Question
As a recently hired accountant for a small business, SMC, Inc., you are provided with last years balance sheet, income statement, and post-closing trial balance
As a recently hired accountant for a small business, SMC, Inc., you are provided with last years balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business.
SMC, Inc. Balance Sheet December 31, 2019
Assets
Cash ......................................................................................................... $34,500
Accounts receivable ................................................................................ 25,000
Inventory .................................................................................................. 10,000
Supplies ................................................................................................... 200
Total assets.............................................................................................. $69,700
Liabilities and Stockholders Equity Liabilities:
Accounts payable ............................................................................. $12,000
Salaries payable ............................................................................... 1,000
Income taxes payable ...................................................................... 3,675
Total liabilities.......................................................................................... $16,675
Stockholders equity:
Capital stock (10,000 shares outstanding).................................... $25,000
Retained earnings ............................................................................ 28,025
Total stockholders equity ....................................................................... 53,025
Total liabilities and stockholders equity................................................ $69,700
SMC, Inc. Income Statement For the Year Ended December31,2019
Sales revenue .......................................................................................... $110,000
Rent revenue ........................................................................................... 1,000
Total revenues......................................................................................... $111,000
Less cost of goods sold........................................................................... 60,000
Gross profit ........................................................................................... $ 51,000
Less operating expenses:
Supplies expense ............................................................................. $ 400
Salaries expense .............................................................................. 22,000
Miscellaneous expense................................................................... 4,100 26,500
Income beforetaxes................................................................................ $ 24,500
Less income taxes................................................................................... 3,675
Net income............................................................................................... $ 20,825
Earnings per share ( $20,825 / 10,000shares) $ 2.08
SMC, Inc. Post-Closing Trial Balance December 31, 2019
Debits Credits
Cash ......................................................................................................... $34,500
Accounts Receivable............................................................................... 25,000
Inventory .................................................................................................. 10,000
Supplies ................................................................................................... 200
Accounts Payable.................................................................................... $12,000
Salaries Payable ...................................................................................... 1,000
Income TaxesPayable............................................................................. 3,675
Common Stock............................................................................................ 25,000
Retained Earnings ................................................................................... 28,025 Totals........................................................................................................ $69,700 $69,700
You are also given the following information that summarizes the business activity for the current year,2020
a. Issued 10,000 additional shares of common stock for $60,000 cash on January 1st.
b. Borrowed $25,000 onMarch 1,2020,from Downtown Bank as a long-term loan. The interest rate on the loan is 4%and Interest for the year is payable on January 1, 2021.
c. Paid $12,000 cash on April1 to lease a building for one year.
d. Received $6,000 on May 1 from a tenant for one years rent.
e. Paid $4,200 on June 1 for a one-year insurance policy.
f. Purchased $3,500 of supplies for cash on June 15th.
g. Purchased inventory for $125,000 on account on July 1.
h. August 1, sold inventory for $185,000 on account; cost ofthe merchandise sold was $120,000.
i. Collected $145,000 cash from customers accounts receivable onAugust 20th.
j. September 1,Paid $95,000 cash for inventories purchased earlier during the year.
k. September 20th paid $34,000 for sales reps salaries, including $1,000 owed atthe beginning of2020.
l. Dividends for $9,500 were paid onOctober 20th.
m. The income taxes payable for the year of 2019 were paid on November 15th.
n. For adjusting entries, all prepaid expenses are initially recorded asassets, andall unearned revenues are initially recorded as liabilities (this is just informational).
o. At year-end, $1,050 worth of supplies are on hand.
p. At year-end, an additional $9,500 of sales salaries are owed, but have not yet been paid.
q. Prepare an adjusting entry to recognize the taxes owed for 2020. The corporate tax rate is 21% of the income before income taxes.
You are asked to do the following on an excel spreadsheet:
1. Journalize the transactions for the current year, 2020, using the chart of accounts listed on the excel spreadsheet provided for the project.
2. Set up T-accounts and enter the beginning balances from the December 31, 2019, post-closing trial balance for SMC. Post all current year journal entries to the T-accounts.
3. Journalize and post any necessary adjusting entries at the end of 2020. (Hint: Items b, c, d, e, o, p, and q require adjustment.)
4. After the adjusting entries are posted, prepare an adjusted trial balance, an income statement, statement ofretained earnings and a balance sheet for 2020. The format of your statements should mirror those prepared by the company in 2019.
5. Journalize and post-closing entries for 2020 and prepare a post-closing trial balance.
6. Compute the Current Ratio and Debt to Total Equity Ratio for 2019 and 2020
7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?
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