Correcting Classification Errors
Strong Knot, Inc., a 'service company, performs adjusting entries monthly, but prepares closing entries annually on December 31. The company recently hired Sally Addsup as its new accountant. Sally'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 her by her predecessor, dated December 31, 2011 The statements Sally prepared are as follows:
STRONG KNOT, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 , 2011 | ||
Revenue: |
|
|
Servicerevenue earned |
| $160,000 |
Unearned revenue |
| 3,500 |
Accounts receivable |
| 8,200 |
Total revenue |
| $171,700 |
Expenses: |
|
|
Insurance expense | $ 1,800 |
|
Office rent expense | 18,000 |
|
Supplies expense | 1,200 |
|
Dividends | 3.,000 |
|
Salary expense | 96,000 |
|
Accumulated depreciation: auto | 12,000 |
|
Accumulated depreciation: equipmen | 13,000 |
|
Repair and maintenance expense | 1,700 |
|
Travel expense | 6,600 |
|
Miscellaneous expense | 2,100 |
|
Interestexpense | 2,800 | 158,200 |
Income beforeincome taxes |
| $ 13,500 |
Income taxes payable |
| 400 |
Net income |
| $ 13,100 |
STRONG KNOT, INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31 , 2011 | |
Retained earnings (per adjusted trial balance) | $17,500 |
Add: Income | 13,100 |
Less: Income taxes expense | 4,000 |
Retained earnings, Dec. 31 , 2011 | $26,600 |
STRONG KNOT,INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31 , 2011 | ||
Assets |
|
|
Cash |
| $160,000 |
Supplies |
| 3,500 |
Automobile |
| 8,200 |
Less: Depreciation expense: automobile |
| $171,700 |
Equipment and music: |
|
|
Less: Depreciation expanse: equipment | $ 1,800 |
|
|
| $85,300 |
Liabilities & Stockholders' Equity
Liabilities: |
|
Accounts payable | $ 5,200 |
Notes payable | 45,800 |
Salary expense | 900 |
Prepaid rent | 800 |
Unexpired insurance | 3,000 |
Total liabilities | $55,700 |
Stockholders' Equity: |
|
Capital stock | 3,000 |
Retained earnings | 26,600 |
Total stockholders' equity | $29,600 |
Total liabilities and stockholders' equity | $85,300 |
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 Notes ayable, which is some amount other than $45,800.)
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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