Question

Please help me with this case

In February 2009, Mr. Alan Pickering contracted to purchase a mineral spring in the Missouri Ozarks. The property, known locally as Verona Springs, included a 6 million gallon-per-day spring that produced exceptionally pure water. Mr. Pickering planned to bottle the water and sell it in the nearby cities of Springfield, Columbia, St. Louis, and Kansas City.

On March 1, 2009, Mr. Pickering and several relatives purchased 500,000 shares in the company for $1 per share. On that same day, the corporation borrowed $300,000 from the local bank. The banknote required five annual $60,000 principal repayments beginning March 1, 2010. Interest payments of 6% of the outstanding balance on the previous March 1 were required on March 1 of each year, also beginning March 1, 2010. The firm then wrote a check for $525,000 to buy the 65 acres of land that included Verona Springs. The water was nearly free of pollutants, but it arose into a small pond before flow- ing to a nearby stream. In the pond, the water was exposed to falling leaves and other contaminants.

To maintain purity, Mr. Pickering hired a local firm to drill a flowing artesian well near the spring (in a flowing artesian well, pressure from an underground aquifer forces water to flow naturally to the surface). The company paid $1,000 cash for the drilling on March 10, 2009. Mr. Pickering expected the well to last at least 10 years before redrilling would be needed. During March, Verona Springs had a building constructed above and around the well. Inside the building, the firm installed filtration, purification, and bottling equipment and a holding tank.

The company paid the $240,000 cost by check on March 31, 2009, when the equipment became operational. The firm expected the building and equipment to last 10 years. On April 5, the firm purchased a truckload of 18,200 one- gallon plastic water bottles and lids for $3,200, and 3,100 shipping boxes for $3,100 ($1.00 per box). The $6,300 for those purchases was payable in 30 days. During April, the firm also purchased miscellaneous supplies for $500 and paid in cash. The firm began bottling water by hiring three local residents to work part-time. During April, they bottled and shipped 18,000 gallons of mineral water (3,000 cases that each contained six 1-gallon bottles). Verona sold the 3,000 cases to regional supermarkets for $5.00 per case. One chain paid for 1,000 cases by check upon receipt; the others purchased on account, payable in 30 days. In late April, the firm paid the three employees a total of $1,500 in cash for their work and also paid a trucking firm $900 in cash to deliver the water. On April 30, the firm had negligible quantities of bottles, lids, boxes, and supplies in inventory.

1. For the two-month period March 1, 2009, to April 30, 2009, prepare journal entries, T-accounts, an income statement, a balance sheet, and a statement of cash flows.

2. Evaluate the company’s performance.

3. Is the large decline in cash a concern?

4. How would the three financial statements change if Verona Springs brought 5,100 boxes for $5100(1.00 per box) and if 2,000 boxes remained in inventory?

5. How would the three financial statements change if, in addition to paying a total of $5,100 for boxes, Verona Springs also spent a total of $4,800 for bottles and lids (a total of $9,900 for boxes, bottles, and lids, instead of $6,300), $2,500 instead of $1,500 for labor, $1,600 instead of $900 for shipping, and then shipped a total of 5,000 cases at $5.00 per case (1,000 cases for cash; 4,000 cases on credit)? Also assume negligible quantities of boxes, bottles, lids, and supplies in inventory.

