As a recently hired accountant for a small business, SMC, Inc., you are provided with last year s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business.
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SMC, Inc.
Balance Sheet
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ASSET
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31-Dec-02
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Cash
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$34,500
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Accounts receivable.
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25,000
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Inventory
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10,000
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Supplies
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200
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Total assets
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$69,700
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Liabilities and Stockholders Equity
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Liabilities:
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Accounts payable
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$12,000
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Salaries payable
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1,000
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Income taxes payable
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3,675
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Total liabilities
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$16,675
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Stockholders equity:
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Capital stock (10,000 shares outstanding)
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$25,000
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Retained earnings.
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28,025
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Total stockholders equity
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53,025
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Total liabilities and stockholders equity.
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$69,700
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SMC, Inc.
Income Statement
For the Year Ended December 31, 2002
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Sales revenue
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110,000
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Rent revenue
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1,000
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Total revenues.
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$111,000
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Less cost of goods sold
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60,000
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Gross margin
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$51,000
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Less operating expenses:
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Supplies expense
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400
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Salaries expense.
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22,000
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Miscellaneous expense
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4,100
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26,500
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Income before taxes
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$24,500
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Less income taxes.
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3,675
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Net income
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20,825
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Earnings per share ($20,825 10,000 shares)
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$2.08
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SMC, Inc.
Post-Closing Trial Balance
37,621
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Debits
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Credits
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Cash
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34,500
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Accounts Receivable
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25,000
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Inventory
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10,000
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Supplies
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200
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Accounts Payable
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$12,000
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Salaries Payable
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1,000
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Income Taxes
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3,675
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Capital Stock
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25,000
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Retained Earnings
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28,025
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Totals
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$69,700
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$69,700
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You are also given the following information that summarizes the business activity for the current year, 2003.
a. Issued 5,000 additional shares of capital stock for $10,000 cash.
b. Borrowed $5,000 on January 2, 2003, from Downtown Bank as a long-term loan. Interest for the year is $500, payable on January 2, 2004.
c. Paid $3,600 cash on November 1 to lease a truck for one year.
d. Received $1,200 on November 1 from a tenant for six months rent.
e. Paid $600 on October 1 for a one-year insurance policy.
f. Purchased $500 of supplies for cash.
g. Purchased inventory for $100,000 on account.
h. Sold inventory for $150,000 on account; cost of the merchandise sold was $80,000.
i. Collected $120,000 cash from customers accounts receivable.
j. Paid $70,000 cash for inventories purchased during the year.
k. Paid $25,000 for sales reps salaries, including $1,000 owed at the beginning of 2003.
l. No dividends were paid during the year.
m. The income taxes payable for the year were paid. Income taxes are based on a 15% corporate tax rate.
n. For adjusting entries, all prepaid expenses are initially recorded as assets, and all unearned revenues are initially recorded as liabilities.
o. At year-end, $150 worth of supplies are on hand.
p. At year-end, an additional $5,000 of sales salaries are owed, but have not yet been paid.
You are asked to do the following:
1. Journalize the transactions for the current year, 2003, using the accounts listed on the financial statements and other appropriate accounts (you may omit explanations).
2. Set up T-accounts and enter the beginning balances from the December 31, 2002, postclosing 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 2003. (Hint: Items b, c,
d, e, m, o, and p require adjustment.)
4. After the adjusting entries are posted, prepare a trial balance, a balance sheet, and an income statement for 2003. (Hint: Income before income taxes should equal $39,600.)
5. Journalize and post closing entries for 2003 and prepare a post-closing trial balance.
6. Using the DuPont framework, compute the return on equity for SMC for 2002 and 2003.
7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?