Recording Transactions (Including Adjusting and Closing Entries), Preparing Financial Statements, and Performing Ratio Analysis

Josh and Kelly McKay began operations of their furniture repair shop (Furniture Refinishers, Inc.) on January 1, 2016. The annual reporting period ends December 31. The trial balance on January 1, 2017, was as follows:

Account Titles





Accounts receivable




Small tools



Accumulated depreciation (on equipment)

Other assets (not detailed to simplify)


Accounts payable


Notes payable

Wages payable

Interest payable

Income taxes payable

Unearned revenue

Common stock (60,000 shares, $0.10 par value)


Additional paid-in capital


Retained earnings


Service revenue

Depreciation expense

Wages expense

Interest expense

Income tax expense

Remaining expenses (not detailed to simplify)




Transactions during 2017 follow:

A.Borrowed $20,000 cash on July 1, 2017, signing a one-year, 10 percent note payable.

B.Purchased equipment for $18,000 cash on July 1, 2017.

C.Sold 10,000 additional shares of capital stock for cash at $0.50 market value per share at the beginning of the year.

D.Earned $70,000 in revenues for 2017, including $14,000 on credit and the rest in cash.

E.Incurred remaining expenses of $35,000 for 2017, including $7,000 on credit and the rest paid with cash.

F.Purchased additional small tools, $3,000 cash.

G.Collected accounts receivable, $8,000.

H.Paid accounts payable, $11,000.

I..Purchased $10,000 of supplies on account.

J.Received a $3,000 deposit on work to start January 15, 2018.

K.Declared and paid a cash dividend, $10,000.

Data for adjusting entries:

L.Supplies of $4,000 and small tools of $8,000 were counted on December 31, 2017 (debit Remaining Expenses).

M.Depreciation for 2017, $2,000.

N.Interest accrued on notes payable (to be computed).

O.Wages earned since the December 24 payroll but not yet paid, $3,000.

P.Income tax expense was $4,000, payable in 2018.


1.Set up T-accounts for the accounts on the trial balance and enter beginning balances.

2.Prepare journal entries for transactions (a) through (k) and post them to the T-accounts.

3.Journalize and post the adjusting entries (l) through (p).

4.Prepare an income statement (including earnings per share rounded to two decimal places), statement of stockholders’ equity, and balance sheet.

5.Identify the type of transaction for (a) through (k) for the statement of cash flows (O for operating, I for investing, F for financing), and the direction and amount of the effect.

6.Journalize and post the closing entry.

7.Compute the following ratios (rounded to two decimal places) for 2017 and explain what the results suggest about the company:

a,Current ratio

b,Total asset turnover

c,Net profit margin

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Sixta Kovacek
Sixta KovacekLv2
30 Sep 2019

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