Your Uncle Bob has worked in an upholstery shop for ten years. Last year, Uncle

Question

Your Uncle Bob has worked in an upholstery shop for ten years. Last year, Uncle Bob’s wages were $ 30,000. Lately, however, Bob has been unhappy with his employer. Convinced that he could run an upholstery shop that did better work at a lower cost, Bob decides to go into business for himself. Withdrawing $ 7,000 cash from his personal savings account, Bob opens BOB’S UPHOLSTERY SHOP. Primarily for liability purposes, Bob has decided to incorporate the business. 7,000 shares of stock, at $1 par value, are issued to Bob. His lawyers accept 500 shares of stock in exchange for the value of their legal advice during the start-up phase. These legal fees would be considered Organization Costs and are amortized over 5 years.

To get the business going, Bob purchases several industrial sewing machines costing $ 4,000. Bob also needs other tools and equipment costing $ 3,000. Not wanting to completely deplete his cash balance, he applies for, and receives, a $ 2,500, 3-year loan from a local bank.

REQUIRED (2 points)

1. Prepare a Balance Sheet for BOB’S UPHOLSTERY SHOP dated January 1, 2008. (Hint: Prepare

journal entries for each transaction noted above.

2. Is Bob’s financial condition better, worse, or the same as it was before he started the business?

Explanation / Answer

Working Date Account Title Dr Cr Cash 7000 Common stock 7000 Orgaization cost (Intangible asset) 500 Common Stock 500 Sewing Machine 4000 Equipments 3000 Cash 7000 Cash 2500 Loan Payable 2500 Ans 1 Balance Sheet as on 1 january 2008 Assests Amount $ Cash $2,500 Fixed assets Sewing Machine 4000 Equipments 3000 Intangible assets Organization cost   500 Total assets 10000 Liabilities Long term Liability Loan Payable 2500 Stockholder equity 7500 Total Liabilities and stockholder equity 10000 Ans 2 It is worse as there are no revenue transaction occurred as it is just started. Previously he was earning $30000 and now he has withdrawn $7000 from bank and has a loan of $2500

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