Several doctors are considering the purchase of a small real estate business as an investment. Because you have some training in the accounting cycle, they have hired you to review the real estate company’s accounting records and to prepare a balance sheet and an income statement for their use. In analyzing various business documents, you verify the following data.
The account balances at the beginning of the current year were as follows:
Cash in Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,800
Notes Receivable (from Current Owner) . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Supplies on Hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750
Prepaid Office Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Owners’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 22,600
During the current year, the following summarized transactions took place:
a. The owner paid $1,200 to the business to cover the interest on the note receivable ($10,000 × 0.12 × 1 year). Nothing was paid on the principal.
b. Real estate commissions earned during the year totaled $45,500. Of this amount, $1,000 has not been received by year-end.
c. The company purchased $500 of supplies during the year. A count at year-end shows $300 worth still on hand.
d. The $4,500 paid for office rental was for 18 months, beginning in January of this year.
e. Utilities paid during the year amounted to $1,500.
f. During the year, $400 of accounts payable were paid; the balance in Accounts Payable at year-end is $300, with the adjustment being debited to Miscellaneous Office Expense.
g. The owner paid himself $1,500 a month as a salary and paid a part-time secretary $2,400 for the year. (Ignore payroll taxes.)
Prepare a balance sheet and an income statement for the real estate business. Does the business appear profitable? Does the balance sheet raise any questions or concerns? What other information might the doctors want to consider in making this investment decision?