Question

accounting question

John Jacobs lost his job as a carpenter with a contractor when a recession hit the construction industry. Jacobs had been making USD 50,000 per year. He decided to form his own company, JacobsCorporation, and do home repairs. The following is a summary of the transactions of the business during the first three months of operations in 2019: Jan.15 Stockholders invested USD 40,000 in the business. Feb.25 Received payment of USD 4,400 for remodeling a basement into a recreation room. The homeowner purchased all of the building materials. Mar. Paid cash for an advertisement that appeared in the local newspaper, USD 150. Apr.10 Received USD 7,000 for converting a room over a garage into an office for a college professor. Theprofessor purchased all of the materials for the job. Apr.11 Paid gas and oil expenses for automobile, USD 900. Apr.12 Miscellaneous business expenses were paid, USD 450. Apr.15 Paid dividends of USD 2,000. a. Prepare journal entries for these transactions. b. Post the journal entries to T-accounts. c. How profitable is this new venture? Should Jacobs stay in this business?

Answer 1

Solution:

Requirement (a) Journal Entries

Date	Account Titles and Explanation	Debit	Credit
Jan. 15	Cash	$       40,000
	Common Stock		$      40,000
	(Being Common Stock Issued)
Feb. 25	Cash	$         4,400
	Service Revenue		$         4,400
	(Being Service revenue earned)
Mar. 5	Advertisement Expense	$             150
	Cash		$            150
	( Being Advertisement expense)
Apr. 10	Cash	$         7,000
	Service Revenue		$         7,000
	(Being Service revenue earned)
Apr. 11	Gas and oil Expense	$             900
	Cash		$            900
	( Being gas and oil expense)
Apr. 12	Miscellaneous Expense	$             450
	Cash		$            450
	( Being miscellaneous expense)
Apr. 15	Dividend	$         2,000
	Cash		$         2,000
	(Being dividend paid)

Requirement (b) T-Accounts

Cash
Jan. 15	$        40,000	Mar. 5	$              150
Feb. 25	$          4,400	Apr. 11	$              900
Apr. 10	$          7,000	Apr. 12	$              450
End Balance	$        47,900	Apr. 15	$          2,000
Common Stock
		Jan. 15	$        40,000
Service Revenue
		Feb. 25	$          4,400
		Apr. 10	$          7,000
		End Balance	$        11,400
Advertisement Expense
Mar. 5	$              150
Gas and oil Expense
Apr. 11	$              900
Miscellaneous Expense
Apr. 12	$              450
Dividend
Apr. 15	$          2,000

Requirement (c) How profitable is this business ?

Jacobs Corporation
Income statement
For the month ended April
Revenue
Service Revenue	$ 11,400
Total Revenue (A)	$ 11,400
Operating Expenses
Advertisement Expense	$        150
Gas and oil Expense	$        900
Miscellaneous Expense	$        450
Total Operating Expense (B)	$    1,500
Non Operating(or) Other	$             -
Net Income (A-B)		$         9,900
Dividend		$       (2,000)
Earnings after dividend		$         7,900

Note:

1) Business is profitable to an extent of $ 9,900 of net income and $ 7,900 of earning after dividend payment.

2) Whether to stay in this business will be depends on several factors, such as

a) Jacobs Corporation is a profitable business but its profitability is much less than 3 months salary of jacobs previous job of $ 12,500 ( ($50,000 / 12 months) * 3 months ).

b) At the same time, jacobs would not get his previous job because of recession.

By this we can say that, it is better to stay in business as it is profitable.