Question

Brothers Harry and Herman Hausyerday began operations of their machine shop (H & H Tool, Inc.) on January 1, 2016. The annual reporting period ends December 31. The trial balance on January 1, 2018, follows (the amounts are rounded to thousands of dollars to simplify):

Account Titles	Debit			Credit
Cash	$	4
Accounts Receivable		4
Supplies		11
Land		0
Equipment		53
Accumulated Depreciation				$	7
Software		20
Accumulated Amortization					7
Accounts Payable					6
Notes Payable (short-term)					0
Salaries and Wages Payable					0
Interest Payable					0
Income Tax Payable					0
Common Stock					65
Retained Earnings					7
Service Revenue		0
Salaries and Wages Expense		0
Depreciation Expense		0
Amortization Expense		0
Income Tax Expense		0
Interest Expense		0
Supplies Expense		0
Totals	$	92		$	92

Transactions and events during 2018 (summarized in thousands of dollars) follow:

a. Borrowed $13 cash on March 1 using a short-term note.

b. Purchased land on March 2 for future building site; paid cash, $7.

c. Issued additional shares of common stock on April 3 for $31.

d. Purchased software on July 4, $12 cash.

e. Purchased supplies on account on October 5 for future use, $17.

f. Paid accounts payable on November 6, $14.

g. Signed a $30 service contract on November 7 to start February 1, 2019.

h. Recorded revenues of $146 on December 8, including $33 on credit and $113 collected in cash.

i. Recognized salaries and wages expense on December 9, $78 paid in cash.

j. Collected accounts receivable on December 10, $17.

Data for adjusting journal entries as of December 31:

k. Unrecorded amortization for the year on software, $7.

l.Supplies counted on December 31, 2018, $11.

m. Depreciation for the year on the equipment, $7.

n. Interest of $2 to accrue on notes payable.

o. Salaries and wages earned but not yet paid or recorded, $13.

p. Income tax for the year was $9. It will be paid in 2019.

9-a. How much net income did H & H Tool, Inc., generate during 2018? What was its net profit margin?

9-b. Is the company financed primarily by liabilities or stockholders’ equity?

9-c. What is its current ratio?

Post Closing Trial Balance is as prepared below:

H&H Tool Inc
Post Closing Trial Balance
December 31, 2018
(in thousands)
	Debit Balances	Credit balances
Cash	67
Account Receivable	20
Supplies	11
land	7
Equipment	53
Accumulated depreciation		14
Software	32
Accumulated amortization		14
Accounts payable		9
Notes Payable		13
salaries and Wages payable		13
Interest Payable		2
Income tax payable		9
Common Stock		96
Retained earnings		20
Total	190	190

Answer 1

H&H Tools Inc

1. Computation of net income for 2018:

(Amount in thousands)

Net income for 2018 = retained earnings ending balance – retained earnings beginning balance

= $20 - $7 = $13

1. Net profit margin = $13/$146 = 8.9%

1. Financed primarily by liabilities or stockholders’ equity –

The company is primarily financed by stockholders’ equity.

Explanation: the stockholders’ equity provided up to $96 financing for total assets, while liabilities financed up to $46 (thousands) of total assets.

1. Current –ratio –(amount in thousands)

Current ratio = current assets/current liabilities

Current assets = Cash + accounts Receivables + Supplies

= $67 +20 + 11 = $98

Current liabilities = accounts payable + notes payable (short-term) + salaries and wages payable + interest payable + income tax payable

= $9 + 13 + 13+ 2 + 9 = $46

Current ratio = 98/46 = 2.13