Ch 5 Solutions

School: University of Michigan, Flint - Course: ACC ACC-521 - Subject: Accounting

E5-2 a. GREEN LAWNS, INC. Income Statement For the Year Ended December 31, Current Year Revenues: Lawn care revenue earned$ 230,400 Expenses: Salary expense$ 124,800 Supply expense 2,880 Advertising expense720 Depreciation expense: equipment 2,400130,800 Income before taxes$ 99,600 Income taxes expense 27,840 Net income$ 71,760 GREEN LAWNS, INC. Statement of Retained Earnings For the Year Ended December 31, Current Year Retained earnings (1/1)$ 108,000 Add: Net Income 71,760 Less: Dividends4,800 Retained earnings (12/31)$ 174,960

GREEN LAWNS, INC. Balance Sheet December 31, Current Year Assets Cash$ 218,640 Accounts receivable10,80 0 Supplies72 0 Equipment$ 28,800 Less: Accumulated depreciation: equipment12,00016,80 0 Total assets$ 246,960 Liabilities Accounts payable$ 3,600 Income taxes payable8,40 0 Total liabilities$ 12,000 Stockholders' Equity Capital stock$ 60,000 Retained earnings174,96 0 Total stockholders' equity$ 234,960 Total liabilities and stockholders' equity$ 246,960 b.The company appears to be extremely liquid.Cash and accounts receivable comprise 93% of total assets.Together, these highly liquid assets total $229,440, compared to only $12,000 in liabilities coming due.In other words, the combined total of cash and accounts receivable are 19 times the obligations coming due in the near future. c.The $108,000 credit Retained Earnings balance reported in the company's adjusted trial balance is itsbeginningbalance.In order to have retained $108,000 in earnings, in excess of any prior years' dividends, the company must have been profitable in the past.