Income statement preparation

Remember to show all work for the problem sets below. The work may be submitted either in a Microsoft Word or Excel document. The answers must be legible.

Income statement preparation

On December 31, 2009, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees: a bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $34,600 for the year.

Expenses for office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during the year on tax-deductible travel and entertainment associated with client visits and new business development.

Lease payments for the office space rented (a tax-deductible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid interest of $15,000 on the $120,000borrowed to start the business. She paid an average tax rate of 30% during 2009.

a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2009.

Impact of net income on a firm’s balance sheet

Conrad Air, Inc., reported net income of $1,365,000 for the year ended December 31, 2009. Show the effect of these funds on the firm’s balance sheet for the previous year (below) in each of the scenarios following the balance sheet.

Conrad Air, Inc.

Balance Sheet (as of December 31, 2009)

Assets Liabilities and Stockholders’ Equity Cash $ 120,000 Accounts payable $70,000 Marketable securities 35,000 Short-term notes 55,000 Accounts receivable 45,000 Current liabilities $ 125,000 Inventories 130,000 Long-term debt 55,000

Current assets 330,000 Total liabilities 2,825,000

Equipment $2,970,000 Common stock $ 500,000 Buildings 1,600,000 Retained earnings 1,575,000 Fixed assets 4,457,000 Stockholders’ equity 2,075,000

Total assets $4,900,000 Total liabilities and equity $4,900,000

a. Conrad paid no dividends during the year and invested the funds in marketable securities.

b. Conrad paid dividends totaling $500,000 and used the balance of the net income to retire (pay off) long-term debt.

c. Conrad paid dividends totaling $500,000 and invested the balance of the net income in building a new hangar.

d. Conrad paid out all $1,365,000 as dividends to its stockholders.

Balance sheet preparation

Adam and Arin Adams have collected their personal asset and liability information and have asked you to put together a balance sheet as of December 31, 2009. The following information is received from the Adams family.

Cash $ 300 Retirement funds, IRA $ 2,000 Checking 3,000 2008 Sebring 15,000 Savings 1,200 2007 Jeep 8,000 IBM stock 2,000 Money market funds 1,200 Auto loan 8,000 Jewelry & artwork 3,000 Mortgage 100,000 Net worth 76,500 Medical bills payable 250 Household furnishings 4,200 Utility bills payable 150 Credit card balance 2,000 Real estate 150,000 Personal loan 3,000

a. Create a personal balance sheet as of December 31, 2009. It should be similar to a corporate balance sheet.

b. What must the total assets of the Adams family be equal to by December 31, 2009?

c. What was their net working capital (NWC) for the year? (Hint: NWC is the difference between total liquid assets and total current liabilities.)