Inferring Year-End Adjustments, Computing Earnings per Share and Net Profit Margin, andRecording Closing Entries (P4-6)
Taos Company is completing the information processing cycle at the end of its fiscal year, December 31, 2011. Following are the correct balances at December 31. 2011, for the accounts both before and after the adjusting entries for 2011.
Trial Balance, December 31, 2011 | ||||||
Items | Before Adjusting Entries | Adjustments | After Adjusting Entries | |||
Debit | Credit | Debit | Credit | Debit | Credit | |
a. Cash | $18,000 |
|
|
| $18.000 |
|
b. Accounts receivable |
|
|
| 1.500 |
| |
c. Prepaid rent | 1.200 |
|
|
| 800 |
|
d. Property, plant, and equipment | 208.000 |
|
|
| 208,000 |
|
e. Accumulated depreciation |
| $52.500 |
|
|
| $70.000 |
f. Income taxes payable |
|
|
|
|
| 6,500 |
g. Unearned revenue |
| 16,000 |
|
|
| 8.000 |
h. Contributed capital |
| 110,000 |
|
|
| 110.000 |
i. Retained earnings. January 1. 201 1 |
| 21,700 |
|
|
| 21.700 |
j. Service revenue |
| 83,000 |
|
|
| 92.500 |
k. Salary expense | 56.000 |
|
|
| 56,000 |
|
l. Depreciation expense |
|
|
|
| 17,500 |
|
m. Rent expense |
|
|
|
| 400 |
|
n. Income tax expense |
|
|
|
| 6.500 |
|
| $283.200 | $283.200 |
|
| $308,700 | $308.700 |
Required:
1. Compare the amounts in the columns before and after the adjusting entries to reconstruct the adjusting entries made in 2011. Provide an explanation of each.
2. Compute the amount of income, assuming that it is based on the amount (a) before adjusting entries and (b) after adjusting entries. Which income amount is correct? Explain why.
3. Compute earnings per share, assuming that 5.000 shares of stock are outstanding.
4. Compute the net profit margin ratio. What does this suggest to you about the company?
5. Record the closing entry at December 31, 2011.
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