Ch # 4 Financial Statements
Financial statements
Financial statements are the formal records that are prepared at the end of accounting period to generate information regarding profit
or loss, retained earnings, financial position and cash flow position, communicated in monetary terms to stakeholders in order to make
decisions.
Accounting Period
The time period at the end of which financial statements are prepared is known as accounting period. It may be a period of 1-year, 6-
months, 3-months or 1-month depending on the policies of the company.
Time period principle
Financial statements are prepared for relatively short accounting periods of equal length to provide timely information to the users of
financial statements. The period of time covered by an income statement is termed the company’s accounting period.
Income Statement
A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for a particular
accounting period shows the net income or net loss is known as income statement. OR
A financial statement which is prepared to ascertain the profit or loss of a business entity by comparing revenues and expenses of a
certain accounting period is known as income statement.
Net Income
The excess of revenue over expenses for a given accounting period is known as net income. OR
Net income means total revenues are greater than total expenses.
Net Income = Total Revenue > Total Expenses
Net Loss
The excess of expenses over revenue for a given accounting period is known as net loss. OR
Net loss means total expenses are greater than total revenues.
Net Income = Total Revenue < Total Expenses
Matching principle ( Expense related)
The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The
revenue earned during an accounting period is matched (offset) with the expenses incurred in generating that revenue. OR
To ascertain the net income or loss for a certain accounting period, revenues should be matched with the expenses of that accounting
period.
Realization Principle ( Revenue Related)
The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is
realized when services are rendered to customers or when goods sold are delivered to customers.
Balance Sheet
The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners’ equity at a
point in time is known as balance sheet. It is also called the statement of financial position.
Current Assets
Cash and other assets that can be converted into cash or used up within a relatively short period of time without interfering with
normal business operations.
Current Liabilities
Existing obligations that are expected to be satisfied with a company’s current assets within a relatively short period of time.
Going Concern Principle/ Assumption
According to this principle or assumption, a business will continue and operate in the foreseeable future. Foreseeable future normally
means at least one year.
Cash Flow Statement/ Statement of Cash Flows
A cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet
accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. It
reports on a business’s cash receipts and cash payments for a specific period.
Retained Earnings
“That portion of stockholders’ (owners’) equity resulting from profits earned and retained in the business.” OR
“Profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the
business or kept as a reserve for specific objectives (such as to pay off a debt or purchase a capital asset).”
Statement of Retained Earnings
The statement of retained earnings summarizes the increases and decreases in retained earnings resulting from business operations
during the period. Increases in retained earnings result from earning net income; decreases result from net losses and from the
declaration of dividends.
Opening Retained Earnigns + Net Income / ( - Net Loss) – Dividends = Closing Retained Earnings
Dividend
“Profit generated by a company that is distributed to stockholders (owners) as a reward of their investment is known as dividend.” OR
“A dividend is a distribution of assets (usually cash) by a corporation to its stockholders.”
NOTE: Dividends are not an expense, and they are not deducted from revenue in the income statement. The reason why dividends are
not viewed as an expense is that these payments do not serve to generate revenue. Rather, they are a distribution of profits to the
owners of the business.
Notes to Financial Statements (accompanying financial statements)
The supplemental disclosures that accompany financial statements are called notes to financial statements. These notes provide users
with various types of information considered necessary for the proper interpretation of the financial statements.
Adequate Disclosure Principle
The generally accepted accounting principle of providing with financial statements any information that users need to interpret those
statements properly.
Closing Entries
Journal entries made at the end of the period for the purpose of closing temporary accounts (revenue, expense, and dividends
accounts) and transferring balances to the Retained Earnings account.
After Closing Trial Balance
A trial balance prepared after all closing entries have been made, consisting only of accounts for assets, liabilities, and owners’ equity
is called after closing trial balance.
Income Summary
The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. The balance (credit
balance for a net income, debit balance for a net loss) is transferred to the Retained Earnings account.
Interim financial statements
The financial statements prepared for periods of less than one year (includes monthly and quarterly statements) are known as interim
financial statements.
