Question

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

December 31 2016 2017

Cash ……………………………….. \(30,000 \) 5,000

Accounts receivable ……………. 35,000 25,000

Office supplies …………………... 8,000 13,500

Office equipment ………………... 40,000 40,000

Machinery ………………………… 28,000 28,500

Building …………………………… 0 250,000

Land ……………………………….. 0 50,000

Accounts payable ………………. 4,000 12,000

Note payable …………………….. 0 250,000

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 \(5,000 additional cash in the business (in exchange for common stock) and the company paid \)3,000 cash in dividends.

3. Compute the December 31, 2017, debt ratio (in percent and rounded to one decimal).

Short answer

1. Total equity for 2016, and 2017 comes out to be $137,000 and $150,000 respectively.

2. Net Income ---- $11,000

3. Debt Ratio ---------- 36%

Step-by-step solution

Balance sheet

Tama Co.
Balance sheet
As on Dec 31
Assets	Amount ($)		Liabilities & Equity	Amount ($)
	2016	2017		2016	2017
Cash	30,000	5,000	Accounts Payable	4,000	12,000
Accounts Receivables	35,000	25,000	Notes Payable	0	250,000
Office supplies.	8,000	13,500	Total Liabilities	4,000	262,000
Office equipment	40,000	40,000
Machinery	28,000	28,500	Total Equity	137,000	150,000
Building	0	250,000
Land	0	50,000
Total Assets	$141,000	$412,000	Total liabilities & Equity	$141,000	$412,000

Computation of net income

Computation of debt ratio

$\begin{array}{c}\mathbf{Debt}\mathbf{}\mathbf{ratio}\mathbf{\left(}\mathbf{2017}\mathbf{\right)}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Liabilities}}{\mathbf{Total}\mathbf{}\mathbf{Assets}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{150}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{412}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{36}\mathbf{\%}\end{array}$