PROBLEM 5.

2A
AFFORDABLE LAWN CARE, INC.
a.
AFFORDABLE LAWN CARE, INC.
Income Statement
For the Year Ended December 31, Current Year
Revenues:
Mowing revenue earned $ 340,000

Expenses:
Insurance expense $ 4,800
Office rent expense 72,000
Supplies expense 10,400
Salary expense 120,000
Depreciation expense: 60,000
trucks
Depreciation expense: 8,000
mowing
Repair &equipment
maintenance 6,000
expense
Fuel expense 3,000
Miscellaneous expense 10,000
Interest expense 6,000 300,200
Income before taxes $ 39,800
Income taxes expense 12,000
Net income $ 27,800

AFFORDABLE LAWN CARE, INC.

Statement of Retained Earnings
For the Year Ended December 31, Current Year
Retained earnings $ 60,000
(1/1/Current Year)
Add: Net Income 27,800
Less: Dividends 10,000
Retained earnings $ 77,800
(12/31/Current Year)

AFFORDABLE LAWN CARE, INC.

Balance Sheet
December 31, Current Year

Assets
Cash $ 117,050
Accounts receivable 9,600
Unexpired insurance 16,000
Prepaid rent 6,000
Supplies 2,150
Trucks $ 300,000
 Less: Accumulated 240,000 60,000
depreciation: trucks
Mowing equipment 40,000
Less: Accumulated 24,000 16,000
depreciation:
Total assets mowing $ 226,800
equipment

Liabilities
Accounts payable $ 3,000
Notes payable 100,000
Salaries payable 1,800
Interest payable 300
Income taxes payable 2,100
Unearned mowing 1,800
revenue
Total liabilities $ 109,000

Stockholders' Equity
Capital stock $ 40,000
Retained earnings 77,800
Total stockholders' equity $ 117,800

Total liabilities and $ 226,800

stockholders' equity
b.
AFFORDABLE LAWN CARE, INC.
General Journal
12/31/Current Year
(1)
Dec. 31 Mowing Revenue Earned 340,000
Income 340,000
To close MowingSummary
Revenue
Earned.
(2)
31 Income Summary 312,200
Insurance 4,800
Expense
Office Rent 72,000
Expense
Supplies 10,400
Expense
Salary 120,000
Expense
Depreciation 60,000
Expense:
Depreciation 8,000
Trucks
Expense:
Repair & 6,000
Mowing
Maintenance
Fuel 3,000
Equip.
Expense
Miscellaneo 10,000
us Expense
Interest 6,000
Expense
Income 12,000
Taxes
To close all expense
accounts. Expense
(3)
31 Income Summary 27,800
Retained 27,800
To transfer netEarnings
income
earned in Earnings
Retained Current Year to
the
account
$27,800).($340,000 -
$300,200 =
(4)
 31 Retained Earnings 10,000
Dividends 10,000
To transfer dividends
declared in
Retained Current Year
Earnings
to the
account.

c.
AFFORDABLE LAWN CARE, INC.
After-Closing Trial Balance
December 31, Current Year
Cash $ 117,050
Accounts receivable 9,600
Unexpired insurance 16,000
Prepaid rent 6,000
Supplies 2,150
Trucks 300,000
Accumulated $ 240,000
depreciation: trucks
Mowing equipment 40,000
Accumulated 24,000
depreciation: mowing
Accounts payable 3,000
equipment
Notes payable 100,000
Salaries payable 1,800
Interest payable 300
Income taxes payable 2,100
Unearned mowing 1,800
revenue
Capital stock 40,000
Retained earnings 77,800
Totals $ 490,800 $ 490,800

d. For the year ended December 31, Current Year, the company
generated net income of $27,800 on $340,000 sales. Thus, net
income as a percentage of sales was approximately 8.2%.
Moreover, the $27,800 profit represented a return on average
stockholders’ equity of approximately 25.5%, which is a fairly
strong return on investment. The company’s balance sheet at
December 31, Current Year, reports cash and accounts receivable
totaling $126,650. It also reports various payables (liabilities)
totaling $109,000. Depending on when the $100,000 note payable
reported in the balance sheet is due, the company may be extremely
liquid. If this obligation is not due in the near future, the company
has $126,650 in cash and accounts receivable to cover obligations of
only $9,000. Moreover, $1,800 of the $9,000 of obligations, the
Unearned Mowing Revenue amount, will not require a cash outlay.
Even if this note is due shortly, the company still appears to be
liquid.