During the summer holiday between finishing high school and beginning university

Question

During the summer holiday between finishing high school and beginning university, Sophie Irwin needed to earn sufficient money to support herself. Unable to obtain a position with a reasonable salary, she decided to try the lawn care business for three months. After a survey of the market potential, Sophie bought a second-hand van for $3,000 on 1 December. On each door she painted ‘Sophie's Lawn Service, Phone 9471 4487, She also spent $900 for a mower, trimmers and other tools. To acquire these items, she borrowed $3,500 cash from her parents by signing a note payable promising to pay the $3,500 plus interest of $105 at the end of three months (ending 28 February). At the end of summer, Sophie realised that she had done a lot of work, and her bank account looked good. This fact prompted her to become concerned about how much profit the business had actually earned. A review of the cheque stubs showed the following: Bank deposits of collections from customers totalled $13,490. The following cheques had been written: petrol, oil and lubrication, $920,; van repairs, $210; mower repair, $75; miscellaneous supplies used, $80; helpers, $4,500; payroll taxes, $175; payment for assistance in preparing payroll tax forms, $50; insurance, $125; telephone, $180; and $3,605 to pay off the note including interest (on 28 February). A notebook kept in the van, plus some unpaid bills, reflected that customers still owed Sophie $1,005 and that she owed $200 for petrol and oil (credit card charges). She estimated that the cost for the use of the van and the other equipment (called depreciation) for three months amounted to $500 Because this is a sole proprietorship, the business is not subject to company income tax; however, Sophie may have to pay personal income tax according to the following guide for a complete financial year ending 30 June. Table 7. Individual tax rates, excluding Medicare lev Taxable income 0- $18,200 $18,201 - $37,000 $37,001 - $80,000 $80,001 - $180,000 $180,001 and over Tax on this income Nil 19c for each $1 over $18,200 $3,572 plus 32.5c for each $1 over $37,000 $17,547 plus 37c for each $1 over $80,000 $54,547 plus 45c for each $1 over $180,000 Prepare a quarterly statement of comprehensive income (profit and loss statement) for Sophie's Lawn Service for the three months December 2013, January and February 2014. Use the main captions: Revenues from services, Expenses and Net profit. Explain whether you see a need for one or more additional financial reports for this business in the future. th Now, prepare a statement of financial position (balance sheet) for the business at 28 February (you may assume that Sophie put $1,000 of her own money into the business bank account when she established it on 1st December).

Explanation / Answer

Answer -

2. Balance sheet

W/N-1 : Working Note for Bank Account -

Sophie Irwin Lawn Service Income Statement For Quarter Ended February 28, 2014 Particulars Amount ($) Amount ($) Revenues from Services Lawn Service - Cheques              13,490 Lawn Service - Credit                1,005 Total Revenue              14,495 Less: Expenses Petrol, Oil and Lubrication (920+200)                1,120 Van repairs                    210 Mower Repairs                      75 Miscellaneous supplies used                      80 Helpers wages                4,500 Payroll taxes                    175 Preparation of payroll tax forms                      50 Insurance                    125 Telephone                    180 Interest expense                    105 Depreciation - equipment                    500 Total expenses                7,120 Net Profit                7,375

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