Question

PA3-3 Analyzing the Effects of Transactions Using T-Accounts, Preparing an Unadjusted Trial Balance, and Determining Net Income and Net Profit Margin [LO 3-1, LO 3-2, LO 3-3, LO 3-4, LO 3-5]

Spicewood Stables, Inc., was established in Dripping Springs, Texas, on April 1. The company provides stables, care for animals, and grounds for riding and showing horses. You have been hired as the new assistant controller. The following transactions for April are provided for your review.

1. Received contributions from investors and issued $200,000 of common stock on April 1.
2. Acquired a barn for $142,000. On April 2, the company paid half the amount in cash and signed a three-year note payable for the balance.
3. Provided $16,000 in animal care services for customers on April 3, all on credit.
4. Rented stables to customers who cared for their own animals; received cash of $13,000 on April 4 for rent earned this month.
5. On April 5, received $1,500 cash from a customer to board her horse in May, June, and July (record as Deferred Revenue).
6. Purchased and received hay and feed supplies on account on April 6 for $3,000.
7. Paid $1,700 on accounts payable on April 7 for previous purchases.
8. Received $1,000 from customers on April 8 on accounts receivable.
9. On April 9, prepaid a two-year insurance policy for $3,600 for coverage starting in May.
10. On April 28, paid $800 in cash for water and utilities used this month.
11. Paid $14,000 in wages on April 29 for work done this month.
12. Received an electric utility bill on April 30 for $1,200 for usage in April; the bill will be paid next month.

Required:

1. 1. Prepare the journal entry for each of the above transactions.

2. 2. Post the transaction activity from requirement 1 to the T-Accounts below. All accounts begin with zero balances because this is the first month of operations.

3. 3. Prepare an unadjusted trial balance as of April 30.

4. 4-a. Refer to the revenues and expenses shown on the unadjusted trial balance. Based on this information, calculate preliminary net income and net profit margin.

5. 4-b. Determine whether the net profit margin is better or worse than the 30.0 percent earned by a close competitor.

Answer 1

Prepare journal entries as follows:

Trn.	Account Titles	Debit	Credit
a	Cash	$200,000
	Common stock		$200,000
b	Building	$142,000
	Cash		$71,000
	Note payable		$71,000
c	Accounts receivable	$16,000
	Service revenue		$16,000
d	Cash	$13,000
	Rent revenue		$13,000
e	Cash	$1,500
	Deferred revenue		$1,500
f	Supplies	$3,000
	Accounts payable		$3,000
g	Accounts payable	$1,700
	Cash		$1,700
h	Cash	$1,000
	Accounts receivable		$1,000
i	Prepaid insurance	$3,600
	Cash		$3,600
j	Utilities expense	$800
	Cash		$800
k	Wages expense	$14,000
	Cash		$14,000
l	Utilities expense	$1,200
	Utilities payable		$1,200

____________________________________________________________________

Prepare T-accounts as follows:

Cash					Accounts payable
a	$200,000	b	$71,000		g	$1,700	f	$3,000
d	$13,000	g	$1,700				l	$1,200
e	$1,500	i	$3,600
h	$1,000	j	$800				End. Bal.	$2,500
		k	$14,000
					Deferred revenue
End. Bal.	$124,400						e	$1,500
Supplies							End. Bal.	$1,500
f	$3,000
					Note payable
End. Bal.	$3,000						b	$71,000
Accounts receivable							End. Bal.	$71,000
c	$16,000	h	$1,000
					Common stock
End. Bal.	$15,000						a	$200,000
Prepaid Insurance							End. Bal.	$200,000
i	$3,600
					Service revenue
End. Bal.	$3,600						c	$16,000
Building							End. Bal.	$16,000
b	$142,000
					Rent revenue
End. Bal.	$142,000						d	$13,000
Utilities expense							End. Bal.	$13,000
j	$800
l	$1,200				Wage expense
					k	$14,000
End. Bal.	$2,000
					End. Bal.	$14,000

______________________________________________________________________

Prepare Unadjsuted trial balance as follows:

Unadjusted Trial balance
	Debit	Credit
Cash	$124,400
Accounts receivable	$15,000
Supplies	$3,000
Prepaid Insurance	$3,600
Building	$142,000
Accounts payable		$2,500
Deferred revenue		$1,500
Note payable		$71,000
Common stock		$200,000
Service revenue		$16,000
Rent revenue		$13,000
Wages expense	$14,000
utilities expense	$2,000
Total	$304,000	$304,000

_____________________________________________________

Compute Net income as follows:

Revenue:
Service revenue		$16,000
Rent revenue		$13,000
Less: Expenses
Wages expense	$14,000
utilities expense	$2,000	$16,000
Net Income		$13,000

______________________________________________________

Net profit margin = Net Income $\div$ Total Revenue

= $13,000 $\div$ $29,000 = 44.82%