Step by Step Assistance

Tuesday, 17 September 2013

The accounting records of Fabiano Distribution show the following assets and liabilities as of December 31, 2010 and 2011. December 31 2010 2011 Cash $ 44,557 $ 6,968 Accounts receivable 24,186 18,962 Office supplies 3,815 2,794 Office equipment 117,114 124,749 Trucks 45,828 54,828 Building 0 152,772 Land 0 38,123 Accounts payable 63,585 31,536 Note payable 0 90,895 Late in December 2011, the business purchased a small office building and land for $190,895. It paid $100,000 cash toward the purchase and an $90,895 note payable was signed for the balance. Mr. Fabiano had to invest $37,000 cash in the business in exchange for stock to enable it to pay the $100,000 cash. The business also pays $2,600 cash per month for dividends.

The accounting records of Fabiano Distribution show the following assets and liabilities as of December 31, 2010 and 2011.

December 31   2010   2011
  Cash $ 44,557   $ 6,968  
  Accounts receivable   24,186     18,962  
  Office supplies   3,815     2,794  
  Office equipment   117,114     124,749  
  Trucks   45,828     54,828  
  Building   0     152,772  
  Land   0     38,123  
  Accounts payable   63,585     31,536  
  Note payable   0     90,895  


Late in December 2011, the business purchased a small office building and land for $190,895. It paid $100,000 cash toward the purchase and an $90,895 note payable was signed for the balance. Mr. Fabiano had to invest $37,000 cash in the business in exchange for stock to enable it to pay the $100,000 cash. The business also pays $2,600 cash per month for dividends.

Required:
1.
Prepare balance sheets for the business as of December 31, 2010 and 2011.
 
2.
By comparing equity amounts from the balance sheets and using the additional information presented in this problem, prepare a calculation to show how much net income was earned by the business during 2011.
   
 
Explanation:
Add dividends ($2,600 × 12) = $31,200
  
FABIANO DISTRIBUTION
Balance Sheet
December 31, 2010
  Assets      
  Cash   $ 44,557  
  Accounts receivable     24,186  
  Office supplies     3,815  
  Trucks     45,828  
  Office equipment     117,114  
      

  Total Assets   $ 235,500  
   



  Liabilities      
  Accounts payable   $ 63,585  
  Equity      
  Total equity     171,915  
      

  Total Liabilities & Equity   $ 235,500  
     




    
FABIANO DISTRIBUTION
Balance Sheet
At December 31, 2011
  Assets      
  Cash   $ 6,968  
  Accounts receivable     18,962  
  Office supplies     2,794  
  Trucks     54,828  
  Office equipment     124,749  
  Building     152,772  
  Land     38,123  
     

  Total Assets   $ 399,196  
     



  Liabilities      
  Accounts payable   $ 31,536  
  Note payable     90,895  
     

  Total Liabilities   $ 122,431  
  Equity      
  Total equity     276,765  
     

  Total Liabilities and Equity   $ 399,196  
     



3.
Compute the 2011 year-end debt ratio for the business.
Explanation:
Debt Ratio = $122,431 / $399,196 = 30.67%

Posting errors are identified below. For each item complete parts 1 through 4 described below: 1. Enter the amount of the difference between the two trial balance columns (debit and credit) due to the error. 2. Identify the trial balance column (debit or credit) with the larger amount if they are not equal. 3. Identify the account(s) affected by the error. 4. Indicate the amount by which the account(s) in column (3) is under- or overstated. Item (a) is completed as an example. a. $1,750 debit to Rent Expense is posted as a $1,570 debit. (1) Difference between Debit and Credit Columns $180 (2) Column with the Larger Total Credit (3) Identify account(s) incorrectly stated Rent Expense (4) Amount that account(s) is overstated or understated Rent Expense is understated by $180

Posting errors are identified below. For each item complete parts 1 through 4 described below:
      
1.
Enter the amount of the difference between the two trial balance columns (debit and credit) due to the error.
2.
Identify the trial balance column (debit or credit) with the larger amount if they are not equal.
3.
Identify the account(s) affected by the error.
4.
Indicate the amount by which the account(s) in column (3) is under- or overstated.
          
Item (a) is completed as an example.
       
a.
  $1,750 debit to Rent Expense is posted as a $1,570 debit.
     
(1)
  Difference between Debit and Credit Columns

  $180
(2)
  Column with the Larger Total

  Credit
(3)
  Identify account(s) incorrectly stated

  Rent Expense
(4)
  Amount that account(s) is overstated or understated

  Rent Expense is understated by $180


b.
$3,500 credit to Cash is posted twice as two credits to Cash.
    
(1)
Difference between Debit and Credit Columns





   
(2)
Column with the Larger Total

Credit

   
(3)
Identify account(s) incorrectly stated

Cash

   
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)



Cash is Understated by $3,500

Cash is Overstated by $3,500

Revenue is understated by $3,500

Revenue is overstated by $3,500

None

c.
$7,000 debit to the Dividends account is debited to Common Stock.
    
(1)
Difference between Debit and Credit Columns


    
    
(2)
Column with the Larger Total



None
     
(3)
Identify account(s) incorrectly stated



Common stock and Dividends
     
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)




Common stock account is understated by $7,000

Dividends is understated by $7,000

Common stock account is overstated by $7,000

Dividends is overstated by $7,000

None

d.
$1,600 debit to Prepaid Insurance is posted as a debit to Insurance Expense.
    
(1)
  Difference between Debit and Credit Columns
    

      
(2)
 Column with the Larger Total

None
     
(3)
Identify account(s) incorrectly stated

Prepaid insurance and Insurance expense
      
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)


Insurance expense is overstated by $1,600

Prepaid insurance is understated by $1,600

Prepaid insurance is overstated by $1,600

Insurance expense is understated by $1,600

None

e.
$30,625 debit to Machinery is posted as a debit to Accounts Payable.
    
(1)
Difference between Debit and Credit Columns
    

    
(2)
Column with the Larger Total



None
    
(3)
Identify account(s) incorrectly stated



Machinery and Accounts Payable
    
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers. Select all that apply.)




Accounts payable is understated by $30,625

Machinery is understated by $30,625

Machinery is overstated by $30,625

Accounts payable is overstated by $30,625

None


f.
$4,400 credit to Services Revenue is posted as a $440 credit.
    
(1)
  Difference between Debit and Credit Columns
    

    
(2)
Column with the Larger Total



Debit
    
(3)
Identify account(s) incorrectly stated



Services revenue
     
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)




Services revenue is overstated by $3,960

Services revenue is understated by $3,960

Cash is overstated by $3,960

Cash is understated by $3,960

None


g.
$790 debit to Store Supplies is not posted.
    
(1)
  Difference between Debit and Credit Columns
     

      
(2)
  Column with the Larger Total



Credit
     
(3)
Identify account(s) incorrectly stated



Store supplies
     
(4)
Amount that account(s) is overstated or understated. (You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.)




Store supplies is understated by $790

Store supplies is overstated by $790

Cash is overstated by $790

Cash is understated by $790

None