PROBLEM $5\mathrm{.}1A$

Correcting Classification Errors

Party Wagon, Inc., provides musical entertainment $at$ weddings, dances, and various other functions. The company performs adjusting entries monthly, but prepares closing entries annually $on$ December $31.$ The company recently hired Jack Armstrong $as$ its new accountant. Jack$s$ first assignment was $to$ prepare $an$ income statement, a statement $of$ retained earnings, and a balance sheet using $an$ adjusted trial balance given $to$ him $by$ his predecessor, dated December $31,$ current year.

From the adjusted trial balance, Jack prepared the following set $of$ financial statements.

PARTY WAGON, INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER $31,$ CURRENT YEAR

Revenue:

Party revenue earned $$156,000$

Unearned party revenue $2,160$

Accounts receivable $10,800$

Total revenue $$168,960$

Expenses:

Insurance expense $ $2,160$

Office rent expense $14,400$

Supplies expense $1,440$

Dividends $1,200$

Salary expense $90,000$

Accumulated depreciation: van $19,200$

Accumulated depreciation: equipment and music $16,800$

Repair and maintenance expense $2,400$

Travel expense $7,200$

Miscellaneous expense $4,320$

Interest expense $5,280164,400$

Income before income taxes $ $4,560$

Income taxes payable $480$

Net income $ $4,080$

page $231$

PARTY WAGON, INC.

STATEMENT $OF$ RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER $31,$ CURRENT YEAR

Retained earnings $(per$ adjusted trial balance$)$ $$18,000$

Add: Income $4,080$

Less: Income taxes expense $2,400$

Retained earnings Dec. $31,$ current year $$19,680$

PARTY WAGON, INC.

BALANCE SHEET

DECEMBER $31,$ CURRENT YEAR

Assets

Cash $$18,000$

Supplies $600$

Van $$48,000$

Less: Depreciation expense: van $9,60038,400$

Equipment and music $$42,000$

Less: Depreciation expense: music and equipment $8,40033,600$

Total assets $$90,600$

Liabilities & Stockholders$$ Equity

Liabilities:

Accounts payable $ $8,400$

Notes payable $46,800$

Salaries payable $1,920$

Prepaid rent $2,400$

Unexpired insurance $5,400$

Total liabilities $$64,920$

Stockholders$$ Equity:

Capital stock $6,000$

Retained earnings $19,680$

Total stockholders$$ equity $$25,680$

Total liabilities and stockholders$$ equity $$90,600$

Instructions

Prepare a corrected set $of$ financial statements dated December $31,$ current year. $(You$ may assume that all $of$ the figures $in$ the company$s$ adjusted trial balance were reported correctly except for Interest Payable $of$ $$240,$ which was mistakenly omitted $in$ the financial statements prepared $by$ Jack.$)$

Prepare the necessary year$-$end closing entries.

Using the financial statements prepared $in$ part $a,$ briefly evaluate the company$s$ profitability and liquidity. $(No$ transactions affected the capital stock account during the year.$)$