E2-8 - Homework Solutions PDF

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Chapter 2 E2-8 Salaries and wages payable Salaries and wages expense Supplies expense Equipment Accounts payable Service revenue Rent revenue Notes payable (due in 2020) Common stock Cash Accounts receivable Accumulated depreciation-equipment Dividends Depreciation expense Retained earnings (beginning of the year)

$2,080 $57,500 $15,600 $18,500 $4,100 $66,100 $8,500 $1,800 $16,000 $29,200 $9,780 $6,000 $4,000 $4,000 $34,000

(a) Prepare an income statement and a retained earnings statement for the year. Fairview Corporation did not issue any new stock during the year. INCOME STATEMENT Revenues Service revenue $66,100 Rent revenue $8,500 Total revenue $74,600 Expenses Salaries and wages expense $57,500 Supplies expense $15,600 Depreciation expense $4,000 Total expenses $77,100 Net revenue $2,500 RETAINED EARNINGS STATEMENT Retained earnings beginning of the year ADD net income LESS dividends Retained earnings

$34,000 $2,500 $36,500 $4,000 $32,500

(b) Prepare a classified balance sheet at July 31. Assets Current assets Cash $29,200 Accounts receivable $9,780 Total current assets $38,980 Property, plant, equipment Equipment $18,500

Chapter 2 LESS accumulated dep. eq. Total assets Liabilities and Stockholders’ Equity Current Liabilities Accounts payable Salaries and wages payable Total current liabilities Long-term liabilities Notes-payable long-term Total liabilities Stockholders’ equity Common stock Retained earnings Total stockholders’ eq. Total liabilities and stockholders’ equity

$6,000 $51,480 $4,100 $2,080 $6,180 $1,800 $7,980 $16,000 $32,500 $48,500 $56,480

(c) Compute the current ratio and debt to assets ratio. Current ratio=Current Assets/Current Liabilities Current ratio=$38,980/$6,180 Current ratio=6.31 Debt to assets ratio=total liabilities/total assets Debt to assets ratio=$7,980/$51,480 Debt to assets ratio=0.16 (d) Suppose that you are the president of Lunar Equipment. Your sales manager has approached you with a proposal to sell $20,000 of equipment to Fairview. He would like to provide a loan to Fairview in the form of a 10%, 5-year note payable. Evaluate how this loan would change Fairview’s current ratio and debt to assets ratio, and discuss whether you would make the sale. This loan would increase Fairview’s ‘notes payable long-term’ account and equipment account by $20,000. The net effect of this would be a $20,000 increase to total assets and total liabilities. The current ratio would not be effected because it only considers total assets and total liabilities. The current ratio would not change because equipment is not a current asset and notes payable long-term is not a current liability....