Question

Pope’s Garage had the following accounts and amounts in its financial statements on December 31, 2016. Assume that all balance sheet items reflect account balances at December 31, 2016, and that all income statement items reflect activities that occurred during the year then ended. Accounts receivable $ 32,500 Depreciation expense 11,000 Land 24,600 Cost of goods sold 87,500 Retained earnings 56,400 Cash 9,700 Equipment 68,500 Supplies 5,400 Accounts payable 22,800 Service revenue 26,500 Interest expense 3,900 Common stock 9,000 Income tax expense 13,904 Accumulated depreciation 41,000 Long-term debt 38,000 Supplies expense 12,900 Merchandise inventory 26,500 Sales revenue 152,000 Required: a. Calculate the total current assets at December 31, 2016. b. Calculate the total liabilities and stockholders’ equity at December 31, 2016. c. Calculate the earnings from operations (operating income) for the year ended December 31, 2016. d. Calculate the net income (or loss) for the year ended December 31, 2016. e. What was the average income tax rate for Pope’s Garage for 2016? f. If $17,500 of dividends had been declared and paid during the year, what was the January 1, 2016, balance of retained earnings?

Answer 1

We will prepare the income statement and balance sheet to answer the questions a to e
Income statement for the year ended 31st December 2016
Service revenue		$26,500
Sales Revenue		$152,000
Total Revenue		$178,500
Less : Cost of goods sold		$87,500
Gross Profit		$91,000
Less : Operating Expenses
Supplies Expense		$12,900
Depreciation Expense		$11,000
Operating income		$67,100
Less : Non operating expense
Interest Expense		$3,900
Net Income before tax		$63,200
Less: Income Tax Expense		$13,904
Net Income		$49,296
Balance sheet as on 31st December 2016
Assets
Accounts receivable	$32,500
Cash	$9,700
Supplies	$5,400
Inventory	$26,500
Total Current assets		$74,100
Land		$24,600
Equipment	$68,500
Accumulated Depreciation	$41,000	$27,500
Total Fixed assets		$52,100
Total assets		$126,200
Liabilities
Accounts payable		$22,800
Long term debt		$38,000
Total Liabilities		$60,800
Common Stock		$9,000
Retained earnings		$56,400
Total Stockholders equity		$65,400
Total Liabilities and stockholders equity		$126,200
a) Current assets includes assets which are realized or utilised within one year, the company's current assets includes cash, supplies, accounts receivable and inventory.
The value of current assets is $74,100
b) The liabilities are amount which is yet to be paid to outside parties, company's liabilities include accounts payable and long term debt and stockholders equity includes retained earnings and common stock
The value of total liabilities and stockholders equity is $126,200
c) The earnings from operations are income earned from the business operation of the company, non operating expense and income are excluded.
Company's operating income is $67,100
d) Net income is the net profit of the company as calculated in the income statement after deducting all the expenses from the revenue of the company
Company’s net income is $49,926
e) The average income tax rate is calculated as income tax expense divided by earnings before tax
Average income tax rate = 13,904/63,200		22.00%
Company's average income tax rate is 22%
f) Dividends are paid from the retained earnings of the company and hence payment of dividend leads to reduction of balance of retained earnings
Balance of retained earnings, 31/12/2016	$56,400
Add : Dividend Paid	$17,500
Less : Income for the year	$49,926
Balance of retained earnings, 1/1/2016	$23,974
The balance of retained earnings on 01st January 2016 was $23,974.