Preparing a Balance Sheet; Discussion of Accounting Principles
Hit Scripts is a service-type enterprise in the entertainment field, and its manager, Joe Russell, has only a limited knowledge of accounting. Joe prepared the following balance sheet, which, although arranged satisfactorily, contains certain errors with respect to such concepts as the business entity and asset valuation. Joe owns all of the corporation’s outstanding stock.
HIT SCRIPTS BALANCE SHEET NOVEMBER 30, 2011 | |||
Assets |
| Liabilities&Owner’s Equity |
|
Cash | $5,000 | Liabilities: |
|
Notes Receivable | 4,000 | Notes Payable | $65,000 |
Accounts Receivable | 3,000 | Accounts Payable | 32,000 |
Land | 60,000 | Total Liabilities | $97,000 |
Building | 75,000 | Owner’s Equity: |
|
Office Furniture | 9,600 | Capital Stock | 10,000 |
Other Assets | 25,000 | Retained Earnings | 74,600 |
Total | $181,600 | Total | $181,600 |
In discussion with Joe and by inspection of the accounting records, you discover the following facts:
1. The amount of cash, $5,000, includes $2,000 in the company’s bank account, $1,200 on hand in the company’s safe, and $1,800 in Joe’s personal savings account.
2. One of the notes receivable in the amount of $600 is an IOU that Joe received in a poker game five years ago. The IOU is signed by “G.W.,” whom Joe met at the game but has not heard from since.
3. Office furniture includes $2,500 for an Indian rug for the office purchased on November 15. The total cost of the rug was $10,000. The business paid $2,500 in cash and issued a note payable to Jana Carpet for the balance due ($7,500). As no payment on the note is due until January, this debt is not included in the liabilities above.
4. Also included in the amount for office furniture is a computer that cost $800 but is not on hand because Joe donated it to a local charity.
5. The “Other Assets” of $25,000 represent the total amount of income taxes Joe has paid the federal government over a period of years. Joe believes the income tax law to be unconstitutional, and a friend who attends law school has promised to help Joe recover the taxes paid as soon as he passes the bar exam.
6. The asset “Land” was acquired at a cost of $15,000 but was increased to a valuation of $60,000 when one of Joe’s friends offered to pay that much for it if Joe would move the building off the lot.
7. The accounts payable include business debts of $30,000 and the $2,000 balance owed on Joe’s personal MasterCard.
a. Prepare a corrected balance sheet at November 30, 2011.
b. For each of the seven numbered items above, use a separate numbered paragraph to explain whether the treatment followed by Joe is in accordance with generally accepted accounting principles.
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