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reflect balances as of December 31, 20X9, unless otherwise implied. Unfortunately, the company has been
unable to locate its listing of assets, but all other information is complete, albeit in disarray.
Capital stock $375,000 Wage expense 60,000 Revenue 120,000 Rent expense 33,000 Beginning retained earnings 133,500 Utilities expense 16,500 Accounts payable 18,750 Dividends 3,750 Notes payable 75,000 a) Determine Glasgow’s net income for the year ending December 31, 20X9.
b) How much are total assets of the company, as of December 31, 20X9?
c) If you were told that assets included an accounts receivable of $7,500 for services provided during
20X9, and that such transactions had been excluded in calculating the given “revenue” amount,
how would this influence your answer to part (a) above?
a) Revenue $ 120,000 b) c) Download free ebooks at bookboon.com
44 Accounting Cycle Exercises I Problem 6: Solution Solution 6
Revenue $ 120,000 Less expenses
Wage expense $ 60,000 Rent expense 33,000 Utilities expense 16,500 Net income 109,500
$ 10,500 b)
Beginning retained earnings $ Plus: Net income 133,500
Less: Dividends 144,000
3,750 Ending retained earnings $ 140,250 Capital stock $ 375,000 Ending retained earnings 140,250 Total stockholders’ equity $ 515,250 Accounts payable $ 18,750 Notes payable 75,000 Total liabilities $ 93,750 Total liabilities $ 93,750 Total stockholders’ equity 515,250 Total assets $ 609,000 c) If, indeed, $7,500 of services was rendered on account, it should have been included in revenues.
This would result in an increase in net income (and therefore retained earnings and total equity) to
match the increase in total assets. Revenues are to be recorded as earned. Download free ebooks at bookboon.com
45 Accounting Cycle Exercises I Problem 7 Problem 7
Smithson Exploration Corporation was formed on January 1, 20X3. The company was formed by Cliff
Smithson with the goal of conducting geophysical support services related to natural gas drilling operations
in the Unita Basin region of eastern Utah. The company’s initial capitalization consisted of shareholder
investments of $2,000,000 and an additional bank loan of $1,500,000.
During the first year of operation, the company purchased land, buildings, and equipment in the amount of
$400,000, $1,000,000, and $600,000, respectively. (Hint: In subsequent chapters you will be introduced to
the concepts of depreciation relating to certain of these assets; for now you may ignore this issue).
During 20X3, the company signed contracts to deliver consulting services with a total value of $5,000,000.
By year’s end, $3,200,000 of services had been provided and billed under these agreements. The other
$1,800,000 of work will not be performed until 20X4. All amounts billed had been collected during 20X3,
with the exception of December’s billings in the amount of $250,000. The Smithson’s are quite confident that
the December billing will be collected in the normal course of business in early 20X4.
Expenses paid during 20X3 included rent ($280,000), wages ($1,560,000), interest ($150,000), and taxes
($430,000). In addition, the company had incurred rent ($20,000), wages ($60,000), and interest ($12,000)
related to 20X3 activity that was not yet paid as of the end of 20X3. Brain power
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46 Accounting Cycle Exercises I Problem 7: Worksheet Smithson Exploration declared and paid dividends to shareholders in the amount of $150,000 during 20X3.
Smithson also repaid $100,000 of the original bank loan.
a) Prepare an income statement for Smithson Corporation for the year ending December 31, 20X3.
b) Prepare a statement of retained earnings for Smithson Corporation for the year ending December
c) Prepare calculations showing that cash is $1,780,000 as of December 31, 20X3.
d) Prepare a balance sheet for Smithson Corporation as of December 31, 20X3.
For the Year Ending December 31, 20X3
Services to customers $ - Expenses
Rent $ - Wages - Interest - Taxes - Net income $ - $ - SMITHSON CORPORATION
Statement of Retained Earnings
For the Year Ending December 31, 20X3
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