6. Identify costs that may not have been included in the case?

Answer 1

Journal Entry
Date	Account Heading	Debit	Credit
March 1,2009	Cash	500,000
	Common Stock		500,000
	(500,000 Shares sold for $1 each)
March 1,2009	Cash	300,000
	Bank Loan		300,000
	( Loan from Bank)
March 1,2009	Land	525,000
	Cash		525,000
	( Purchase of land)
March 10,2009	Well	1,000
	Cash		1,000
	( Construction of well)
March 31,2009	Building and Equipment	240,000
	Cash		240,000
	( Construction of buliding and purchase of equipments)
March 31,2009	Interest Expense	1,500
	Interest Payable		1,500
March 31,2009	Depreciation expense- Well	5
	Accumulated Depreciation - Well		5
	( Depreciation on well for 20 days: (1000/10/12*20/31)
April 05,2009	Supplies	3,200
	Packing Material	3,100
	Accounts Payable		6,300
	( Purchase of water bottles,lids and shipping boxes on credit, payable in 30 days)
April 15,2009	Supplies	500
	Cash		500
	(Miscellaneous Supplies Purchased)
April 15,2009	Cash	5000
	Accounts Receivable	10000
	Sales Revenue		15000
	(Sold 3000 cases @ $5 per case, out of this 2000 cases sold on account)
April 30,2009	Wages	1500
	Cash		1500
April 30,2009	Delivery charges	900
	Cash		900
April 30,2009	Supplies Expenses	3,700
	Packing Expenses	3,100
	Supplies		3,700
	Packing Material		3,100
April 30,2009	Interest Expense	1,500
	Interest Payable		1,500
April 30,2009	Depreciation expense- Building and Equipment	2,000
	Accumulated Depreciation - Well		2,000
	( Depreciation on Building and Equipment for 1 month)
April 30,2009	Depreciation expense- Well	8
	Accumulated Depreciation - Well		8
	( Depreciation on well for 1 month)

Closing Entries

April 30,2009	Income summary	14,214
	Supplies Expenses		3,700
	Packing Expenses		3,100
	Interest Expense		3,000
	Depreciation expense- Building and Equipment		2,000
	Depreciation expense- Well		14
	Wages		1500
	Delivery charges		900
April 30,2009	Sales Revenue	15,000
	Income Summary		15,000
April 30,2009	Income Summary	786
	Retained Earnings		786

Profit and Loss Account
For two month ended April 30,2009
Sales Revenue		$         15,000
Less: Operating Expenses
Supplies expense	$          3,700
Packing expense	3,100
Delivery charges	900
Wages	1500
Depreciation expense- well	14
Depreciation expense- Building and Equipment	2,000
Total Operating Expenses		$       (11,214)
Operating Income		3,786
Interest Expense		(3,000)
Net profit		$               786
Balance sheet
as at April 30,2009
Assets
Current Assets
Cash	$        36,100
Accounts Receivable	10,000
Total Current Assets		$         46,100
Fixed Assets
Land	525,000
Well	1,000
less: Accumulated Depreciation-well	(14)
	986
Building and Equiment	240,000
less: Accumulated Depreciation-Building and Equioment	(2,000)
	238,000
Total Fixed Assets		763,986
Total Assets		$       810,086
Liabilities
Current Liabilities
Account Payable	6,300
Interest Payable	3,000
Total Current Liabilities		$            9,300
Non Current Liability
Bank Loan	300,000
Total Non Current Liability		300,000
Total Liabilities		309,300
Shareholder's Equity
Common Stock	500,000
Retained Earnings	786
Total Shareholder's Equity		500,786
Total Liabilities and Shareholder's Equity		$       810,086

Cash Flow Statement
For two months ended April 30,2009
Cash Flow from Operating Activities
Cash received from customers	$          5,000
Cash paid to suppliers and for expenses	(1,400)
Cash paid to employees	(1,500)
Cash from operating activities		$            2,100
Cash Flow from Investment Activities
Cash Paid for purchase of Land	(525,000)
Cash paid for Construction of well	(1,000)
Cash paid for Building and Equipment	(240,000)
Net cash used in Investment activities		(766,000)
Cash Flow from Financing Activities
Cash received from issue of Shares	300,000
Cash received for loan from Bank	500,000
Net cash from financing activities		800,000
Increase/ (Decrease) in Cash		$         36,100
Opening Cash and Cash Equivalent		-
Closing Cash and Cash Equivalent		$         36,100