Tom Martinez started and operated a small boat repair service
Tom Martinez started and operated a small boat repair service company during 2015. He is interested in obtaining a $ 100,000 loan from your bank to build a dry dock to store boats for customers in the winter months. At the end of the year, he prepared the following statements based on information stored in a large filing cabinet:
The following is a summary of completed transactions:
a. Received the following contributions to the business from the owner when it was started in exchange for 1,000 shares in the new company:
b. Earned service fees during 2015 of $ 87,000; of the cash collected, $ 20,000 was for deposits from customers on work to be done by Martinez during 2016.
c. Received the cash dividends on shares of ABC Industrial purchased by Tom as a personal investment six years earlier.
d. Incurred expenses during 2015, $ 61,000.
e. Determined amount of supplies on hand (unused) at the end of 2015, $ 700.
1. Did Tom prepare the statement of earnings on a cash basis or on an accrual basis? Explain how you can tell. Which basis should be used? Explain why.
2. Reconstruct the correct entries under accrual accounting principles and post the effects to T- accounts.
3. Prepare an accrual- based statement of earnings for 2015 and a statement of financial position at the end of 2015. Explain (using footnotes) the reason for each change that you make to the statement of earnings.
4. What additional information would assist you in formulating your decision regarding the loan to Tom?
5. Based on the revised statements and additional information needed, write a letter to Tom explaining your decision at this time regarding the loan.
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