Question

Gary's TV had the following accounts and amounts in its financial statements on December 31, 2019. Assume that all balance sheet items reflect account balances at December 31, 2019, and that all income statement items reflect activities that occurred during the year then ended. Interest expense Paid-in capital Accumulated depreciation Notes payable (long-term) Rent expense Merchandise inventory Accounts receivable Depreciation expense Land Retained earnings Cash Cost of goods sold Equipment Income tax expense Accounts payable Net sales $ 4,500 10,000 3,000 35,000 9,000 106,000 28,000 1,500 19,000 122,000 20,000 220,000 10,000 30,000 13,000 310,000 Required: a. Calculate the difference between current assets and current liabilities for Gary's TV at December 31, 2019. b. Calculate the total assets at December 31, 2019. c. Calculate the earnings from operations (operating income) for the year ended December 31, 2019. d. Calculate the net income (or loss) for the year ended December 31, 2019. e. What was the average income tax rate for Gary's TV for 2019? f. If $32,000 of dividends had been declared and paid during the year, what was the January 1, 2019, balance of retained earnings?

Answer 1

Solution:

a) Calculation of difference between Current Assets and Current Liabilities

Particulars	Amount ($)
Current Assets :
Merchandise Inventory	106,000
Accounts receivable	28,000
Cash	20,000
Total     (A)	154,000
B) Current Liabilities :
Accounts Payable	13,000
Total      (B)	13,000
Difference (A –B )	141,000

b) Calculation of Total assets as at 31st December, 2019

Particulars	Amount ($)
Assets :
Merchandise Inventory	106,000
Accounts receivable	28,000
Cash	20,000
Land	19,000
Equipment less depreciation (10,000 – 3,000)	7,000
Total Assets	180,000

c) Calculation of Earnings from operation for the year ended 31st December, 2019

Particulars	Amount ($)
Net Sales	310,000
Less: Cost of goods sold	220,000
Gross Profit	90,000
Less: Operating Expenses
Rent	9,000
Depreciation	1,500
Operating Income	79,500

d) Calculation of Net Income or loss for the year ended 31st December, 2019

Particulars	Amount ($)
Operating Income	79,500
Less: Non Operating Expenses
Interest	4,500
Income Tax	30,000
Net Income	45,000

e) Calculating Average Income tax rate

Average Income tax rate = Income Tax / Net Income

= $30,000 / $45,000

= 66.67%

f) Balance of retained earnings on 1st January, 2019 before declaration of Dividend of $32000

Particulars	Amount ($)
Retained Earnings on 31st December, 2019	122,000
Less: Net Income	45,000
Add: Dividend	32,000
Retained Earnings on 01st January, 2019	109,000

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