Sadie Hawkins owns The Education Supply Center, a small store that sells educational supplies. Hawkins recently approached the local bank for a loan to finance a planned expansion of her store. Hawkins prepared the balance sheet shown below and submitted it to one of the bank’s loan officers in support of her loan application.

INSTRUCTIONS

1. Identify any errors in the balance sheet, and explain why they should be considered errors.

2. Prepare a corrected balance sheet in accordance with generally accepted accounting principles.

The Education Supply Center
Balance Sheet
December 31, 2019
Assets
Cash.....................................................................................$ 28,800
Accounts Receivable.............................................................34,000
Inventory................................................................................82,000
Equipment (cost)...................................................................70,000
Personal Residence............................................................416,000
Supplies....................................................................................4,320
Family Auto............................................................................80,000
Total Assets.......................................................................$715,120
Liabilities and Owner’s Equity
Accounts Payable...............................................................$ 34,900
Note Payable on Family Car.................................................26,000
Mortgage on House............................................................224,000
Sadie Hawkins, Capital........................................................430,220
Total Liabilities and Owner’s Equity................................$715,120

The following additional information was made available by Hawkins:

a. The inventory has an original cost of $65,800. It is listed on the balance sheet at the estimated selling price.

b. The cash listed on the balance sheet includes $7,400 in Sadie Hawkins’ personal account. The remainder of the cash is in the store’s account.

c. The store recently purchased a delivery truck for $78,000, financed through a bank loan. The bank has legal title to the truck. To date, the store has paid $22,000 on the loan. Of the remaining $56,000 liability, $21,200 is current and the remainder long-term. Hawkins did not include the truck or the liability on the balance sheet because neither she nor the business owns it.

d. Depreciation allowable to date is $14,000 on the equipment and $10,000 on the truck.

Analyze: If Hawkins knew that $1,800 of accounts receivable was not collectible, what should be done to reflect this fact on the records of the business? On the balance sheet?