Question

Problem I: The adjusted trial balance of Debit Company is shown below:

      Debit Company

Adjusted Trial Balance December 31, 2020

Cash                               $6,500

Accounts receivable         8,000

Supplies                          1,000

Prepaid Rent (3 months)   2,500 Equipment, net                 42,000
Accounts payable		$4,000
Salary payable		2,000
Unearned revenue (2 month advance)		2,000
Note payable — long term		14,000
Common stock		10,ooo
Retained earnings		14,700
Dividends	4000
Service revenue		75,000
Salary expense	40,000
Rent expense	10,ooo
Supplies expense	1,500
Depreciation expense	5,000
Utilities expense	1200
Total	S121.700	$121.700

Compute the company's current ratio and debt ratio at the end of the year.

. Assume the current ratio. and debt ratio from the previous year was 2.50 and .40 respectively. Did the ratios improve or deteriorate from last vear?

Refer to the data in Problems I and 2. Journalize the closing entries at the end of the vear. Set up a T-account for Retained Earnings and post to that account. Does the T-account balance agree with the Retained Eamings balance in the balance sheet?

Answer 1

Answer:

CURRENT RATIO = CURRENT ASSTES / CURRENT LIABILITIES

= $18,000 / $8,000

= 2.25

Since the current ratio was 2.50 one year ago, Debit Company's ability to pay its current liabilities has decreased.

Calculations:

Current Assets = Cash + Account receivable + Supplies + Prepaid expenses

= $6,500 + $8,000 + $1,000 + $2,500

= $18,000

Current Liabilities = Account payable + Salary payable + Unearned revenue

= $4,000 + $2,000 + $2,000

= $8,000

DEBT RATIO = LIABILITIES / ASSETS

= $22,000 / $60,000

= 0.37

Since the Debt ratio was 0.4 one year ago, Debit Company's debt ratio has improved because a lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has lower overall debt.

JOURNAL ENTRIES

Closing Entries:-

Date	Account Title and Explanation	Debit $	Credit $
12/31/2020	Service revenue	75,000
	Income summary		75,000
	(To record closing of revenue account)
12/31/2020	Income summary	57,700
	Salary expense		40,000
	Rent expense		10,000
	Supplies expense		1,500
	Depreciation expense		5,000
	Utilities expense		1,200
	(To record closing of expense account)
12/31/2020	Income summary (75,000 - 57,700)	17,300
	Retained Earnings		17,300
	(To record closing of income summary account)
12/31/2020	Retained earnings	4,000
	Dividends		4,000
	(To record closing of dividend account)

T- Account for RETAINED EARNINGS

Particulars	Amount $	Particulars	Amount $
Dividends	4,000	Beginning balance	14,700
Ending Balance	28,000	Net Income (Working)	17,300
TOTAL	32,000	TOTAL	32,000

Working: Calculation of Net Income

Debit Company Income Statement for the year ended12/31/2020
Particulars	Amount $	Amount $
Service revenue		75,000
Less: Expenses
Salary expense	40,000
Rent expense	10,000
Supplies expense	1,500
Depreciation expense	5,000
Utilities expense	1,200
Total expenses		(57,700)
NET INCOME		17,300

BALANCE SHEET

Debit Company Balance Sheet as on 12/31/2020
	Amount $	Amount $
Assets:
Current Assets:
Cash	6,500
Account receivable	8,000
Supplies	1,000
Prepaid expense	2,500
Total Current Assets		18,000
Non- Current Assets
Equipment	42,000
Total Non- Current Assets		42,000
TOTAL ASSETS		60,000
Liabilities
Cuurent Liabilities
Account payable	4,000
Salary payable	2,000
Unearned revenue	2,000
Total Current Liabilities		8,000
Non- Current Liabilities
Notes payable (long-term)	14,000
Total Non- Current Liabilities		14,000
Total Liabilities		22,000
Shareholder's Equity
Common Stock	10,000
Retained Earnings	28,000
Total Shareholder's Equity		38,000
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY		60,000

*Yes, the T-account balance do agree with the Retained Eamings balance in the balance sheet as shown in the Balance Sheet above.

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