Ramirez Company is completing the information processing cycle at its fiscal year-end on December 31. Following are the correct balances at December 31 for the accounts both before and after the adjusting entries.
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Ramirez Company is completing the information processing cycle at its fiscal year-end on December 31. Following are the correct balances at December 31 for the accounts both before and after the adjusting entries.
| Trial Balance, December 31 of the Current Year | |||||||||||
| Before Adjusting Entries | After Adjusting Entries | ||||||||||
| Items | Debit | Credit | Debit | Credit | |||||||
| a. | Cash | $ | 14,400 | $ | 14,400 | ||||||
| b. | Accounts receivable | 490 | |||||||||
| c. | Prepaid insurance | 480 | 320 | ||||||||
| d. | Equipment | 168,680 | 168,680 | ||||||||
| e. | Accumulated depreciation, equipment | $ | 40,800 | $ | 46,300 | ||||||
| f. | Income taxes payable | 1,450 | |||||||||
| g. | Common stock and additional paid-in capital | 106,000 | 106,000 | ||||||||
| h. | Retained earnings, January 1 | 19,440 | 19,440 | ||||||||
| i. | Service revenue | 73,300 | 73,790 | ||||||||
| j. | Salary expense | 55,980 | 55,980 | ||||||||
| k. | Depreciation expense | 5,500 | |||||||||
| l. | Insurance expense | 160 | |||||||||
| m. | Income tax expense | 1,450 | |||||||||
| $ | 239,540 | $ | 239,540 | $ | 246,980 | $ | 246,980 | ||||
Required:
1. Compare the amounts in the columns before and after the adjusting entries to reconstruct the adjusting entries made in 2015.
2-a. Compute the amount of income assuming that it is based on the amounts (a) before adjusting entries and (b) after adjusting entries.
2-b. Which income amount is correct?
Net income (loss) amounts after adjusting entries 
rev: 09_26_2016_QC_CS-62775
2.
Net income is $10,700 because this amount includes all revenues and all expenses (after the adjusting entries). This amount is correct because it incorporates the effects of the revenue realization and expense matching principles applied to all transactions whose effects extend beyond the period in which the transactions occurred. Net income of $17,320 was not correct because expenses of $7,110 and revenues of $490 were excluded that should have been recorded in the current year.
3. Compute earnings per share, assuming that 2,600 shares of stock are outstanding all year.
Earnings per share = $10,700 net income ÷ 2,600 shares = $4.12 per share
4. Compute the total asset turnover ratio, assuming total assets at the beginning of the year were $109,500. If the industry average is $0.53.
Total asset turnover ratio = Sales (or Operating) revenue ÷ Average total assets
= $73,790 ÷ [($109,500 + $137,590)/2]
= $73,790 ÷ $123,545 = 0.597
5. Record the closing entry at December 31 of the current year.
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