As a recently hired accountant for a small business, SMC, Inc., you are provided with last year s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet SMC, Inc. Balance Sheet SMC, Inc. Balance Sheet ASSET 31-Dec-02 Cash $34,500 Accounts receivable. 25,000 Inventory 10,000 Supplies 200 Total assets Total assets $69,700 Liabilities and Stockholders Equity Liabilities and Stockholders Equity Liabilities and Stockholders Equity Liabilities: Liabilities: Accounts payable $12,000 Salaries payable 1,000 Income taxes payable 3,675 Total liabilities Total liabilities $16,675 Stockholders equity: Stockholders equity: Capital stock (10,000 shares outstanding) $25,000 Retained earnings. 28,025 Total stockholders equity Total stockholders equity 53,025 Total liabilities and stockholders equity. Total liabilities and stockholders equity. $69,700 SMC, Inc. Income Statement For the Year Ended December 31, 2002 SMC, Inc. Income Statement For the Year Ended December 31, 2002 SMC, Inc. Income Statement For the Year Ended December 31, 2002 Sales revenue 110,000 Rent revenue 1,000 Total revenues. Total revenues. $111,000 Less cost of goods sold Less cost of goods sold 60,000 Gross margin Gross margin $51,000 Less operating expenses: Less operating expenses: Supplies expense 400 Salaries expense. 22,000 Miscellaneous expense 4,100 26,500 Income before taxes Income before taxes $24,500 Less income taxes. Less income taxes. 3,675 Net income Net income 20,825 Earnings per share ($20,825 10,000 shares) Earnings per share ($20,825 10,000 shares) $2.08 SMC, Inc. Post-Closing Trial Balance 37,621 SMC, Inc. Post-Closing Trial Balance 37,621 SMC, Inc. Post-Closing Trial Balance 37,621 Debits Credits Cash 34,500 Accounts Receivable 25,000 Inventory 10,000 Supplies 200 Accounts Payable Accounts Payable $12,000 Salaries Payable Salaries Payable 1,000 Income Taxes Income Taxes 3,675 Capital Stock 25,000 Retained Earnings Retained Earnings 28,025 Totals $69,700 $69,700 You are also given the following information that summarizes the business activity for the current year, 2003. a. Issued 5,000 additional shares of capital stock for $10,000 cash. b. Borrowed $5,000 on January 2, 2003, from Downtown Bank as a long-term loan. Interest for the year is $500, payable on January 2, 2004. c. Paid $3,600 cash on November 1 to lease a truck for one year. d. Received $1,200 on November 1 from a tenant for six months rent. e. Paid $600 on October 1 for a one-year insurance policy. f. Purchased $500 of supplies for cash. g. Purchased inventory for $100,000 on account. h. Sold inventory for $150,000 on account; cost of the merchandise sold was $80,000. i. Collected $120,000 cash from customers accounts receivable. j. Paid $70,000 cash for inventories purchased during the year. k. Paid $25,000 for sales reps salaries, including $1,000 owed at the beginning of 2003. l. No dividends were paid during the year. m. The income taxes payable for the year were paid. Income taxes are based on a 15% corporate tax rate. n. For adjusting entries, all prepaid expenses are initially recorded as assets, and all unearned revenues are initially recorded as liabilities. o. At year-end, $150 worth of supplies are on hand. p. At year-end, an additional $5,000 of sales salaries are owed, but have not yet been paid. You are asked to do the following: 1. Journalize the transactions for the current year, 2003, using the accounts listed on the financial statements and other appropriate accounts (you may omit explanations). 2. Set up T-accounts and enter the beginning balances from the December 31, 2002, postclosing trial balance for SMC. Post all current year journal entries to the T-accounts. 3. Journalize and post any necessary adjusting entries at the end of 2003. (Hint: Items b, c, d, e, m, o, and p require adjustment.) 4. After the adjusting entries are posted, prepare a trial balance, a balance sheet, and an income statement for 2003. (Hint: Income before income taxes should equal $39,600.) 5. Journalize and post closing entries for 2003 and prepare a post-closing trial balance. 6. Using the DuPont framework, compute the return on equity for SMC for 2002 and 2003. 7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?