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:

STRONG KNOT, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR Revenue: Service revenue earned $160,000 Unearned revenue 3,500 Accounts receivable 8,200 Total revenue $171,700 Expenses: Insurance expense $1,800 Office rent expense 18,000 Supplies expense 1,200 Dividends 3,000 Salary expense 96,000 Accumulated depreciation: auto 12,000 Accumulated depreciation: equipment 13,000 Repair and maintenance expense 1,700 Travel expense 6,600 Miscellaneous expense 2,100 Interest expense 2,800 158,200 Income before income taxes $ 13,500 Income taxes payable 400 Net income $ 13,100

STRONG KNOT, INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, CURRENT YEAR Retained earnings (per adjusted trial balance) $17,500 Add: Income 13,100 Less: Income taxes expense 4,000 Retained earnings, Dec. 31, current year $26,600

STRONG KNOT, INC. BALANCE SHEET DECEMBER 31, CURRENT YEAR Assets Cash $15,400 Supplies 900 Automobile $37,000 Less: Depreciation expense: automobile 4,000 33,000 Equipment and music $39,000 Less: Depreciation expense: equipment 3,000 36,000 Total assets $85,300 Liabilities & Stockholders Equity Liabilities: Accounts payable $ 5,200 Notes payable 45,800 Salaries payable 900 Prepaid rent 800 Unexpired insurance 3,000 Total liabilities $55,700 Stockholders Equity: Capital stock 3,000 Retained earnings 26,600 Total stockholders equity $29,600 Total liabilities and stockholders equity $85,300

Instructions:

1. 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.)

2. Prepare the necessary year-end closing entries.

3. Using the financial statements prepared in part a, briefly evaluate the companys profitability and liquidity.