As a recently hired accountant for a small business, SMC, Inc., you are provided
ID: 2577406 • 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:
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.
Explanation / Answer
SMC, Inc 31-Dec-17 Post-Closing Trial Blance Business activity for 2018 34500 Cash 34500 Debit Credit 25000 Accounts Receivable 25000 01-Jan-18 Cash 45000 10000 Inventory 10000 Capital stock 45000 200 Supplies 200 (Issue of 10000 shares $10 each) 69700 Total assets 69700 01-Mar-18 Bank 20000 Downtown Bank 20000 Liabilities & Stockholders' Equity (Loan @ 5% interest, interest for the year Liabilities: payable on 1 Jan 2019) 12000 Accounts payable 12000 01-Apr-18 Building Lease 7200 1000 Salaries payable 1000 Cash 7200 3675 Income taxes payable 3675 (Paid for building lease 1 year) 16675 Total liabilities 16675 01-May-18 Cash 4800 Stockholders' equity: Rent income 4800 25000 Capital stock (10000 shares ) 25000 (1 year's rent received) 28025 Retained earnings 28025 01-Jun-18 Insurance 2400 53025 Total stockholders' equity 53025 Cash 2400 69700 Total liabilities and stockholders' equity 69700 (One year insurance policy) 15-Jun-18 Supplies 2570 Income statement for the year ended 31 Dec 2017 Cash 2570 110000 Sales revenue (Supplies purchased) 1000 Rent revenue 01-Jul-18 Inventory 100000 111000 Total revenue Bank 100000 60000 less Cost of goods sold (inventory purchases) 51000 Gross margin 01-Aug-18 Accounts receivable 165000 less Operating expenses: Sales 165000 400 Supplies expense (Credit sales) 22000 Salaries expense 01-Aug-18 Cost of sales 92000 2400 Insurance 4100 Misccellaneous expense Inventory 92000 28900 Total expenses (Transfer of inventory to cost of sales) 22100 Income before taxes 20-Aug-18 Cash 105000 3675 less Income taxes Accounts Receivable 105000 18425 Net income (Collected from debtors) 1.84 Earnings per share 01-Sep-18 Accounts payable 80000 Cash 80000 Income statement for the year ended 31 Dec 2018 (Paid to trade creditors) 165000 Sales revenue 20-Sep-18 Salaries 31000 1000 Rent revenue Outstanding salaries 1000 166000 Total revenue Cash 32000 60000 less Cost of goods sold (Paid salaries and outstanding salaries) 106000 Gross margin 20-Oct-18 Dividends 8500 less Operating expenses: Bank 8500 1970 Supplies expense (Dividends paid) 31000 Salaries expense 15-Nov-18 Income tax payable 3675 4100 Misccellaneous expense Bank 3675 37070 Total expenses (Income taxable at the beginning of the year paid) 68930 Income before taxes 31-Dec-18 Supplies on hand 600 17233 less Income taxes Supplies 600 51698 Net income (Supplies on hand at end of year recorded) 5.17 Earnings per share 31-Dec-18 Salaries 9100 8500 Dividends Outstanding salaries 9100 43198 Carried forward (Recorded outstanding salaries) 31-Dec-18 Income tax expense 17233 Bank 17233 (Income tax for the year paid)
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