Question

1. 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

Additional information:
	Rent received includes $57,000 of deposits for fall 2018 rentals.
	The social security payments are for the months April through July. July's payment was received on June 30. Wages payable at 3/31/18 totaled $1,600. Wage expense of $400 per day for hourly employees is paid through Friday June 21.
	Supplies on hand were $1,800 at 3/31/18 and $2,200 at 6/30/18.
	The gift shop was added during the quarter. Sales are cash only. Ending inventory totaled $375.
	Radio advertising costs $1,000 a month during the summer season. Lakeside has paid through 6/1/18.
	The April 5 payment for insurance on the lodge covered the period from 4/1/18 to 3/31/19.
	A $350 utility bill covering June 2018 was received on 7/3/18.
	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.
	The new air conditioner was installed on May 1 just in time for the summer season. It has a useful life of 5 years.
	Real estate taxes on the lodge total $5,000 a quarter. The county bills real estate taxes one year in arrears.
	The income tax rate is 20%.

Required:

1. Prepare an income statement for Lakeside Travel Lodge for the quarter ending June 30, 2018 in proper form.

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

3. When should revenue on gift shop sales be recognized?

4. 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

Rent received	212000	212000-57000=	155000	Unearned rent included
Proceeds from gift shop sales	1500		1500
Mrs. Bates' Social Sec.pmts. recd.	9000	9000/4*1=	2250	Unearned income included
COGS(Giftshop inv.)		1000-375=	-625	As ending inventory is $ 375, (1500+375)=1875 must have been bought
Salaries and wages expense	-34400	34400+2000-1600=	-34800	Wages paid for prior period included & wages for the period ,left out.
Supplies expense	-8200	1800+8200-2200=	-7800	Payment for purchase of supplies inventory included , instead of actual supplies used during the period.
Advertising expense	-2000	2000+1000=	-3000	Advtg. Exp. For the mth. Of June needs to be accrued.
Insurance expense	-1980	1980/12*3=	-495	Insurance paid for 1 year--only 3 months need to be accounted.
Utilities expense	-600	600+350=	-950	Utility bill for June to be included
Boat dock repairs expenses	-3300		-5650	Full amt. of repair bill need to be accrued, instead of advance pmts.
Depreciation-A/C			-200	2 mths. Depn.
Real estate taxes			-5000	Taxes to be accrued
Income before tax			100230
Tax at 20%			-20046
Income after tax /Net Income			80184

B.He has accounted on a cash payment & receipt basis & not on accrual basis. That is expenses & incomes for the period are to be accrued & provided for, so as to reflect the accurate profitability or otherwise for the concerned period---as explained alongside the income statement , line by line.
C. Revenue on gift shop sales should recognised only when the inventory purchased for the purpose are actually sold.
D. Cash from rental revenues should be recognised only when it accrues or falls due.

Journal entries (To find Current assets & C/Liab.)
(Partial) as opening balance are not known)
Rental revenue	57000
Unearned rental revenue		57000
SS receipts	2250
Unearned SS receipts		2250
(9000/4)
Wages payable	1600
Wage expense(bal.fig.)	34800
Wages payable		2000
Cash		34400
Supplies expense	7800
Supplies		7800
(1800+8200-2200)
COGS	625
Giftshop inv.(1000-375)		625
Advtg. Exp.	1000
A/cs payable		1000
(June advtg. Exp.accrued)
Insurance expense(1980/12*3)	495
Prepaid insurance	1485
Cash		1980
Utilities expense	350
A/cs payable		350
Boat dock Repair exp.	5650
Advance paid for rep.		3300
A/cs payable		2350
Depreciation expense	200
Acc. Depn.-Air conditioner		200
(6000/5/12*2)
Real estate tax expense	5000
Real estate Tax liability		5000
Income tax expense	20046
Income tax liability		20046

Current Liabilities		Current assets
A/cs payable(1000 advtg.+350 utilities+2350 boat rep.bal.)	3700	Cash (op. bal.35000+Old I/S 165020	200020
Wages payable	2000	Giftshop inv.	375
Real estate Tax liability	5000	Prepaid insurance	1485
Income tax liability	20046	Supplies	2200
Unearned rental revenue	57000
Unearned SS receipts(9000/4)	2250
Total C/L	89996	Total C/A	204080