P1-3B Shaw’s Garden was started on May 1 with an investment of $45,000 cash. Fol

Question

P1-3B Shaw’s Garden was started on May 1 with an investment of $45,000 cash. Follow-ing are the assets, liabilities, and common stock of the company on May 31, 2014, and the revenues and expenses for the month of May, its first month of operations.Accounts receivable $ 8,400 Notes payable $26,000Service revenue 10,400 Salaries and wages expense 1,900Advertising expense 1,800 Equipment 58,800Accounts payable 4,400 Maintenance and repairs expense 2,100Cash 10,800 Insurance expense 400Common stock 45,000No additional common stock was issued in May, but a dividend of $1,600 in cash was paid. Instructions (a) Prepare an income statement and a retained earnings statement for the month of May and a balance sheet at May 31, 2014.(b) Briefly discuss whether the company’s first month of operations was a success.(c) Discuss the company’s decision to distribute a dividend.

Explanation / Answer

(a) Income statement of P1-3B Shaw's Garden for for the month of May, 2014

Operating expenses:

salaries & wages 1900

Advt expenses 1800

Maintenance & repairs 2100

Statement of changes in equity at the end of May 31, 2014

Common stock balance as on May 1, 2014 45,000

Retained earnings 4,600

Dividends paid (1,600)

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Balance as at May 31, 2014 48,000

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Statement of Financial position:

Current Assets:

Trade Receivables 8400

Cash 10800

Prepaid expenses 400

Equity:

Common stock 45000

Retained earnings 3000

Current Liabilities:

Trade payables 26,000

Accrued expenses 4,400

(B) As the company is able to generate profits of $4,600, the company's first month of operations was a success.

The company's decision to distribute a dividend based on one month's operation shows that they are more liberal in distributing the profits to the shareholders. However, it is suggested that the company should follow a standard and pre-determined Dividend Policy. The decision of distribution of dividends to the shareholders to be taken after completion of full financial year keeping in view the cash needs of the company.

Operating expenses:

salaries & wages 1900

Advt expenses 1800

Maintenance & repairs 2100

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