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Diapers Daycare Company: Balance Sheet and return on equity

Problem #2: The accounting records of Diapers Daycare Company show the following assets and liabilities as of the end of 1999 and 2000 in the table below.

Late in December 2000 (just before the amounts in the second column were calculated), Pamela Uhe, the owner, purchased a small office building and moved the business from rented quarters to the new building. The building and the land it occupies cost $225,000. The business paid $120,000 in cash and a note payable was signed for the balance. Uhe had to invest $35,000 cash in the business to enable it to pay the $120,000. The business earned a satisfactory net income during 2000, which enabled Uhe to withdraw $3,000 per month from the business for personal expenses (P. Uhe, Withdrawals).

December 31
1999 2000

Cash . . . . . . . . . . . . . . . . . . . . . $ 52,500 $ 18,750
Accounts receivable. . . . . . . . . 28,500 22,350
Office supplies . . . . . . . . . . . . . 4,500 3,300
Trucks . . . . . . . . . . . . . . . . . . . 54,000 54,000
Office equipment . . . . . . . . . . . 138,000 147,000
Building . . . . . . . . . . . . . . . . . . 180,000
Land . . . . . . . . . . . . . . . . . . . . . 45,000
Accounts payable . . . . . . . . . . . 7,500 37,500
Notes payable . . . . . . . . . . . . . . 105,000
P. Uhe, Capital . . . . . . . . . . . . . ? ?

Required (Show all work)

1. On a separate sheet of lined paper, prepare proper balance sheets for the business as of the end of 1999 and the end of 2000. (Remember that owner's equity equals the difference between assets and liabilities.)

2. By comparing owner's equity amounts from the balance sheets and using the additional information presented in this problem, prepare a calculation to show how much net income was earned by the business during 2000. (Hint: The value of Owner's Equity on 12/31/99 is the same value as on 1/1/00. Also, The only way the amount of Owner's Equity can change during year 2000 is to be increased by net income or additional investment, or decreased by owner withdrawals.)

3. Calculate the 2000 return on equity for the business. Also, calculate the modified return on equity assuming that P. Uhe's efforts were worth $40,000 for the year.

Check Figures:
1999 A = L + OE = $277,500
2000 A = L + OE = $470,400
2000 Net Income = $58,900
Modified ROE = 6.3%

Solution Preview

The answer is also in the excel file attached
The accounting records of Diapers Daycare Company show the following assets and liabilities as of the end of 1999 and 2000 in the table below.

Late in December 2000 (just before the amounts in the second column were calculated), Pamela Uhe, the owner, purchased a small office building and moved the business from rented quarters to the new building. The building and the land it occupies cost $225,000. The business paid $120,000 in cash and a note payable was signed for the balance. Uhe had to invest $35,000 cash in the business to enable it to pay the $120,000. The business earned a satisfactory net income during 2000, which enabled Uhe to withdraw $3,000 per month from the business for personal expenses (P. Uhe, Withdrawals).

31-Dec 31-Dec
1999 2000
...

Solution Summary

Prepares balance sheet and calculates return on equity.

$2.19