Question

Jack Roberts formed a lawn service business, Roberts Lawn Service, as a summer job. To start the business on May 1, he deposited $1,000 in a new bank account in the name of the proprietorship. The $1,000 consisted of a $600 loan from his father and $400 of his own money, so Jack invested $400 of capital in the business.

Jack rented lawn equipment, purchased supplies, and hired high school students to mow and trim his customer’s lawns.

At the end of each month, Jack mailed bills to his customers. On August 31, he was ready to dissolve the business and return to university for the fall semester. Because he had been so busy, he had kept few records other than his chequebook and a list of amounts owed to him by customers.

At August 31, Jack’s chequebook shows a balance of $2,000, and his customers still owe him $750. During the summer, he collected $5,500 from customers. His chequebook lists payments for supplies totalling $400, and he still has gasoline, weed-eater cord, and other supplies that cost a total of $50. He paid his employees $1,800, and he still owes them $300 for the final week of the summer.

Jack rented some equipment from Ludwig Tool Ltd. On May 1, the business signed a six- month lease on mowers and paid $600 for the full lease period. Ludwig will refund the unused portion of the prepayment if the equipment is in good shape. In order to get the refund, Jack has kept the mowers in excellent condition. In fact, he had to pay $300 to repair a mower that ran over a hidden tree stump.

To transport employees and equipment to jobs, Jack used a trailer that the business bought for $300. He figures that the summer’s work used up one-third of the trailer’s service potential. The business chequebook lists an expenditure of $500 for cash withdrawals by Jack during the summer. Jack paid his father back during August.

1. Prepare the income statement and the statement of owner’s equity of Roberts Lawn Service for the four months May through August.

2. Prepare the classified balance sheet of Roberts Lawn Service at August 31. 3. Was Jack’s summer work successful? Give the reason for your answer.

Answer 1

1.

Roberts Lawn Service Income Statement For the period ended August 31
Service Revenue		$ 6,250
Expenses
Supplies Expense	350
Salaries and Wages Expense	2,100
Repairs Expense	300
Rent Expense	400
Depreciation Expense	100	3,250
Net Income		$ 3,000

Roberts Lawn Service Statement of Owner's Equity For the period ended August 31
Capital introduced, May 1		$ 400
Add: Net Income	$ 3,000
Less: Withdrawals	(500)	2,500
J. Roberts, Capital, August 31		$ 2,900

2.

Roberts Lawn Service Balance Sheet August 31
Assets	Liabilities and Owner's Equity
Current Assets			Current Liabilities
Cash	2,000		Salaries and Wages Payable	300
Accounts Receivable	750		Total Current Liabilities		300
Supplies	50		Long Term Liabilities		0
Prepaid Rent	200		Total Liabilities		300
Total Current Assets		$ 3,000	Owner's Equity
Property Plant and Equipment			J. Roberts. Capital	2,900
Trailer	300		Total Owner's Equity		2,900
Accumulated Depreciation	(100)	200
Total Assets		$ 3,200	Total Liabilities and Owner's Equity		$ 3,200

Yes, Jack's summer work was very successful.

First, he earned $ 3,000 net on revenues of $ 6,250, a healthy 48 %.

Next, the cash flows were enough for him to repay the loan of $ 600 taken from his father.

Starting with total capital of $ 1,000, he has total assets of $ 3,200 at the end of 4 months of business. Hence it increased 320 %.

Most importantly, his liquidity position is extremely good, He has $ 2,000 cash in his business account. Plus his business has a current ratio of 10 times as on August 31.( Current Assets / Current Liabilities = $3,000 / $ 300 = 10 x ). The current assets are more than enough to pay off the short term payment obligations of the business.