Budi started a small boat repair service company during the current year.
He is interested in obtaining a $100,000 loan from your bank to build a dry dock to store boats for customers.
At the end of the year, he prepared the following statements based on information stored in a large filing cabinet
BUDI COMPANY Profit for the Current Year
Service fees collected in cash during the current year
55
Cash dividends received
10000
Total
65000
Expense for operations paid during the current year
22
Cash stolen
500
New tools purchased during the current year (cash paid)
1000
Supplies purchased for use on service jobs (cash paid)
3200
Total
26700
Profit
38300
BUDI COMPANY Assets Owned at the End of the Current Year
Cash in checking account
29300
Building (at current market value)
32000
Tools and equipment
18000
Land (at current market value)
30000
Stock in ABC Industrial
130000
Total
239300
The following is a summary of completed transactions:
a. Received the following contributions (at fair value) to the business from the owner when it was started in exchange for 1,000 shares of $1 par value common stock in the new company:
Building 21000
Land 20000
Tools and equipment 17000
Cash 1000
b. Earned service fees during the current year of 87000; of the cash collected 20000 was for deposits from customers on work to be done by Budi in the next year.
c. We received the cash dividends on shares of ABC Industrial stock purchased by Budi six years earlier (the stock was not owned by the company).
d. He incurred operating expenses during the current year of 61000
e. Determined amount of supplies on hand (unused) at the end of the current year as 700
f. A temporary employee subsequently fired, stole 500 cash from the business. There was no insurance coverage for theft
g. We have purchased tools and equipment during the year
Required:
1. Did Budi prepare the income statement on a cash basis or an accrual basis? Explain how you can tell Which basis should be used? Explain why!
2. Reconstruct the correct entries under accrual accounting principles and post the effects to T accounts
3. Prepare an accrual-based income statement a statement of stockholder’s equity (only for one shareholder) and a classified balance sheet. Explain (using footnotes) the reason each change that you make to the income statement
4. What additional information would assist you in formulating your decision regarding the loan to Budi?
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