Reference no: EM13555632

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.

SMC, Inc. Balance Sheet
ASSET	31-Dec-02
Cash	$34,500
Accounts receivable.	25,000
Inventory	10,000
Supplies	200
Total assets		$69,700
Liabilities and Stockholders Equity
Liabilities:
Accounts payable	$12,000
Salaries payable	1,000
Income taxes payable	3,675
Total liabilities		$16,675
Stockholders equity:
Capital stock (10,000 shares outstanding)	$25,000
Retained earnings.	28,025
Total stockholders equity		53,025
Total liabilities and stockholders equity.		$69,700

SMC, Inc. Income Statement For the Year Ended December 31, 2002
Sales revenue	110,000
Rent revenue	1,000
Total revenues.		$111,000
Less cost of goods sold		60,000
Gross margin		$51,000
Less operating expenses:
Supplies expense	400
Salaries expense.	22,000
Miscellaneous expense	4,100	26,500
Income before taxes		$24,500
Less income taxes.		3,675
Net income		20,825
Earnings per share ($20,825 10,000 shares)		$2.08

SMC, Inc. Post-Closing Trial Balance 37,621
	Debits	Credits
Cash	34,500
Accounts Receivable	25,000
Inventory	10,000
Supplies	200
Accounts Payable		$12,000
Salaries Payable		1,000
Income Taxes		3,675
Capital Stock		25,000
Retained Earnings		28,025
Totals	$69,700	$69,700

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.?