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