000 60,000
Mowing equipment 40,000
Less: Accumulated depreciation: mowing equipment 24,000 16,000
Total assets $ 226,800

Liabilities
Accounts payable $ 3,000
Notes payable 100,000
Salaries payable 1,800
Interest payable 300
Income taxes payable 2,100
Unearned mowing revenue 1,800
Total liabilities $ 109,000

Stockholders' Equity
Capital stock $ 40,000
Retained earnings 77,800
Total stockholders' equity $ 117,800

Total liabilities and stockholders' equity $ 226,800

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 PROBLEM 5.2A
AFFORDABLE LAWN CARE, INC. (continued)
b.
AFFORDABLE LAWN CARE, INC.
General Journal
12/31/Current Year
(1)
Dec. 31 Mowing Revenue Earned 340,000
Income Summary 340,000
To close Mowing Revenue Earned.

(2)
31 Income Summary 312,200
Insurance Expense 4,800
Office Rent Expense 72,000
Supplies Expense 10,400
Salary Expense 120,000
Depreciation Expense: Trucks 60,000
Depreciation Expense: Mowing Equip. 8,000
Repair & Maintenance Expense 6,000
Fuel Expense 3,000
Miscellaneous Expense 10,000
Interest Expense 6,000
Income Taxes Expense 12,000
To close all expense accounts.

(3)
31 Income Summary 27,800
Retained Earnings 27,800
To transfer net income earned in Current Year to the
Retained Earnings account ($340,000 - $300,200 =
$27,800).

(4)
31 Retained Earnings 10,000
Dividends 10,000
To transfer dividends declared in Current Year to
the
Retained Earnings account.

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 PROBLEM 5.2A
AFFORDABLE LAWN CARE, INC. (concluded)
c.
AFFORDABLE LAWN CARE, INC.
After-Closing Trial Balance
December 31, Current Year
Cash $ 117,050
Accounts receivable 9,600
Unexpired insurance 16,000
Prepaid rent 6,000
Supplies 2,150
Trucks 300,000
Accumulated depreciation: trucks $ 240,000
Mowing equipment 40,000
Accumulated depreciation: mowing equipment 24,000
Accounts payable 3,000
Notes payable 100,000
Salaries payable 1,800
Interest payable 300
Income taxes payable 2,100
Unearned mowing revenue 1,800
Capital stock 40,000
Retained earnings 77,800
Totals $ 490,800 $ 490,800

d. For the year ended December 31, Current Year, the company generated net income of
$27,800 on $340,000 sales. Thus, net income as a percentage of sales was approximately
8.2%. Moreover, the $27,800 profit represented a return on average stockholders’ equity
of approximately 25.5%, which is a fairly strong return on investment. The company’s
balance sheet at December 31, Current Year, reports cash and accounts receivable totaling
$126,650. It also reports various payables (liabilities) totaling $109,000. Depending on
when the $100,000 note payable reported in the balance sheet is due, the company may be
extremely liquid. If this obligation is not due in the near future, the company has $126,650
in cash and accounts receivable to cover obligations of only $9,000. Moreover, $1,800 of the
$9,000 of obligations, the Unearned Mowing Revenue amount, will not require a cash
outlay. Even if this note is due shortly, the company still appears to be liquid.

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