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. Sallys 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, current year. The statements Sally prepared are as follows:

Instructions:

a.) Prepare a corrected set of financial statements dated December 31, current year. (You may assume that all of the figures in the companys adjusted trial balance were reported correctly except for Notes Payable, 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 companys profitability and liquidity.

STRONG KNOT, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR Revenue: Service revenue $160,000 earned Unearned revenue... 3,500 Accounts receivable. . 8.200 Total revenue $171,700 Expenses: Insurance expense.. Office rent expense. Supplies expense. $1,800 18,000 1,200 Dividends.... 3,000 Salary expense. .. 96,000 Accumulated 12,000 depreciation: auto Accumulated 13,000 depreciation: equipment Repair and maintenance expense 1,700 Travel expense 6,600 2,100 Miscellaneous expense Interest expense... 2,800 158,200 13,500 Income before income taxes Income taxes payable.. 400 Net income.. $13,100 STRONG KNOT, INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR $17,500 Retained earnings (per adjusted trial balance) Add: Income.... 13,100 Less: Income taxes expense... 4,000 $26,600 Retained earnings, Dec. 31, current year STRONG KNOT, INC. BALANCE SHEET DECEMBER 31, CURRENT YEAR Assets Cash.. $15,400 900 Supplies $37,000 Automobile.. Less: Depreciation 4.000 33,000 expense: automobile Equipment and music. $39,000 Less: Depreciation expense: equipment 36,000 3.000 Total assets... $85,300 Liabilities & Stockholders' Equity Liabilities: Accounts payable... Notes payable...... Salaries payable.. . Prepaid rent... . Unexpired insurance $ 5,200 45,800 900 800 3.000 Total liabilities... . .. $55,700 Stockholders' Equity: Capital stock....... Retained earnings... 3,000 26.600 Total stockholders' equity $29,600 Total liabilities and $85,300 stockholders' equity