Question

Final Project Data

On December 1, 2015 John Trap created a new travel agency, Trap Adventures, Inc. providing exclusive adventure trips. The following transactions occurred during December 2015.

NOTE: There are no beginning balances – this is a new company.

Dec 1 John Trap invested $60,000 cash in the company for common stock.
Dec 2 Purchase office equipment for $17,500 cash.
Dec 2 The company rented furnished office space by paying $18,000 cash for the first six months (December 2015 – May 2016) rent.
Dec 3 The company purchased $1,500 of office supplies on account.
Dec 10 The company paid $3,600 cash for the premium on a 12-month insurance policy.
Dec 14 The company paid $10,750 cash for two weeks' salaries earned by employees.
Dec 24 The company collected $54,000 cash on commissions from airlines on tickets obtained for customers.
Dec 28 The company paid $12,125 cash for two weeks' salaries earned by employees.
Dec 29 The company paid $350 cash for minor repairs to the company's computer.
Dec 30 The company paid $450 cash for this month's telephone bill.
Dec 30 Dividends of $3,000 cash were paid.

PART 2: Answer two of the questions below in 1-2 fully developed paragraphs. A fully developed paragraph should have a major point with 3-5 support sentences. 1-2 sentences is not acceptable or does not discuss the question.

1. Trap Adventures, Inc. is looking for an accountant. In your own words, explain to Trap’s hiring team the role of accountant and accounting within business.
      a. Provide examples of the expectations of the accountant.

2. Discuss the financial position of Trap Adventures, Inc. using the following ratios:
      a. Current ratio
      b. Return on equity: For each ratio, provide the calculation and an explanation of the meaning. Is this a positive or negative result for the Trap Adventures, Inc.?

3. Using Trap Adventures, Inc.’s income statement, evaluate the operations for the month of December. Complete a common-size income statement using sales as the base number.
      a. What is the largest percentage?
      b. What is the smallest percentage?
      c. What recommendations could be made to increase Trap’s net income?

4. Currently, Trap Adventures, Inc. does not own any loans or bank notes (long-term liabilities). What would happen if Trap decides to obtain a bank loan for $25,000 to fund daily operations?
      a. How would this transaction impact the financial statements – which accounts would be affected?
      b. What is the debt to equity ratio?
      c. What does the debt to equity ratio represent?

Answer 1

Travel Agency:
T-Accounts:
Cash account:
DEBIT	AMOUNT$	CREDIT	AMOUNT$
DEC
1	60000	2	17500
24	54000	2	18000
		10	3600
		14	10750
		28	12125
		29	350
		30	450
		30	3000
		CB	48225
Common Stock account:
		1	60000
Office Equipment account:
2	17500
Office supplies account:
3	1500
Accounts Payable account:
		3	1500
Prepaid Insurance account:
10	3600
Salary expense account:
14	10750	CB	22875
28	12125
Commission Revenue account:
		24	54000
Repair expense account:
29	350
Telephone expense account:
30	450
Dividend paid account:
30	3000

Income Statement:		Common size
	Amount$	%age
Commission Revenue	54000	100
Less:Expenses:
Rent(18000/6)	3000	5.56
Insurance (3600/12)	300	0.56	LOWEST
Salary	22875	42.36	HIGHEST
Repair	350	0.65
Telephone	450	0.83
Total expense	26975	49.95
Net Income	27025	50.05
Less:Dividend	3000	5.56
Tfr to RE	24025	44.49
Balance Sheet:
Assets:	Amount $
Cash	48225
Supplies	1500
Ad. Rent(18000-3000)	15000
Prepaid Ins.(3600-300)	3300
Current Assets	68025
Equipment	17500
Total Assets	85525
Liabilities & Capital:	Amount $
Current Liabi.- AP	1500
Shareholders Equity:
CS	60000
RE	24025
Total Liab. & Capi.	85525

PART 2)

1) The running of business requires finance and proper use

of finance will require proper recording and control of the

same. The Accountant does the work of the recording and

finalising the accounts at the period end and presenting the

accounts and finance position to the shareholders. The

Accountant also keeps control on the statutory requirements

of the legal matters, like taxes and court cases.

The expectations of the Accountant is that concern takes care

of his/her salary. The daily expenses of the accounts department

are well be cared by concern. Statutory requirements would

be fulfilled by the management whenever arise.

2) a) Current ratio :The ratio shows the liquid assets carried by

concern to pay-off its liabilities. The Agency's CR is 68025/1500 =

45.35. The ratio is very good showing huge liquidity with the

concern to meet its liabilities. (formula = CA/CL)

b) Return on equity: The ratio shows the concerns return to the

shareholders. The ROE of Agency is 27025/60000=45%. The return

is supposed to be one of the best in the travelling business. The

shareholders are getting 45% on investment. (Formula:NI/Eq.)

3) a. Largest percentage is of Salary expense.

b. Smallest percentage is of Insurance expense.

c) The Trap's net income can be raised through going for more

ticket bookings and getting more business. For this purpose they

could employ intermediaries. The control on the concern's expenses

would also help the agency to enhance its net income.

4)a) The loan transaction of $25000 will increase the cash

and debt of liability side. The concern's current ratio is

good so bank would not find it difficult to lend because

concern's Net income margin is also good.

b &c) The Debt to Equity ratio shows the use of leverage by

concern to enhance the shareholder's wealth. The agency's

D/E ratio then will be Debt/Equity = 25000/(60000+24025)=0.3.

The ratio is with in the controlling limit as against 0.3 loan the

concern is having 1 equity.