Question

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 $160,000 of common stock on April 1.
2. Acquired a barn for $230,000. On April 2, the company paid half the amount in cash and signed a three-year note payable for the balance.
3. Provided $22,000 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 $13,500 on April 4 for rent earned this month.
5. On April 5, received $2,150 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 $3,400.
7. Paid $2,620 on accounts payable on April 7 for previous purchases.
8. Received $1,800 from customers on April 8 on accounts receivable.
9. On April 9, prepaid a two-year insurance policy for $6,200 for coverage starting in May.
10. On April 28, paid $1,650 in cash for water and utilities used this month.
11. Paid $14,200 in wages on April 29 for work done this month.
12. Received an electric utility bill on April 30 for $2,020 for usage in April; the bill will be paid next month.

1. 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.

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

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

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

Answer 1

T-Accounts:

CASH
	Debit $		Credit $
a)	160,000	b)	115,000
d)	13,500	g)	2,620
e)	2,150	i)	6,200
h)	1,800	j)	1,650
		k)	14,200
End. bal.	37,780

ACCOUNT PAYABLES
	Debit $		Credit $
g)	2,620	f)	3,400
		l)	2,020
		End. bal	2,800

SUPPLIES
	Debit $		Credit $
f)	3,400
End. bal.	3,400

DEFERRED REVENUE
	Debit $		Credit $
		e)	2,150
		End. bal.	2,150

ACCOUNT RECEIVABLES
	Debit $		Credit $
c)	22,000	h)	1,800
End. bal.	20,200

NOTES PAYABLE
	Debit $		Credit $
		b)	115,000
		End. bal.	115,000

PREPAID INSURANCE
	Debit $		Credit $
i)	6,200
End. bal.	6,200

COMMON STOCK
	Debit $		Credit $
		a)	160,000
		End. bal.	160,000

BUILDING
	Debit $		Credit $
b)	230,000
End. bal.	230,000

SERVICE REVENUE
	Debit $		Credit $
		c)	22,000
		End. bal.	22,000

UTILITIES EXPENSE
	Debit $		Credit $
j)	1,650
l)	2,020
End. bal.	3,670

RENT REVENUE
	Debit $		Credit $
		d)	13,500
		End. bal.	13,500

WAGE EXPENSE
	Debit $		Credit $
k)	14,200
End. bal.	14,200

UNADJUSTED TRIAL BALANCE:

UNADJUSTED TRIAL BALANCE
	Debit $	Credit $
Cash	37,780
Account receivable	20,200
Supplies	3,400
Prepaid Insurance	6,200
Building	230,000
Accounts payable		2,800
Deferred revenue		2,150
Note payable		115,000
Common stock		160,000
Service revenue		22,000
Rent revenue		13,500
Wages expense	14,200
Utilities expense	3,670
Total	315,450	315,450

COMPUTATION OF NET INCOME:

Revenue:
Service revenue		22,000
Rent revenue		13,500
Less: Expenses
Wages expense	14,200
Utilities expense	3,670	(17,870)
Net Income		17,630

Net Profit Margin = Net Income / Total Revenue

= 17,630 / 35,500

= 49.66%

The net profit margin is BETTER than the 30.0 percent earned by a close competitor.

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