Question

2) Remi and Co begins the month with capital of $200,000 and the following assets and liabilities arose: Assets Non-current assets $500,000 $125,000 Receivables Liabilities Bank overdrafts $35,000 Payables $90,000 Long-term loan $300,000 During the last year the following transactions occurred: 1) Borrowed $150,000 from bank long term loan during the year for purchase of building 2) Customers pay and receivables reduces by $45,000 3) Invoiced customers for $70,000 4) Reduction in Accounts payable 45,000 5) Paid salaries of $15,000 6) Paid miscellaneous office expenses $500 7) Depreciation of $15,000 is charge for all assets for the year. 8) Interest on loan to be accrued at year end at 5% per annum a) Prepare income statement at year-end. b) Calculate Earnings per share for Remi and co. c) Analyse the company - what do you notice about it at year-end.

Answer 1

a) & b) Please find attached Trial balance, based on which income statement and Earnings per share (EPS) have been arrived at:

Trial Balance Opening Balance Debit Credit Transactions Credit Closing Balance Debit Credit Debit Transaction number Ref Cr. 2, 70,000.00 45,000.00 Dr. 3 125,000.00 500,000.00 Receivables Non-current assets Building Accumulated Depreciation Capital 150,000.00 500,000.00 150,000.00 150,000.00 Dr.1 15,000.00 Cr. 7 15,000.00 200,000.00 200,000.00 35,000.00 90,000.00 45,000.00 45,000.00 Bank Overdraft Payables Interest Payable Long-term loan Revenue Salaries Miscellaneous office expense Depreciation Expense Interest Expense 300,000.00 Dr. 2 60,500.00 Cr. 4,5,6 Dr. 4 22,500.00 Dr. 8 ($300000+$150000)*5% 150,000.00 Dr. 1 70,000.00 Cr.3 Dr. 5 Dr. 6 Dr. 7 Dr. 8 ($300000+$150000)*5% 50,500.00 45,000.00 22,500.00 450,000.00 70,000.00 15,000.00 500.00 15,000.00 22,500.00 15,000.00 500.00 15,000.00 22,500.00 625,000.00 625,000.00 363,000.00 363,000.00 853,000.00 853,000.00
.
70,000.00 Income statement Revenue Less: Expenses Salaries 15,000.00 Miscellaneous office expense 500.00 Depreciation Expense 15,000.00 Earnings before interest and taxes (EBIT) Less: Interest Expense Earnings before taxes (EBT) 30,500.00 39,500.00 22,500.00 17,000.00 As number of shares details not available, it is assumed to be $ 1 per share. Thus $200000 / $ 1 per share = 200,000 200000 shares 0.09 per share | Number of shares outsanding (assume $ 1 per share) Earnings Per Share (EBT/Number of shares o/s)

c) EPS show very low in value, which strongly affect stock price in the market. Company is generating very less profit. More investment exists in long term assets and there exists more long term loan; whereas the source and use of asset and liabilities are not reflecting in the income statement. Company has to improve its performance, find measures to increase revenue, make optimal use of available assets and long term loans, through which net income of the company would increase and correspondingly higher EPS, which in turn attract more investors into business.