Question

Q1. Jesse James graduated from high school in Wawanesa and decided to start his own business doing small building and repair jobs. Jesse knew that incorporating a business had many benefits so he set up a corporation with the help of a lawyer. The business was incorporated on July 1, 2019. Jesse had saved $20,000 which he transferred from his personal account into the bank account for Jesse James Home Improvements Ltd. (JJHI) and received shares in return. He then purchased a used Toyota Tundra for $14,000 and tools for $2,500 cash. Shortly, after opening the business Jesse realized there was a large demand for these types of services so he hired an assistant.

At the end of the calendar year, Jesse realized that there would be income tax owing on his earnings. With the help of his friend (you) the following information was collected for the six months ending December 31, 2019:

 Deposits for building and repair services into the bank account totalled $48,000

 The following cheques had been written:

o Wages to his assistant $16,000 o Payroll taxes $600

o Rent $2,500

o Manitoba Hydro $350

o Repairs and maintenance on the Toyota Tundra $1,900 o Gas $800

o Rogers Wireless for cell phone service $626

o Advertising $500

o Supplies purchased and used on jobs $850

Uncollected invoices to customers for jobs completed amounted to $4,500. The $500 December rent has not yet been paid. Jesse estimates that the depreciation on truck and tools to be $1,000 and $250 respectively. The average income tax rate for income from his business is 25%.

Required:

Note: I would suggest preparing the journal entries first in order to help you complete these required.

1. Prepare a statement of earnings for Jesse James Home Improvements Ltd. for the six months ending December 2019.

2. Prepare a statement of financial position for Jesse James Home Improvements Ltd. as of at December 31, 2019.

1

3. Jesse has asked you for advice as to how he can use the information on these two statements to decide whether he should apply for a bank loan to expand his business. What would you tell him?

Answer 1