Consider the unadjusted trial balance of Creative Advertising Ltd. at October 31, 2020 , and the related month-end adjustment data.Adjustment data:

a. Accrued advertising revenue at October \(31, \$ 2,900\)

b. Prepaid rent expired during the month: The unadjusted prepaid balance of \(\$ 4,000\) relates to the period October 2020 through January 2021.

c. Supplies used during October, \(\$ 200\)

d. Depreciation on computers for the month: The computers' expected useful life is three years.

e. Accrued salary expense at October 31 for Monday through Thursday; the five-day weekly payroll is \(\$ 2,000\).

Requirements

1. Using Exhibit 3-5 as an example, prepare the adjusted trial balance of Creative Advertising Ltd. at October 31, 2020. Key each adjusting entry by letter.

2. Prepare the income statement, the statement of retained earnings, and the classified balance sheet. Draw arrows linking the three financial statements.

3.

a. Compare the business's net income for October to the amount of dividends paid to the owners. Suppose this trend continues into November. What will be the effect on the business's financial position, as shown by its accounting equation?

b. Will the trend make it easier or more difficult for Creative Advertising Ltd. to borrow money if the business gets in a bind and needs cash? Why?

c. Does either the current ratio or the cash position suggest the need for immediate borrowing? Explain.

Transcribed Image Text:

A Creative Advertising Ltd. Trial Balance October 31, 2020 B C D 2 Cash $ 16,300 3 Accounts receivable 7,000 4 Prepaid rent 4,000 5 Supplies 600 6 Computers 36,000 7 Accumulated depreciation $ 3,000 8 Accounts payable 8,800 9 Salary payable 10 Share capital 15,000 11 Retained earnings (September 30, 2019) 21,000 12 Dividends 4,600 13 Advertising revenue 25,400 14 Salary expense 4,400 15 Rent expense 16 Utilities expense 300 17 Depreciation expense 18 Supplies expense 19 Total S 73,200 S 73,200 20