Two entrepreneurs, Grasso and Marchetti, decided to start a business together. T

Question

Two entrepreneurs, Grasso and Marchetti, decided to start a business together. The purpose of the business entity, formed as a corporation, is to provide support service to upscale entertainment events and social gatherings. During July - the first month of operations - the following transactions and events occurred (listed in chronological order).

A) The two owners each invested $10,000 cash into the corporation in exchange for 1,000 shares of stock.
B) Purchased equipment from Too Cool for You Company in exchange for $15,000 cash. The equipment was expected to be used for five years with no salvage (residual) value at the end of five years.
C) Spent $2,000 cash for advertising in newspapers, magazines, and on the lnternet. D) Performed services for various clients and were paid $25,000 cash for those services.
E) Purchased supplies worth $3,500 on account; $1,700 of supplies remained on July 31. As ofJuly 31, the company still owed the entire $3,500 balance.
F) Signed a two-year contract, to begin on August 1, to provide services to Trombatori Enterprises. The amount of the contract was $12,000, paid in cash on July 15.
G) Performed services for Jo-Mama Enterprises. The agreed upon amount was $5,000; as of July 31, Jo-Mama still owed the entire amount.
H) Hired two employees, Luana and Monica, and incurred total salaries expenses of $3,000, of which $500 remained to be paid as of the end of the month.
I) incurred expenses for utilities and rent for a total of $4,000. As of July 31, $1,500 of that remained to be paid.

Using the information above, answer the following: After the first month of operations, are Grasso and Marchetti better off or worse off? Be specific with your response; you must state whether they are (A) BETTER OFF or WORSE OFF and (B) PROVIDE AN EXACT AMOUNT.

Explanation / Answer

A business owner is better-off, if his/her business makes profit. In the given scenario, Grasso and Marchetti would be better-off, if the expenses incurred in the first month are lesser than the revenue generated. However, to determine this, we first need to calculate all realizable revenues and expenses.

Expenses:

Depreciation expense for the month on equipment purchased = $15,000 / 60 = $250

Advertising expense = $2,000

Supplies used = $3,500 - $1,700 = $1,800

Salaries expense = $3,000

Utilities & Rent expense = $4,000

Revenues:

Revenue received against services performed for various clients = $25,000

Revenue earned from services performed for Jo-Mama Enterprises = $5,000

Total Revenue = $25,000 + $5,000 = $30,000
Total Expense = $250 + $2,000 + $1,800 + $3,000 + $4,000 = $11,050

Profit = $30,000 - $11,050 = $18,950

So, Grasso and Marchetti are better-off by $18,950 after first month of operation.

Notes: Any revenue received against which any services are not performed, will not be included in revenue for the month as it has not been earned yet. In the same way, any expense that is not related to the month will not be included while calculation of expenses for the month.

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