Question

Question:

Suppose you have organized another business under the name “PAPA’s Hotel & Restaurant” on December 1, 2019. In order to compete in the market, you have decided to avail of financing from Azizi Bank for further expansion. Bank requires a list of documents including financial statements for further process. The business transactions during the month of December are as follows:

Dec 01: You have invested cash of $2,500,000 in your business, PAPA’s Hotel & Restaurant.

Dec 01: Purchased hotel building for $550,000. Made a $180,000 cash down payment and issued a note payable for balance amount.

Dec 01: You have agreed with Unilever Corporation to provide meeting hall and charge fixed revenue of $5,000 per month. The entire six-month rent revenue of $30,000 was collected in advance and credited to Unearned Rent Revenue.

Dec 01: Purchased food items for the restaurant on credit $10,000

Dec 10: Received cash of $80,000 from customers as rent revenue from customers.

Dec 15: Paid $10,000 salary to employees for services during the first half of December.

Dec 18: Purchased restaurant supplies of $2,500 on account.

Dec 31: Paid cash $10,000 for food items purchased on Dec 01.

Dec 31: You withdrew $5,000 cash from the business for personal use.

As you are following the accrual basis of accounting so adjustments are needed as at December 31, 2019. The information regarding adjustments is as follows:

1. Salaries earned by employees but not paid amount to $10,000 for second half of Dec.
2. As of Dec. 31, you have earned $20,000 rent revenue but not received any amount yet.
3. On Dec 1, entire six-month rent revenue of $30,000 was collected in advance and credited to Unearned Rent Revenue. As at December 31, adjustment is needed.
4. A Toyota Corolla car had been rented on Dec 09, at daily rate of $80 to provide transportation facility. No rental payment has yet been made.
5. Depreciation on Hotel’s building is based on an estimated useful life of 15 years. The original cost of building was $550,000 and residual value of $50,000.

Instructions:

1. Prepare Journal Entries, Post to the ledger, Prepare Trial Balance, Prepare adjusting entries, and then Prepare adjusted Trial Balance
2. Prepare financial statements (balance sheet & income statement) as of December 31, 2019 based on above information as it is the compulsory requirement of Azizi bank.
3. Evaluate the financial position and profitability of your business?
4. If you have applied for the financing of $250,000, whether you are qualified against the collateral of hotel building as at December 31, 2019?

Answer 1

a) Joural Entries to be provided

Debit ($) Credit ($)

Dec 1 Cash Account 25,00,000

Capital Account 25,00,000

(Being cash introduced in the business)   

Dec 1 Hotel Building 5,50, 000

Account Payable 1,80,000

Cash 1,80,000

Account Payable    5,50,000 ( Being Building purchases and downn paymet cash)

Dec 1 Cash Account    30000

Un earnned revenue 30000

( Assume That rent received by cash)

Dece 1 Purchases - foods items 10000

Accounts Payable 10000

Dec 10 Cash Account 80000

Room Rent Received 80000

Dec 15 Salary Paid 10000

Cash Account 10000

( Assume that salary is paid through cash)

Dec 18 Purchases 2500

Cash Account 2500

( Assume that purchases through cash)

Dec 31 Account Payable 10000

Cash Account 10000

Dec 31 Capital Account 5000

Cash Account 5000

Post to the ledger  

CASH ACCOUNT

Partuculars	Amount ($)	Particulars	Amount($)
Capital Account	25,00,000	Hotel Building	1,80,000
Rent advance	30,000	Salary Paid	10,000
Room Rent Received	80,000	Purchase Restaurant supplies	2500
		Accounts Payable	10000
		Personal Drawings	5000
TOTAL	26,101,000	TOTAL	207500
Balance			2402500

CAPITAL ACCOUNT

Partuculars	Amount ($)	Particulars	Amount($)
Cash	5000	Cash	25,00,000
TOTAL	5000	TOTAL	25,00,000
Balace	24,95,000

HOTEL BUILDING

Partuculars	Amount ($)	Particulars	Amount($)
CASH	180000
Account Payabble	370000
TOTAL	550000	TOTAL	0
Balance			550000

ROOM RENT RECEIVED

Partuculars	Amount ($)	Particulars	Amount($)
		CASH	80000
TOTAL	0		80000
BALANCE	80000

UNEARNED REVENUE ACCOUNT

Partuculars	Amount ($)	Particulars	Amount($)
		CASH	30000
TOTAL	0		30000
BALANCE	30000

ACCOUNTS PAYABLE

Partuculars	Amount ($)	Particulars	Amount($)
CASH	180000	Hotel Buildinng	550000
cash	10000	Purchases	10000
TOATAL	190000	TOTAL	560000
Balannce	370000

TRIAL BALANCE ON ACTUAL

Partuculars	Amount ($)	Amount($)
	Debit	Credit
Capital account		24,95,000
Building	550000
Cash account	2402500
Accounts Payable		370000
Unearned Revenue		30000
Room Rent Received		80000
Salary paid	10000
Purchases Food Items	10000
Purchases Others	2500
TOTAL	29,75,000	2975000

Adjusted Journal Entries

Dec 31 Salary Paid 10000

Salary Payable 10000

Dec 31 Unearned Rent Revenue    20000

Rent Received 20000

Dec 31 Transportaion Charges    1840

Transportation Charges payable 1840

( 23 days @ 80)

Dec 31 Depreciation on Building     33,333      

Hotel Building 33,333

( 550000-50000)15 years

TRIAL BALANCE ON 31 st December 2019

Partuculars	Amount ($)	Amount($)
	Debit	Credit
Capital account		24,95,000
Building	516667
Cash account	2402500
Accounts Payable		370000
Unearned Revenue		10000
Room Rent Received		80000
Salary paid	20000
Purchases Food Items	10000
Purchases Others	2500
Salary Payable		10000
Transportation Charges	1840
Transportation Charges Payable		1840
Depreciation	33,333
Hall Rent Received		20000
TOTAL	2986840	2986840

b) INCOME STATEMENT

Partuculars	Amount ($)	Particulars	Amount($)
Purchases Food Items	10000	Room Rent Received	80000
Purchases Others	2500	Hall Rent Received	20000
Salary paid	20000
Transportation Charges	1840
Depreciation	33,333
Excess Income	32327
TOTAL	100000	TOTAL	100000

BALANCE SHEET AS ON 31. 12.2019

Partuculars	Amount ($)	Particulars	Amount($)
Capital Account	24,95,000	HOTEL BUILDING	516667
Accounts Payable	370000	Cash account	2402500
Unearned Rental Income	10000
Salary Payable	10000
Transportation Charges payable	1840
Net Income as per income Statement	32327
TOTAL	2919167	TOTAL	2919167

c) Finacial position of the Hotel is good because income statement shown income for the month december 2019, so in future net income shall be incresess

d) Yes, the hotel is qualified for $ 250000 as loan from bank because collaterial security like hotel buliding value is $ 550000 so collateral security is in excess of loan amaount.