Strong Knot, Inc., a service company, performs adjusting entries monthly, but prepares closing entries annually on December 31. The company recently hired Sally Adds up as its new accountant. Sally’s first assignment was to prepare an income statement, a statement of retained earnings, and a balance sheet using an adjusted trial balance given to her by her predecessor, dated December 31, 2011. The statements Sally prepared are as follows:

Instructions

a. Prepare a corrected set of financial statements dated December 31, 2011. (You may assume that all of the figures in the company’s adjusted trial balance were reported correctly except for Notes Payable, which is some amount other than $45,800.) 

b. Prepare the necessary year-end closing entries. 

c. Using the financial statements prepared in part a, briefly evaluate the company’s profitability and liquidity.

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STRONG KNOT, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2011 Revenue Service revenue earned __ __ .. . Unearned revenue. Accounts receivable Total revenue ·.. . $160,000 3,500 8,200 $171,700 Expenses .x..1,800 18,000 Office rent expense Dividends 3,000 Accumulated depreciation: auto Accumulated depreciation: equipment. Repair and maintenance expense Travel expense Miscellaneous expense. . . Interest expense 12,000 13,000 1,700 6,600 2,100 2,800 158,200 13,500 400 $ 13,100 Income before income taxes Net income STRONG KNOT, INC. STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2011 Retained earnings (per adjusted trial balance) Add: Income Less: Income taxes expense Retained earnings, Dec. 31, 2011 . *-. . . . .$17,500 13,100 4,000 $26,600 STRONG KNOT, INC. BALANCE SHEET DECEMBER 31, 2011 Assets $15,400 900 Cash Automobile Less: Depreciation expense: automobile. Equipment and music. . Less: Depreciation expense: equipment .. Total assets . . . . .$37,000 4,00033,000 $39,000 3,000 36,000 $85,300 Liabilities & Stockholders' Equity Liabilities Accounts payable Notes payable... Salaries payable Prepaid rent S 5,200 45,800 900 800 3,000 $55,700 Total liabilities.. Stockholders' Equity: Capital stock... . Retained earnings .. Total stockholders' equity .. 3,000 26,600 $29,600 S85,300 Total liabilities and stockholders' equity .. . . . .