Question

Pope’s Garage had the following accounts and amounts in its financial statements on December 31, 2019. Assume that all balance sheet items reflect account balances at December 31, 2019, and that all income statement items reflect activities that occurred during the year then ended.
Accounts receivable $33,000
Depreciation expense 12,000
Land 27,000
Cost of goods sold 90,000
Retained earnings 59,000
Cash 9,000
Equipment 71,000
Supplies 6,000
Accounts payable 23,000
Service revenue 20,000
Interest expense 4,000
Common stock 10,000
Income tax expense 12,000
Accumulated depreciation 45,000
Long-term debt 40,000
Supplies expense 14,000
Merchandise inventory 31,000
Sales revenue 140,000

Required:
a. Calculate the total current assets at December 31, 2019.
b. Calculate the total liabilities and owners’ equity at December 31, 2019.
c. Calculate the earnings from operations (operating income) for the year ended December 31, 2019.
d. Calculate the net income (or loss) for the year ended December 31, 2019.
e. What was the average income tax rate for Pope’s Garage for 2019?
f. If $16,000 of dividends had been declared and paid during the year, what was the January 1, 2019, balance of retained earnings?

Answer 1

Answer and Explanation:

a. The computation of the total current asset is shown below

= Account receivable + cash + supplies + merchandise inventory

= $33,000 + $9,000 + $6,000 + $31,000

= $79,000

b The total liabilities and owners equity is

= Account payable + long term debt + common stock + retained earnings

= $23,000 + $40,000 + $10,000 + $59,000

= $132,000

c. The earnings from operations is

Sales revenue $140,000

Less cost of goods sold $90,000

Gross profit $50,000

add: service revenue $20,000

Less depreciation expense $12,000

Less supplies expense $14,000

Operating income $44,000

d. The net income is

= operating income - interest expense - income tax expense

= $44,000 - $4,000 - $12,000

= $28,000

e. The average income tax rate is

= $12,000 ÷ $40,000 × 100

= 30%

f. The beginning retained earnings is

= $59,000 + $16,000  - $28,000

= $47,000