Worksheet
A multicolumn schedule consists of a trial balance, adjusting entries, adjusted trial balance, income statement and balance sheet used
at the end of the accounting period as an aid to preparing financial statements and for planning purposes.
PRACTICAL PROBLEMS
Q#1
OVERNIGHT AUTO SERVICE
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 18,592
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,250
Shop supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Accumulated depreciation: building . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,650
Tools and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Accumulated depreciation: tools and equipment . . . . . . . . . . . . . . . . . 2,200
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,690
Wages payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,950
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,580
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Unearned rent revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Retained earnings (Note: still must be
updated for transactions recorded in the accounts
listed below. Closing entries serve this purpose.) . . . . . . . . . . . . . . . 0
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Repair service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,000
Rent revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900
Wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,750
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Depreciation expense: building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650
Depreciation expense: tools and equipment . . . . . . . . . . . . . . . . . . . . 2,200
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,400
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,628
$279,100 $279,100
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the balance sheet
dated December 31, 2011.
b. Prepare the necessary closing entries at December 31, 2011.
c. Prepare an after-closing trial balance dated December 31, 2011.
Q # 2 Jan’s Dance Studio, Inc., performs adjusting entries every month, but closes its accounts only at year-end. The studio’s year-end
adjusted trial balance dated December 31, 2011, appears below. (Bear in mind, the balance shown for Retained Earnings was last updated on
December 31, 2010. )
JAN’S DANCE STUDIO, INC.
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,100
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,400
Prepaid studio rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,200
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Unearned studio revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Studio revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,000
Salary expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
Supply expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000
$344,200 $344,200
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the studio’s balance
sheet dated December 31, 2011.
b. Prepare the necessary closing entries at December 31, 2011.
c. Prepare an after-closing trial balance dated December 31, 2011.
Q # 3 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 are prepared annually at December 31. An adjusted trial balance dated
December 31, 2011, follows.
LAWN PRIDE, INC.
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,525
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,075
Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Accumulated depreciation: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000
Mowing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Accumulated depreciation: mowing equipment . . . . . . . . . . . . . . . . . . 12,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050
Unearned mowing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Mowing revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Depreciation expense: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Depreciation expense: mowing equipment . . . . . . . . . . . . . . . . . . . . . 4,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Fuel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
$406,500 $406,500
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the company’s
balance sheet dated December 31, 2011.
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company’s profitability and liquidity.
Q # 4 Mystic Masters, Inc., provides fortune-telling services over the Internet. In recent years the company 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, 2011, follows.
MYSTIC MASTERS, INC.
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 960
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 00
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400
Accumulated depreciation: furniture and fixtures . . . . . . . . . . . . . . . . . . . $ 5,200
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,540
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Unearned client revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Client revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Depreciation expense: furniture and fixtures . . . . . . . . . . . . . . . . . . . . . .1,400
Office and telephone expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Internet service expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
$96,600 $96,600
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the company’s balance sheet dated December
31, 2011. (Hint: The company incurred no income taxes expense in 2011.)
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
Q # 5 Garden Wizards provides gardening services to both commercial and residential customers. The company performs adjusting entries
on a monthly basis, whereas closing entries are prepared annually at December 31. An adjusted trial balance dated December 31, 2011,
follows.
GARDEN WIZARDS
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,700
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
Trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Accumulated depreciation: trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000
Salaries payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Unearned service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
Service revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,600
Salary expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
Depreciation expense: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300
Fuel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
$367,100 $367,100
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the company’s
balance sheet dated December 31, 2011.
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
Q # 6 Debit Doctors, Inc., provides accounting advice over the Internet. In recent years the company 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, 2011, follows.
DEBIT DOCTORS, INC.
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accumulated depreciation: furniture and fixtures . . . . . . . . . . . . . . . . . $ 6,600
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,100
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Unearned client revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Client revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,700
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,200
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Depreciation expense: furniture and fixtures . . . . . . . . . . . . . . . . . . . . 1,200
Office and telephone expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,600
Internet service expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
$103,270 $103,270
Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December 31, 2011. Also prepare the company’s
balance sheet dated December 31, 2011. (Hint: The company incurred no income taxes expense in 2011.)
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
