Question

Norman Bates, manages the Lakeside Travel Lodge for his mother. Mrs. Bates suspects

Norman is up to no good, and has asked you to review the Lodge’s accounting records.

Norman has provided you with the following income statement, and additional

information for the quarter ending June 30, 2018.

Lakeside Travel Lodge

Income Statement

At June 30, 2018

Rent received

$ 212,000

Proceeds from gift shop sales

1,500

Mrs. Bates' Social Security payments received

9,000

Salaries and wages paid

(34,400)

Paid for supplies

(8,200)

Paid for inventory

(1,000)

Advertising paid

(2,000)

Insurance paid

(1,980)

Utilities paid

(600)

Boat dock repairs paid

(3,300)

Paid for new air conditioner

(6,000)

Net Income

$ 165,020

A

dditional information:

1. Rent received includes $57,000 of deposits for fall 2018 rentals.

2. The social security payments are for the months April through July. July's payment

was received on June 30.

3. Wages payable at 3/31/18 totaled $1,600. Wage expense of $400 per day for hourly

employees is paid through Friday June 21.

4. Supplies on hand were $1,800 at 3/31/18 and $2,200 at 6/30/18.

5. The gift shop was added during the quarter. Sales are cash only. Ending inventory

totaled $375.

6. Radio advertising costs $1,000 a month during the summer season. Lakeside has paid

through 6/1/18.

7. The April 5 payment for insurance on the lodge covered the period from 4/1/18 to

3/31/19.

8. A $350 utility bill covering June 2018 was received on 7/3/18.

9. The final bill for boat dock repairs was received on July 5. The total cost of the repairs

was $5,650. The contractor required a down payment of $1,000 in March to cover

supplies.

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10. The new air conditioner was installed on May 1 just in time for the summer season. It

has a useful life of 5 years.

11. Real estate taxes on the lodge total $5,000 a quarter. The county bills real estate

taxes one year in arrears.

12. The income tax rate is 20%.

Required:

A) Prepare an income statement for Lakeside Travel Lodge for the quarter ending June

30, 2018 in proper form.

B) How would you characterize Norman’s grasp of accounting reality? Be specific.

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C) When should revenue on gift shop sales be recognized?

D) When should cash from rental revenues be recorded?

E) Prepare the current asset and current liability sections of Lakeside Travel Lodge’s

balance sheet at June 30, 2018 in good form. Assume a cash balance of $35,000 at

3/31/18.

Answer 1

A.  

Lakeside Travek Lodge
Income Statement for the quarter ending June 30, 2018
Particulars of Expense		Amount	Particulars of Income		Amount
Salaries and Wages Paid	34400		Rent Received	212000
Less Wages Payable at endof March	-1600		Less Rent received in Advance for Fall	-57000	155000
Add wages for 9 days @ $400/day assuming the lodge is open all days	3600	36400
			Proceeds from Gift Shop Sales	1500	1500
Supplies Consumed
Opening Stock	1800		Social Security Payments Received for 4 months	9000
Add Purchases	8200		Less Advance for July	-2250	6750
Less Closing Stock on June 30	-2200	7800
Gift Shop Items Consumed
Paid	1000
Less Closing Stock	-375	625
Radio Advertisement
Paid till June 1	2000
Add June accrual for Advt	1000	3000
Insurance paid on April 5	1980
Less Prepaid Insurance for 9 months	-1485	495
Utilities paid	600
Add Utility for June received on Jul 3	350	950
Boat Dock Repairs paid	3300
Add accrual for Boat Dock repairs	2350	5650
Depreciation on Air Conditioner
Cost $6000, useful life 5 yrs or 60 months. Dep per month is 6000/60 is 100.DepforMay and June is	200	200
Real Estate Taxes	5000	5000
Income before Tax		103130
Tax @20% on 103130		20626
Income after tax		82504
Total		163250	Total		163250

B. Norman's grasp of accounting is poor. He has not understood the concepts as can be seen from the below examples:

a) He has no understanding of the matching concept. Incomes and expenses must relate to the same period.Whereas he shows rent received in advance as income and not a liability. Same with Social security payment. This overstates his income.

b) Expenses though not paid in the accounting period must be accrued. He does not consider accrual sforboat repairs or salaries and wages or advertisement costs, again overstating his income.   

C. Revenue from Gift shop sales can be recognized when the payment is received from the customer. Since alll gift shop sales were for cash the revenue has been recognized in full.

D. Cash from rental income should be recognized when the period for which the rental income has been received expires. Sine $57000 was received in advance for the fall , it should not be recognized as income.

E.

Blalnce Sheet of Lake Side Travel Lodge as at June 30, 2018
Current Liabilities			Current Assets
Salaries and Wages arrears at end June	3600		Stock
Advertisement Payable	1000		Supplies	2200
Utility Payable	350		Gift Shop Inventory	375
Boat Dock Repairs Payable			Cash Balance	35000
Total Bill 5650			Insurance Prepaid	1485
Less Advance Paid in Mar 1000
Less Amt paid in June 3300	1350
Real Estate Taxes Payable	5000
Income Tax Payable	20626
Rent Received in Advance	57000
Social Security Received in Advance	2250
Total	91176			39060