Question

Kathy and James Mohr, local golf stars, opened the Chip-Shot Driving Range on March 1,
2014, 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 Mohrs leased five acres
of land at a cost of $1,000 per month and paid the first month’s rent. During the first month, adver-
tising 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, Kathy and James 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.
Kathy and James 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 Mohrs 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 Mohrs 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 recognized in March?



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  • CreatedJanuary 30, 2014
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