Giovanni Company

Income Statement
For Year Ended December 31, 2011
Revenues
Professional fees earned
Rent earned
Dividends earned
Interest earned

$47,000
3,600
500
1,120
_________

Total revenues
Expenses
Depreciation expenseBuilding
Depreciation expenseEquipment
Wages expense
Interest expense
Insurance expense
Rent expense
Supplies expense
Postage expense
Property taxes expense
Repairs expense
Telephone expense
Utilities expense

$52,220
2,000
1,000
17,500
1,200
1,425
1,800
900
310
3,825
579
421
1,820
_______

Total expenses
Net income

32,780
$19,440

Giovanni Company
Statement of Retained Earnings
For year Ended December 31, 2011
Retained earnings, December 31, 2010
Add: Net income
Less: Dividends
Retained earnings, December 31, 2011

GIOVANNI COMPANY

$61,800
19,440
81,240
6,000
$75,240

Balance sheet
December 31, 2011
Assets
Current assets
Cash
Short-term investments
Supplies
Prepaid insurance
Total current assets
Plant assets
Equipment
Accumulated depreciationEquipment
Building
Accumulated depreciationBuilding
Land
Total plant assets
Total assets
Liabilities
Current liabilities
Accounts payable
Interest payable
Rent payable
Wages payable
Property taxes payable
Current portion of long-term note payable
Unearned professional fees

$6,400
10,200
3,600
800
$21,000
18,000
3,000
90,000
9,000

15,000
81,000
28,500
124,500
$145,500

$2,500
1,400
200
1,180
2,330
6,400
650

Total current liabilities

Long-term liabilities
Long-term notes payable

$14,660
25,600

Total liabilities
Equity
Common stock
Retained earnings

40,260
30,000
75,240

Total equity
Total liabilities and equity
Date

General Journal

105,240
$145,500
Debit

Credit

Dec. 31 Professional fees earned

Rent earned
Dividends earned
Interest earned
Income summary

$47,000
3,600
500
1,120

Dec. 31 Income summary

Depreciation expenseBuilding
Depreciation expenseEquipment
Wages expense
Interest expense
Insurance expense
Rent expense
Supplies expense
Postage expense
Property taxes expense
Repairs expense
Telephone expense
Utilities expense

32,780

$52,220

2,000
1,000
17,500
1,200
14,25
1,800
900
310
3,825
579
421
1,820

Dec. 31 Income summary

Retained earnings

19,440

Dec. 31 Retained earnings

Dividends

6,000

19,440

6,000

Return on assets (total assets at December 31, 2010, were $150,000) 13.16%
Debt ratio
0.28
Profit margin ratio
37.23%
Current ratio
1.43
Ethics Challenge:
Depreciation should be recorded as a contra-asset, because is an
estimate of the reduction in value of the asset. It needs to be a contraaccount because it is a negative debit, not a positive credit. The
depreciation expense is an expense (equity) debit, while the accumulated
depreciation should be in the equipment account as a contra-asset in the
debit side. While Welch is correct that the balance sheet will show the
same amount for the total assets with either method, the depreciation
does need to be a contra-account because it is not a credit but an
estimate of a loss of debit. Bergez does not really face an ethical problem
because the balance sheet will still show the correct totals.