Question

Pope’s Garage 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.

Accounts receivable	$	99,000
Depreciation expense		36,000
Land		81,000
Cost of goods sold		270,000
Retained earnings		177,000
Cash		27,000
Equipment		213,000
Supplies		18,000
Accounts payable		69,000
Service revenue		60,000
Interest expense		12,000
Common stock		30,000
Income tax expense		36,000
Accumulated depreciation		135,000
Long-term debt		120,000
Supplies expense		42,000
Merchandise inventory		93,000
Net sales		420,000

Required:

1. Calculate the total current assets at December 31, 2019.
2. Calculate the total liabilities and stockholders’ equity at December 31, 2019.
3. Calculate the earnings from operations (operating income) for the year ended December 31, 2019.
4. Calculate the net income (or loss) for the year ended December 31, 2019.
5. What was the average income tax rate for Pope’s Garage for 2019?
6. If $48,000 of dividends had been declared and paid during the year, what was the January 1, 2019, balance of retained earnings?

Answer 1

(a) -- Calculate the total current assets at December 31, 2019.

Answer -

	Particulars	Explanation	Amount ($)
A.	Accounts receivable	Given in question	99000
B.	Cash	Given in question	27000
C.	Supplies	Given in question	18000
D.	Merchandise inventory	Given in question	93000
Total Current Assets at December 31, 2019		A + B + C + D	237000

.

(b) -- Calculate the total liabilities and stockholders’ equity at December 31, 2019.

Answer -

	Particulars	Explanation	Amount ($)
A.	Retained earnings	Given in question	177000
B.	Accounts Payable	Given in question	69000
C.	Common stock	Given in question	30000
D.	Long-term debt	Given in question	120000
Total Liabilities and Stockholders’ equity at December 31, 2019		A + B + C + D	396000

.

(c) -- Calculate the earnings from operations (operating income) for the year ended December 31, 2019.

Answer -

	Particulars	Explanation	Amount ($)
A.	Net sales	Given in question	420000
B.	Service revenue	Given in question	60000
C.	Cost of goods sold	Given in question	270000
D.	Depreciation expense	Given in question	36000
E.	Supplies expense	Given in question	42000
Operating Income for the year ended December 31, 2019		A + B - C - D - E	132000

.

(d) -- Calculate the net income (or loss) for the year ended December 31, 2019.

Answer -

	Particulars	Explanation	Amount ($)
A.	Operating Income for the year	Calculated in Part - (c)	132000
B.	Interest expense	Given in question	12000
C.	Income tax expense	Given in question	36000
Net Income for the year ended December 31, 2019		A - B - C	84000

.

(e) -- What was the average income tax rate for Pope’s Garage for 2019?

Answer -

	Particulars	Explanation	Amount ($)
A.	Income tax expense	Given in question	36000
B.	Operating Income for the year	Calculated in Part - (c)	132000
C.	Interest expense	Given in question	12000
D.	Earnings before taxes	B - C	120000
Average Income Tax Rate		A / D	30%

.

(f) -- If $48000 of dividends had been declared and paid during the year, what was the January 1, 2019, balance of retained earnings?

Answer -

	Particulars	Explanation	Amount ($)
A.	Retained earnings, December 31, 2019	Given in question	177000
B.	Net Income for the year	Calculated in Part - (d)	84000
C.	Dividends declared and paid during the year	Given in question	48000
Retained earnings, January 1, 2019		A - B + C	141000