Mary and Jack Gray, local golf stars, opened the Chip-Shot Driving Range on
March 1, 2008, by investing $25,000 of their cash savings in the business. A caddy shack was
constructed for cash at a cost of $8,000, and $800 was spent on golf balls and golf clubs. The
Grays leased five acres of land at a cost of $1,000 per month and paid the first month’s rent.
During the first month, advertising costs totaled $750, of which $150 was unpaid at March
31, and $400 was paid to members of the high-school golf team for retrieving golf balls. All
revenues from customers were deposited in the company’s bank account. On March 15, Mary
and Jack withdrew a total of $1,000 in cash for personal living expenses. A $100 utility bill
was received on March 31 but was not paid. On March 31, the balance in the company’s bank
account was $18,900.
Mary and Jack thought they had a pretty good first month of operations. But, their estimates
of profitability ranged from a loss of $6,100 to net income of $2,450.
Instructions
With the class divided into groups, answer the following.
(a) How could the Grays have concluded that the business operated at a loss of $6,100? Was this
a valid basis on which to determine net income?
(b) How could the Grays have concluded that the business operated at a net income of $2,450?
(Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net
income?
(c) Without preparing an income statement, determine the actual net income for March.
(d) What was the revenue earned in March?
HELP, how would I begin to solve this?
Mary and Jack Gray, local golf stars, opened the Chip-Shot Driving Range on March 1,
2012, by investing $25,000 of their cash in the business. The Grays leased five acres of
land at a cost of $1,000 per month and paid the first month’s rent. During the first month,
advertising costs totaled $750, of which $150 was unpaid at March 31. All revenues from
customers were deposited in the company’s bank account. On March 15, Maryand Jack
withdrew a total of $1,000 in cash for personal living expenses. A $100 utility bill was
To solve this problem, we need to analyze the transactions and information given, and then make calculations based on that information. Let's go step by step.
(a) How could the Grays have concluded that the business operated at a loss of $6,100? Was this a valid basis on which to determine net income?
To determine whether the business operated at a loss of $6,100, we need to calculate the total expenses and compare them with the total revenue.
1. Calculate the total expenses:
- Caddy shack construction cost: $8,000
- Golf balls and clubs cost: $800
- Leased land cost (monthly): $1,000 (since it states "paid the first month's rent," we consider it as an expense for March)
- Advertising costs: $750 (including the unpaid portion of $150)
- High-school golf team payment: $400
Total Expenses = $8,000 + $800 + $1,000 + $750 + $400 = $10,950
2. Calculate the total revenue:
Given information states that all revenues were deposited in the company's bank account, but it doesn't provide the exact revenue amount. To calculate the revenue, we need to consider the change in the bank account balance.
Bank Account Balance on March 1: $25,000 (initial investment)
Bank Account Balance on March 31: $18,900
Total Revenue = Bank Account Balance on March 1 - Bank Account Balance on March 31
Total Revenue = $25,000 - $18,900 = $6,100
Since the total revenue is equal to the total expenses, the Grays could conclude that the business operated at a loss of $6,100. This calculation is a valid basis for determining net income.
(b) How could the Grays have concluded that the business operated at a net income of $2,450? (Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net income?
To determine whether the business operated at a net income of $2,450, we need to prepare a balance sheet at March 31 and analyze the owner's equity section.
Balance Sheet at March 31:
------------------------------------------------------------
| Assets | Liabilities |
------------------------------------------------------------
| Cash: $18,900 | |
| | |
------------------------------------------------------------
| Total Assets: $18,900 | Total Liabilities: |
------------------------------------------------------------
| |and Owner's Equity: |
| | |
------------------------------------------------------------
| |Owner's Equity: |
| | |
| |Capital: $25,000 |
| | |
| | Net Income: ? |
| | |
------------------------------------------------------------
Based on the information provided, the balance sheet doesn't explicitly mention any liabilities (such as loans or accounts payable) apart from the unpaid advertising costs. Therefore, the only entry in the owner's equity section is the capital investment of $25,000.
To determine the net income, we need to rearrange the owner's equity equation:
Owner's Equity = Capital + Net Income
$25,000 = $25,000 + Net Income
Net Income = $0
Since the calculated net income is $0, the Grays cannot conclude that the business operated at a net income of $2,450. This basis is not valid because the balance sheet shows no entry indicating a net income of $2,450.
(c) Without preparing an income statement, determine the actual net income for March.
Since we already calculated the net income as $0 in the previous step, the actual net income for March is $0.
(d) What was the revenue earned in March?
The revenue earned in March is $6,100. This was calculated by finding the difference between the opening and closing bank account balances, as explained in part (a).