Compute the current ratio and the debt ratio of Sedberry’s accounting practice and evaluate these…

(Learning Objectives 3, 4, 5, 6: Adjusting the accounts, preparing the financial statements, closing the accounts, and evaluating the business). Start from the trial balance and the posted T-accounts that Lance Sedberry, Certified Public Accountant, Professional Corporation (P.C.), prepared for his accounting practice at January 18. A professional corporation is not subject to income tax. Later in January, the business completed these transactions:

Jan. 21

Received $900 in advance for tax work to be performed over the next 30 days.

21

Hired a secretary to be paid on the 15th day of each month.

26

Paid $900 on account.

28

Collected $600 on account.

31

Declared and paid dividends of $1,000.

Required

1. Open these T-accounts: Accumulated Depreciation—Equipment, Accumulated Depreciation—Furniture, Salary Payable, Unearned Service Revenue, Retained Earnings, Depreciation Expense—Equipment, Depreciation Expense—Furniture, and Supplies Expense. Also, use the T-accounts that you opened

2. Journalize the transactions of January 21 through 31.

3. Post the January 21 to 31 transactions to the T-accounts, keying all items by date.

4. Prepare a trial balance at January 31. Also set up columns for the adjustments and for the adjusted trial balance.

5. At January 31, Sedberry gathers the following information for the adjusting entries:

a. Accrued service revenue, $1,000.

b. Earned $300 of the service revenue collected in advance on January 21.

c. Supplies on hand, $300.

d. Depreciation expense—equipment, $100; furniture, $200.

e. Accrued expense for secretary’s salary, $700. Make these adjustments directly in the adjustments columns and complete the adjusted trial balance at January 31.

6. Journalize and post the adjusting entries. Denote each adjusting amount as Adj. and an account balance as Bal.

7. Prepare the income statement and statement of retained earnings of Lance Sedberry, Certified Public Accountant, P.C., for the month ended January 31 and the classified balance sheet at that date. Draw arrows to link the financial statements.

8. Journalize and post the closing entries at January 31. Denote each closing amount as Clo. and an account balance as Bal.

9. Compute the current ratio and the debt ratio of Sedberry’s accounting practice and evaluate these ratio values as indicative of a strong or weak financial position.

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