Inferring Year-End Adjustments, Computing Earnings per Share and Net Profit Margin, and Recording Closing Entries

Taos Company is completing the information processing cycle at the end of its fiscal year, December 31, 2011. Following are the correct balances at December 31, 2011, for the accounts both before and after the adjusting entries for 2011.

Required:
1. Compare the amounts in the columns before and after the adjusting entries to reconstruct the adjusting entries made in 2011. Provide an explanation of each.
2. Compute the amount of income, assuming that it is based on the amount (a) before adjusting entries and (b) after adjusting entries. Which income amount is correct? Explain why.
3. Compute earnings per share, assuming that 5,000 shares of stock are outstanding.
4. Compute the net profit margin ratio. What does this suggest to you about the company?
5. Record the closing entry at December 31,2011.

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Trial Balance, December 31, 2011 Before After AdjustmentsAdjusting Entries Debit Credit Adjusting Entries Items Debit Credit Debit Credit $ 18,000 S 18,000 a. Cash 1,500 b. Accounts receivable c. Prepaid rent 1,200 800 d. Property, plant, and equipment 208,000 208,000 e. Accumulated depreciation f. Income taxes payable g. Unearned revenue h. Contributed capital i. Retained earnings, January 1, 2011 j. Service revenue $ 52,500 $ 70,000 6,500 16,000 8,000 110,000 110,000 21,700 21,700 83,000 92,500 k. Salary expense 56,000 56,000 1. Depreciation expense 17,500 m. Rent expense 400 n. Income tax expense 6,500 $283.200 $283,200 $308,700 $308,700