Chapter 4: Q1TP (page 247)

Kathy Wintz formed a lawn service business as a summer job. To start the corporationon May 1, 2018, she deposited $1,000 in a new bank account in the name of the business. The $1,000 consisted of a $600 loan from Bank One to her company, Wintz Lawn Service, and $400 of her own money. The company issued $400 of common stock to Wintz. Wintz rented lawn equipment, purchased supplies, and hired other students to mow and trim customers’ lawns.
At the end of each month, Wintz mailed bills to the customers. On August 31, she was ready to dissolve the corporation and return to college. Because she was so busy, she kept few records other than the checkbook and a list of receivables from customers.
At August 31, the business’s checkbook shows a balance of $2,000, and customers still owe $750. During the summer, the business collected $5,500 from customers. The business checkbook lists payments for supplies totaling $400, and it still has gasoline, weed trimmer cord, and other supplies that cost a total of $50.
The business paid employees $1,800 and still owes them $300 for the final week of the summer. Wintz rented some equipment from Ludwig’s Machine Shop. On May 1, the business signed a six-month rental agreement on mowers and paid $600 for the full rental period in advance. Ludwig’s will refund the unused portion of the prepayment if the equipment is returned in good shape. In order to get the refund, Wintz has kept the mowers in excellent condition. In fact, the business had to pay $300 to repair a mower.To transport employees and equipment to jobs, Wintz used a trailer that the business bought for $300. The business estimates that the summer’s work used up one-third of the trailer’s service potential. The business checkbook lists a payment of $500 for cash dividends paid during the summer. The business paid the loan back during August. (For simplicity, ignore any interest expense associated with the loan.)
Requirements
1. As a team, prepare the income statement and the statement of retained earnings of Wintz Lawn Service for the four months May 1 through August 31, 2018.
2. Prepare the classified balance sheet (report form) of Wintz Lawn Service at August 31, 2018.
3. Was Wintz’s summer work successful? Give your team’s reason for your answer.

Short Answer

Expert verified

(1) Journal entries are mentioned in Step 1.

(2) T accounts are mentioned in Step 2.

(3) As the business was able to earn net income, it will be considered as successful venture.

Step by step solution

Step-by-Step-Solution Step 1: Income statement and Statement of retained earnings

Income statement is shown as follows:

Wintz Lawn Service
Income Statement
Month Ended August 31, 2018.
Revenues
Service Revenue (5,500+$750		$6,250
Expenses
Salaries Expense ($1,800+$300)	$2,100
Rent Expense ($600*4/6)	$400
Supplies Expense	$350
Repair Expense	$300
Depreciation Expense-Trailer (300*1/3)	$100
Total Expenses		3,250
Net Income		$3,000

Statement of retained earnings is shown as follows:

Wintz Lawn Service
Statement of Retained Earnings
Month Ended August 31, 2018
Retained Earnings, Beginning Balance	$0
Net Income for the year	$3,000
	$3,000
Dividends	($500)
Retained Earnings, Ending Balance	$2,500

Step 2: Classified balance sheet

Balance Sheet is shown as follows:

Wintz Lawn Service
Balance Sheet
August 31, 2018.
Assets
Current Assets:
Cash		$2,000
Accounts Receivable		$750
Prepaid Rent ($600-$400)		$200
Office Supplies		$50
Total Current Assets			$3,000
Property, Plant, and Equipment:
Trailer	$300
Less: Accumulated Depreciation- Trailer	($100)
Total Property, Plant, and Equipment:		$200	$200
Total Assets			$3,200


Liabilities
Current Liabilities:
Salaries Payable	$300
Total Current Liabilities:		$300
Total Liabilities		$300

Stockholders’ Equity
Common Stock	$400
Retained Earnings	$2,500
Total Stockholders’ Equity		$2,900
Total Liabilities and Stockholders’ Equity		$3,200

Step 3: Explanation on Summer Work Performance

Yes, summer work was successful as business was able to generate profits of $3,000 in the given period. Also there is very less amount of liabilities.