Preparing a Balance Sheet; Discussion of Accounting Principles
Howard Jaffe is the founder and manager of Old Town Playhouse. The business wishes to obtain a bank loan to finance the production of its next play. As part of the loan application, Jaffe was asked to prepare a balance sheet for the business. He prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner’s equity.
OLD TOWN PLAYHOUSE BALANCE SHEETSEPTEMBER 30, 2015 | |||
Assets | Liabilities&Owner’s Equity | ||
Cash | $ 19,400 | Liabilities: |
|
Accounts Receivable | 150,200 | Accounts Payable | $ 7,000 |
Props and Costumes | 3,000 | Salaries Payable | 32,000 |
Theater Building | 26,000 | Total Liabilities | $ 39,000 |
Lighting Equipment | 10,000 | Owner’s Equity: |
|
Automobile | 15,000 | Howard Jaffe, |
|
Capital | 184,600 |
|
|
Total | $223,600 | Total | $223,600 |
In discussions with Jaffe and by reviewing the accounting records of Old Town Playhouse, you discover the following facts:
1. The amount of cash, $19,400, includes $16,000 in the company’s bank account, $2,400 on hand in the company’s safe, and $1,000 in Jaffe’s personal savings account.
2. The accounts receivable, listed as $150,200, include $10,000 owed to the business by Dell, Inc. The remaining $140,200 is Jaffe’s estimate of future ticket sales from September 30 through the end of the year (December 31).
3. Jaffe explains to you that the props and costumes were purchased several days ago for $18,000. The business paid $3,000 of this amount in cash and issued a note payable to Ham’s Supply Co. for the remainder of the purchase price ($15,000). As this note is not due until January of next year, it was not included among the company’s liabilities.
4. Old Town Playhouse rents the theater building from Time International. The $26,000 shown in the balance sheet represents the rent paid through September 30 of the current year. Time International acquired the building seven years ago at a cost of $180,000.
5. The lighting equipment was purchased on September 26 at a cost of $10,000, but the stage manager says that it isn’t worth a dime.
6. The automobile is Jaffe’s classic 1935 Ford, which he purchased two years ago for $12,000. He recently saw a similar car advertised for sale at $15,000. He does not use the car in the business, but it has a personalized license plate that reads “OTPLAY.”
7. The accounts payable include business debts of $6,000 and the $1,000 balance of Jaffe’s personal Visa card.
8. Salaries payable include $30,000 offered to Robin Needelman to play the lead role in a new play opening next December and $2,000 still owed to stagehands for work done through September 30.
9. When Jaffe founded Old Town Playhouse several years ago, he invested $20,000 in the business. However, New Theatre, Inc., recently offered to buy his business for $184,600. Therefore, he listed this amount as his equity in the above balance sheet.
Instructions
a. Prepare a corrected balance sheet for Old Town Playhouse at September 30, 2015.
b. For each of the nine numbered items above, explain your reasoning for deciding whether or not to include the items in the balance sheet and in determining the proper dollar valuation.
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