Question

04. You are the new accountant for James Carmen Lid., a merchandising company. The company has provided you with the following unadjusted trial balance as of December 31, 2019 James Carmen Ltd Adjusted Trial Balance at December 31, 2019 Credit Debit $ 12,000 $ 34,000 101.000 10,000 130,000 90,000 15,000 Account Title Cash Accounts payable Accounts receivable Accumulated depreciation, equipment Cost of sales Contributed capital (30,000 shares) Deferred revenue Equipment, at cost Other operating expense Merchandise inventory Note receivable, due July 31, 2021 Prepaid rent Prepaid insurance Rent expense Retained earnings, Jan.1/18 Sales revenue Wages expense 80,000 8,500 22,000 25,000 2.500 2,000 28,000 72,000 302,000 112,000 $ $23,000 $ $23,000 Additional information is stated below. Journal entries related to these transactions have not yet been recorded • Equipment has a useful life of 15 years. Depreciation expense for 2019 is estimated at 55,300 • Wages owed to employees totalled $5,200 as at December 31, 2019. • The note receivable was obtained by James Carmen Ltd. on August 1, 2019. The note carries an annual interest rate of 7% that is payable at maturity • The balance in prepaid insurance represents a payment on November 1, 2019. for a full year of insurance beginning on that date. Cash dividends of 0.50 per share were declared on December 31, 2019 and will be paid on January 15, 2020 • The company is subject to an income tax rate of 20%. Income taxes are due on March 15, 2020 Required: 1. Prepare the adjusting journal entries as at December 31, 2019 for the items listed above. Create new accounts as needed. 2. Prepare a multiple-step statement of earnings for the year ended December 31, 2019. James Carmen Ltd. did not issue or repurchase any shares during 2019. 3. Prepare a classified statement of financial position as at December 31, 2019. 4. Prepare the closing entries at December 31, 2019. 5. Compute the net profit margin ratio and total asset turnover for 2019, and explain the meaning of each ratio. Total assets equalled $180,000 at January 1, 2019.

Answer 1

1)

Adjustement Entries

Date	Description	Ref.No.	Debit	Credit
1)	Depriciation Account		5300
	Accumulated Depriciation			5300
	(being depricition charged on asset)
2)	Wages Account		5200
	Wages payble account			5200
	( being wages outstanding)
3)	Interest receivable account		729
	Interest Revenue			729
	(being interest accrued not received)
4)	Insureance account		333
	Prepaid Insureance			333
	(being prepaid insureance expired for two months)
5)	Retained Earnings account		15000
	Dividends payble account			15000
	(being dividend declared not paid)
6)	Income Statement account		2679
	Tax Payble			2679
	( Tax payble adjusted)

Note -

Interset Receivable = ($ 25000 X 7/100) X 5/12 = $729

Insureance Expense = (2000 X 2/12) = $ 333

2) James Carmen Ltd.

Income Statement

For the year ended on 31st December, 2020

Description	Amount
Sales Revenue	302000
Less: Cost of Sales	130000
Gross Profit	172000
Operating Expenses
Wages (112000+5200)	117200
Other Oprerating Expenses	8500
Rent Expenses	28000
Insureance Expenses	333
Depriciation	5300
Total Operating Expenses	159333
Operating Income	12667
Non-Operating
Interest Revenue	729
Net Income Before Tax	13396
Less: Tax @ 20%	(2679)
Profit After Tax	10717

3)   

James Carmen Ltd.

Statement Of Financial Position

For The Year Ended 32st December, 2020

Description	Amount
Current Assets
Cash	12000
Interest Receivable	729
Prepaid Insureance	1667
Prepaid Rent	2500
Notes Receivable	25000
Merchendise Inventory	22000
Accounts Receivable	101000
Total Current Assets	164896
Non-Current Assets
Equipment At Cost	80000
Less : Accumulated Depriciation (10000 + 5300)	15300
Total Non-Current Assets	64700
Total Assets	229596
Liabilities and Shareholders Equity
Current Liabilities
Dividends Payble	15000
Tax Payble	2679
Wages Payble	5200
Deferred Revenue	15000
Accounts Payble	34000
Total Current Assets	71879
Non - Current Liabilities	-
Total Liablilities	56879
Shareholders Equity
Contributed Capital	90000
Retained Earnings ( 72000 + 10717 -15000)	67717
Shareholders Equity	157717
Total Liabilities and Shareholders Equity	229596

4)

Closing Entry

	Description	Ref No.	Debit	Credit
	Dividend Payble		15000
	Tax Payble		2679
	Wages Payble		5200
	Deferred Revenue		15000
	Accounts Payble		34000
	Contributed Capital		90000
	Retained Earnings		67717
	Accumulated Depriciation		15300
	Cash			12000
	Interest Receivable			729
	Prepaid Insureance			1667
	Prepaid Rent			2500
	Notes Receivable			25000
	Inventory			22000
	Accounts Receivable			101000
	Equipment At Cost			80000
	(Closing Entry)

5)  

Net Profit Ratio =

Profit After Tax / Sales Revenue = ( $10717 / $ 302000 ) X 100 = 3.55%

Total Asset Turnover Ratio =

Sales Revenue / Average Total Asset  = 302000 / 204798 = 1.47 times

Note - Average Total asset = (180000 + 229596) / 2 = $204798