Correcting . Classification Errors
Party Wagon, Inc., provides musical entertainment at weddings, dances, and various other functions. The company performs adjusting entries monthly, but prepares closing entries annually on December 31. The company recently hired Jack Armstrong as its new accountant. Jack's first assignment was to prepare an income statement, a statement of retained earnings, and a balance sheet using an adjusted trial balance given to him by his predecessor, dated December 31,2011.
From the adjusted trial balance, Jack prepared the following set of financial statements:
PARTY WAGON, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2011 | ||
Revenue: |
|
|
Party revenue earned |
| $ 130,000 |
Unearned party revenue |
| $ 1,800 |
Accounts receivable |
| 9,000 |
Total revenue |
| $140,800 |
|
| |
Insurance expense | $ 1800 |
|
Office rent expense | 12,000 |
|
Supplies expense | 1,200 |
|
Dividends | 1,000 |
|
Salary expense | 75,000 |
|
Accumulated depreciation: van | 16,000 |
|
Accumulated depreciation: equipment and music | 14,000 |
|
Repair and maintenance expense | 2,000 |
|
Travel expense | 6,000 |
|
Miscellaneous expense | 3,600 |
|
Interest expense | 4,400 | 137,000 |
Income before income taxes |
| $ 3,800 |
Income taxes payable |
| 400 |
Net income |
| $ 3,400 |
|
|
|
PARTY WAGON, INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2011 | |
Retained earnings (per adjusted trial balance) | $15,000 |
Add: Income | 3,400 |
Less; Income taxes expense | 2,000 |
Retained earnings Dec. 31,2011 | $16,400 |
PARTYWAGON;IN BALANCE SHEET DECENBER 31,2011 | |||
Assets |
|
| |
Cash |
| $15,000 | |
Supplies |
| 500 | |
Van | $40,000 |
| |
Less: Depreciation expense: van | 8,000 | 32,000 | |
Equipment and music | $35,000 |
| |
Less: Depreciation expense: music and equipment | 7,000 | 28,000 | |
Total assets |
| $75,500 | |
Liabilities: | |||
Accounts payable |
| $ 7,000 | |
Notes payable |
| 39,000 | |
Salaries payable |
| 1,600 | |
Prepaid rent |
| 2,000 | |
Unexpired insurance |
| 4,500 | |
Total liabilities |
| $54,100 | |
Stockholders' Equity: | |||
Capital stock |
| 5,000 | |
Retained earnings |
| 16,400 | |
Total stockholders' equity |
| $21,400 | |
Total liabilities and stockholders' equity |
| $75,500 | |
Instructions
a. Prepare a corrected set of financial statements dated December 31, 2011. (You may assume that all of the figures in the company's adjusted trial balance were reported correctly except for Interest Payable of $200, which was mistakenly omitted in the financial statements prepared by Jack.)
b. Prepare the necessary year-end closing entries.
c. Using the financial statements prepared in part a, briefly evaluate the company's profitability and liquidity.
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