Ferritto opened an Italian restaurant. Business has been good, and Ferritto is considering expanding the restaurant. Ferritto, who knows little accounting, produced the following financial statements for Romano Castle, Inc., at December 31, 2018, the end of the first month of operations:

In these financial statements all amounts are correct, except for Stockholders’ Equity. Ferritto heard that total assets should equal total liabilities plus stockholders’ equity, so he plugged in the amount of stockholders’ equity at $49,000 to make the balance sheet come out even.

Requirement
1. Joe Ferritto has asked whether he should expand the restaurant. His banker says Ferritto may be wise to expand if (a) net income for the first month reached $10,000 and (b) total assets are at least $35,000. It appears that the business has reached these milestones, but Ferritto doubts whether the financial statements tell the true story. He needs your help in making this decision. Prepare a corrected income statement and balance sheet. (Remember that Retained Earnings, which was omitted from the balance sheet, should equal net income for the first month; there were no dividends.) After preparing the statements, give Joe Ferritto your recommendation as to whether he should expand the restaurant.

Transcribed Image Text:

A1 Romano Castle, Inc. Income Statement Month Ended December 31, 2018 2 Sales revenue 3 Common stock Total revenue 42,000 10,000 52,000 4 6 Accounts payable 7 Advertising expense 8 Rent expense Total expenses 10 Net income 11 8,000 5,000 6,000 19,000 33,000 A1 Romano Castle, Inc. Balance Sheet December 31, 2018 2 Assets Cash 12,000 22,000 5,000 10,000 49,000 3 Cost of sales (expense) Food inventory Furniture Total Assets 8 Liabilities None 10 Stockholders' Equity 49,000 11