Question

The accounting records of Nettle Distribution show the following assets and liabilities as of December 31, 2016 and 2017.

December 31 2016 2017

Cash ……………………………….. \(64,300 \) 15,640

Accounts receivable ……………. 26,240 19,100

Office supplies …………………... 3,160 1,960

Office equipment ………………... 44,000 44,000

Trucks …..………………………… 148,000 157,000

Building …………………………… 0 80,000

Land ……………………………….. 0 60,000

Accounts payable ………………. 3,500 33,500

Note payable …………………….. 0 40,000

Required

1. Prepare balance sheets for the business as of December 31, 2016 and 2017. (Hint:Report only total equity on the balance sheet and remember that total equity equals the difference between assets and liabilities.)

2. Compute net income for 2017 by comparing total equity amounts for these two years and using the following information: During 2017, the owner invested \(35,000 additional cash in the business (in exchange for common stock) and the company paid \)19,000 cash in dividends.

3. Compute the 2017 year-end debt ratio (in percent and rounded to one decimal).

Short answer

1. Total equity for 2016, and 2017 comes out to be $282,200 and $304,200 respectively.

2. Net Income ---- $6,000

3. Debt Ratio ---------- 81%

Step-by-step solution

Balance sheet

Tama Co.
Balance sheet
As on Dec 31
Assets	Amount ($)		Liabilities & Equity	Amount ($)
	2016	2017		2016	2017
Cash	64,300	15,640	Accounts Payable	3,500	33,500
Accounts Receivables	26,240	19,100	Notes Payable	0	40,000
Office supplies.	3,160	1,960	Total Liabilities	3,500	73,500
Office equipment	44,000	44,000
Trucks	148,000	157,000	Total Equity	282,200	304,200
Building	0	80,000
Land	0	60,000
Total Assets	$285,700	$377,700	Total liabilities & Equity	$285,700	$377,700

Computation of net income

$\begin{array}{c}\mathbf{Net}\mathbf{}\mathbf{income}\mathbf{\left(}\mathbf{2017}\mathbf{\right)}\mathbf{=}\mathbf{Ending}\mathbf{}\mathbf{Equity}\mathbf{-}\mathbf{Additional}\mathbf{}\mathbf{investment}\mathbf{+}\mathbf{Dividend}\mathbf{-}\mathbf{Beginning}\mathbf{}\mathbf{Equity}\\ \mathbf{=}\mathbf{\$}\mathbf{304}\mathbf{,}\mathbf{200}\mathbf{-}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{19}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{282}\mathbf{,}\mathbf{200}\\ \mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{000}\end{array}$

Computation of debt ratio

$\begin{array}{c}\mathbf{Debt}\mathbf{}\mathbf{ratio}\mathbf{\left(}\mathbf{2017}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Liabilities}}{\mathbf{Total}\mathbf{}\mathbf{Assets}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{304}\mathbf{,}\mathbf{200}}{\mathbf{\$}\mathbf{377}\mathbf{,}\mathbf{700}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{81}\mathbf{\%}\end{array}$