Preparing Financial Statements and Closing Entries of a Profitable Company
Mystic Masters, Inc., provides fortune-telling services over the Internet. In recent years the company has experienced severe financial difficulty. Its accountant prepares adjusting entries on a monthly basis, and closing entries on an annual basis, at December 31. An adjusted trial balance dated December 31, 2011 , follows.
MYSTIC MASTERS, INC: ADJUSTED TRIAL BALANCE DECEMBER 31, 2011 | ||
| Debits | Credits |
Cash | $ 960 |
|
Accounts receivable | 300 |
|
Unexpired insurance | 2,000 |
|
Prepaid rent | 1,500 |
|
Supplies | 200 |
|
Furniture and fixtures | 8,400 |
|
Accumulated depreciation: furniture and fixtures |
| $5,200 |
Accounts payable |
| 6,540 |
Notes payable |
| 24,000 |
Salaries payable |
| 1,700 |
Interest payable |
| 360 |
Unearned client revenue |
| 200 |
Capital stock |
| 4,000 |
Retained earnings |
| 2,600 |
Client revenue earned |
| 52,000 |
Insurance expense | 6,000 |
|
Office rent expense | 9,000 |
|
Supplies expense | 440 |
|
Salary expense |
| 48, 000 |
Depreciation expense: furniture and fixtures | 1,400 |
|
Office and telephone expense | 3,000 |
|
Internet service expense | 4,900 |
|
Legal expense | 1,500 |
|
Interest expense | 4,000 |
|
Miscellaneous expense | 5,000 |
|
| $96,600 | $96,600 |
Instruction
a. Prepare an income statement and statement of retained earnings for the year ended December 31 ,2011. Also prepare the company's balance sheet dated December 31, 2011. (Hint: The company incurred no income taxes expense in 2011.)
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company's performance.
e. Identify information that the company is apt to disclose in the notes that accompany the financial statements prepared in part a.
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