Question

Decision-Making Across the Organization Kathy and James Mohr, local golf stars, opened the Chip-Shot Driving Range Company on March 1, 2017. They invested $25,000 cash and received common stock in exchange for their investment. A caddy shack was constructed for cash at a cost of $8,000, and $800 was spent on golf balls and golf clubs. The Mohrs leased five acres of land at a cost of $1,000 per month and paid the first month's rent. During the first month, advertising costs totaled $750, of which $150 was unpaid at March 31, and $400 was paid to members of the high-school golf team for retrieving golf balls. All revenues from customers were deposited in the company's bank account. On March 15, Kathy and James received a dividend of $1,000. A $100 utility bill was received on March 31 but was not paid. On March 31, the balance in the company's bank account was $18,900. Kathy and James thought they had a pretty good first month of operations. But, their estimates of profitability ranged from a loss of $6,100 to net income of $2,450. Instructions With the class divided into groups, answer the following.

(a) How could the Mohrs have concluded that the business operated at a loss of $6,100? Was this a valid basis on which to determine net income?

(b) How could the Mohrs have concluded that the business operated at a net income of $2,450? (Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net income?

(c) Without preparing an income statement, determine the actual net income for March.

(d) What was the revenue recognized in March?

Answer 1

Solution a:

Mohrs have concluded business operating at a loss of $6,100 on the basis of balance in bank account. He followed cash basis of accouting and concluded that bank balance was decrease by $6,100, therefore business incurred a loss of $6,100 = Ending bank balance - Beginning bank balance = $18,900 - $25,000 = ($6,100).

This is not valid basis on which income is determined.

Solution b:

Chip-Shot Driving Range Company
Balance Sheet at March 31
Liabilities	Amount	Assets	Amount
Advertising expense payable	$150.00	Cash	$18,900.00
Utility expenses payable	$100.00	Caddy Shack	$8,000.00
Common Stock	$25,000.00	Golf balls and golf club	$800.00
Retained earnings (bal figure)	$2,450.00
Total	$27,700.00		$27,700.00

Hence net income for march 2017 considered by moher is equal to addition to retained earnings = $2,450

No this is not a valid basis to determine net income and in $2,450 as dividend also paid by company to Kathy and james for $1,000 and dividend is not be reduced while arriving at net income.

Solution c:

Actual net income for march = $2,450 + $1,000 = $3,450

Solution d:

Revenue recognized in march = Net Income + Expenses recognized in march = $3,450 + ($1,000 + $750 + $400 + $100) = $5,700