As a recently hired accountant for a small business, SMC, Inc., you are provided
ID: 2577413 • Letter: A
Question
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2017
SMC, Inc.
Balance Sheet
December 31, 2017
Assets
Cash .................. $34,500
Accounts receivable ................................................................................ 25,000
Inventory .................................................................................................. 10,000
Supplies ................................................................................................... 200
Total assets.............................................................................................. $69,700
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable ............................................................................. $12,000
Salaries payable ............................................................................... 1,000
Income taxes payable ...................................................................... 3,675
Total liabilities........................ $16,675
Stockholders’equity:
Capital stock (10,000 shares outstanding).................................... $25,000
Retained earnings ............................................................................ 28,025
Total stockholders’ equity ....................................................................... 53,025
Total liabilities and stockholders’ equity................................................ $69,700
SMC, Inc.
Income Statement
For the Year Ended December 31, 2017
Sales revenue .......................................................................................... $110,000
Rent revenue ........................................................................................... 1,000
Total revenues ......................................................................................... $111,000
Less cost of goods sold........................................................................... 60,000
Gross margin ........................................................................................... $ 51,000
Less operating expenses:
Supplies expense ............................................................................. $ 400
Salaries expense .............................................................................. 22,000
Miscellaneous expense ................................................................... 4,100
26,500 Income before taxes................................................................................ $ 24,500
Less income taxes................................................................................... 3,675
Net income............................................................................................... $ 20,825
Earnings per share ( $20,825 / 10,000 shares) $ 2.08
SMC, Inc.
Post-Closing Trial Balance
December 31, 2017
Debits Credits
Cash ......................................................................................................... $34,500
Accounts Receivable ............................................................................... 25,000
Inventory .................................................................................................. 10,000
Supplies ................................................................................................... 200
Accounts Payable .................................................................................... $12,000
Salaries Payable ...................................................................................... 1,000
Income Taxes Payable............................................................................. 3,675
Capital Stock............................................................................................ 25,000
Retained Earnings ................................................................................... 28,025
Totals........................................................................................................ $69,700 $69,700
You are also given the following information that summarizes the business activity for the current year, 2018
a. Issued 10,000 additional shares of capital stock for $45,000 cash on January 1st.
b. Borrowed $20,000 on March 1, 2018, from Downtown Bank as a long-term loan. The interest rate on the loan is 5% and Interest for the year is payable on January 1, 2019.
c. Paid $7,200 cash on April1 to lease a building for one year.
d. Received $4,800 on May 1 from a tenant for one year’s rent.
e. Paid $2,400 on June 1 for a one-year insurance policy.
f. Purchased $2,570 of supplies for cash on June 15th.
g. Purchased inventory for $100,000 on account on July 1.
h. August 1, sold inventory for $165,000 on account; cost of the merchandise sold was $92,000.
i. Collected $105,000 cash from customers’ accounts receivable on August 20th.
j. September 1, Paid $80,000 cash for inventories purchased earlier during the year.
k. September 20th, paid $32,000 for sales reps’ salaries, including $1,000 owed at the beginning of 2016.
l. Dividends for $8,500 were paid on October 20th.
m. The income taxes payable at the beginning of 2018 were paid on November 15th.
n. For adjusting entries, all prepaid expenses are initially recorded as assets, and all unearned revenues are initially recorded as liabilities.
o. At year-end, $600 worth of supplies are on hand.
p. At year-end, an additional $9,100 of sales salaries are owed, but have not yet been paid.
q. Prepare an adjusting entry to recognize the taxes owed for 2018. The corporate tax rate is 25% of the income before income taxes.
You are asked to do the following on an excel spreadsheet:
1. Journalize the transactions for the current year, 2018, using the accounts listed on the financial statements and other appropriate accounts .
2. Set up T-accounts and enter the beginning balances from the December 31, 2017, post-closing trial balance for SMC. Post all current year journal entries to the T-accounts.
3. Journalize and post any necessary adjusting entries at the end of 2018. (Hint: Items b, c, d, e, o, p, and q require adjustment.)
4. After the adjusting entries are posted, prepare an adjusted trial balance, an income statement, statement of retained earnings and a balance sheet for 2018. The format of your statements should mirror those prepared by the company in 2017.
5. Journalize and post-closing entries for 2018 and prepare a post-closing trial balance.
6. Compute the Current ratio and Debt to Total Asset Ratio for 2017 and 2018
7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?
Explanation / Answer
1. Journal Entry
Date
Particulars
Dr. Amount (In $)
Cr. Amount (In $)
Jan 1
Cash ($4.5)
TO Common Stock ($2.5)
TO Additional Paid in capital ($2)
45,000
25,000
20,000
March 1
Cash
TO Bank Loan
20,000
20,000
April 1
Prepaid Rent
TO Cash
7,200
7,200
May 1
Cash
TO Unearned Rent
4,800
4,800
June 1
Prepaid Insurance
TO Cash
2,400
2,400
June 15
Supplies
TO Cash
2,570
2,570
July 1
Inventory
TO Accounts Payable
100,000
100,000
Aug 1
Accounts Receivable
TO Sales Revenue
165,000
165,000
Aug 1
Cost of Goods Sold
TO Inventory
92,000
92,000
Aug 20
Cash
TO Accounts Receivable
105,000
105,000
Sept 1
Accounts Payable
TO Cash
80,000
80,000
Sept 20
Salaries Expense
Salary Payable
TO Cash
31,000
1,000
32,000
Oct 20
Dividends Paid
TO Cash
8,500
8,500
Nov 15
Income Taxes Payable
TO Cash
3,675
3,675
Date
Particulars
Dr. Amount (In $)
Cr. Amount (In $)
Jan 1
Cash ($4.5)
TO Common Stock ($2.5)
TO Additional Paid in capital ($2)
45,000
25,000
20,000
March 1
Cash
TO Bank Loan
20,000
20,000
April 1
Prepaid Rent
TO Cash
7,200
7,200
May 1
Cash
TO Unearned Rent
4,800
4,800
June 1
Prepaid Insurance
TO Cash
2,400
2,400
June 15
Supplies
TO Cash
2,570
2,570
July 1
Inventory
TO Accounts Payable
100,000
100,000
Aug 1
Accounts Receivable
TO Sales Revenue
165,000
165,000
Aug 1
Cost of Goods Sold
TO Inventory
92,000
92,000
Aug 20
Cash
TO Accounts Receivable
105,000
105,000
Sept 1
Accounts Payable
TO Cash
80,000
80,000
Sept 20
Salaries Expense
Salary Payable
TO Cash
31,000
1,000
32,000
Oct 20
Dividends Paid
TO Cash
8,500
8,500
Nov 15
Income Taxes Payable
TO Cash
3,675
3,675
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