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Analysis of Adjusting Entries and Financial Ratios for Wagonblatt Company

This analysis examines the adjusting entries made in 2006 for Wagonblatt Company and computes income, earnings per share, and net profit margin. The closing entry and post-closing trial balance are also recorded.

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Analysis of Adjusting Entries and Financial Ratios for Wagonblatt Company

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  1. ACC 207 P4-7 Arash Foroudi Becky Truax Julio Perez Ken Chen Michael English

  2. Question Wagonblatt Company is completing the information processing cycle at its fiscal year end, December 31,2006. Following are the correct balances at December 31, 2006, for the accounts both before and after the adjusting entries for 2006.

  3. Requirement #1Compare the amounts in the columns before and after the adjusting entries to reconstruct the adjusting entries made in 2006. Provide an explanation of each.

  4. Requirement #2Compute the amount of income assumed that it is based on the amounts (a) before adjusting entries and (b) after adjusting entries. Which income amount is correct? Explain why. Before adjusting entries 46,000 - 41,700 = 4,300 After adjusting entries 46,400 - 55,100 = (8700) Expenses are significantly understated before the adjusting entries, therefore the amount of income computed after the adjusting entries is more accurate.

  5. Requirement #3Compute earnings per share, assuming that 3,000 shares of stock are outstanding all year. Earnings per share = Income/Average number of shares of common stock outstanding -8,700/3,000 = -2.9 Answer: -2.9

  6. Requirement #4Compute the net profit margin. What does this suggest to you about the company? Net profit margin = net income/ net sales -8700/46,400=-18.8% Answer: -18.8%

  7. Requirement #5Record the closing entry at December 31, 2006. Service revenue(-R) . . . . . . . . . . . 46,400 Salary expense(-E) . . . . . . . . . . . . . 41,700 Depreciation expense(-E) . . . . . . . . . .8,500 Insurance expense(-E) . . . . . . . . . . . . . 200 Income tax expense(-E) . . . . . . . . . . .4,700 Retained Earnings(-SE) . . . . . . . . . .(8,700)

  8. Requirement #6 Wagonblatt Company Post Closing Trial Balance December 31 2006 (Dollars) Debit Credit Cash 9,000 Accounts receivable 400 Prepaid insurance 400 Equipment 120,200 Accumulated Depreciation on Equipment 40,000 Income taxes payable 4,700 Contributes capital 80,000 Retained earnings January 1, 2006 5,300 Service Revenue 0 Salary expense 0 Depreciation expense 0 Insurance expense 0 Income tax expense 0 130,000130,000

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