Several years ago your brother opened Magna Appliance Repairs. He made a small i
ID: 2488343 • Letter: S
Question
Several years ago your brother opened Magna Appliance Repairs. He made a small initial investment and added money from his personal bank account as needed. He withdrew money for living expenses at irregular inergals as the business grew, he hired an assistant. He is now considering adding more employees, purchasing additional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your brother submitted a loan application to the bank and included most the recent finantial statements (which follow) prepared from accounts maintained by a part-time book keeper.
Magna Appliance Repairs (Income Statment) For the year ended October 31, 2016
Service Revenue: $675,000
Less: Rent Paid $187,200
Wages paid $148,500
Supplies Paid $42,000
Utilities paid $39,000
Insurance paid 21,600
Misc payments $54,600 492,900
Net income 182,100
Magna Appliance Repairs Balance Sheet October 31,2016
Cash $95,400
Amount due from customers $112,500
Truck: 332,100
Total assets: 540,000
Equities
Owners Capital $540,000
After reviewing the financial statements, the loan officer at the bank asked your brother if he used the accurate basis of accounting for revenues and expenses. Your brother responded that he did and that why he included an account for "Amounts Due from Customers". The loan offier then asked whether or not the accounts were adjusted prior to the preparation of the statements. Your brother answered that they had not been adjusted.
a) why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statments?
b) Indicate possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.
Explanation / Answer
a) Loan officer may have suspected this as owner has not accounted for depreciation on truck . Also there are certain expenses that have been charged completely to income statement. example insurance & supplies
b) Further , It is clearly identifiable from income statement that accounts receivables have not been adjusted for doubtful accounts as their is no working for any bad debt expense. Owner has not made any provision to account for any expected loss that may arise on account of bad debt.
all insurance & supplies has been charged to expense. No working has been done To record supplies in hand or unexpired insurance
Also there is suspision as to ,there may be amounts outstanding on account of salaries or wages payable, Rent Payable that may also have not been adjusted
Depreciation has not been charged to Truck Account
As it is said that owner withdraw profits at irregular intervals, there has to be an account for retained earnings
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