Solutions Guide: Please do not present as your own.

I sometimes post solutions

that are totally mine, from the books solutions manual, or a mix of my work and
the books solutions manual. But this is only meant as a solutions guide for you to
answer the problem on your own. I recommend doing this with any content you buy
online whether from me or from someone else.

BYP1-4
Mary and Jack Gray, local golf stars, opened the Chip-Shot Driving Range on March 1,
2008, 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 Grays leased five acres of land at a cost of $1,000 per month and paid the first
months rent. During the first month, advertising 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 companys bank
account. On March 15, Mary and Jack 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 companys bank account was $18,900. Mary and Jack 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. How could the Grays 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? Without preparing an
income statement, determine the actual net income for March. What was the revenue
earned in March?

(a)

The estimate of the $6,100 loss was based on the difference between the
$25,000 invested in the driving range and the bank balance of $18,900 at
March 31. This is not a valid basis for determining income because it only
shows the change in cash between two points in time.

(b)

The balance sheet at March 31 is as follows:

CHIP-SHOT DRIVING RANGE COMPANY
Balance Sheet
March 31, 2008

Assets
Cash ...........................................................................................$18,900
Caddy shack............................................................................................
Equipment...............................................................................................
Total assets....................................................................................
Liabilities and Stockholders Equity
Liabilities
Accounts payable ($150 + $100)..................................................
Stockholders equity
Common stock..............................................................................
Retained earnings.........................................................................
27,450
Total liabilities and stockholders equity...........................

(c)

$25,000
2,450

As shown in the balance sheet, the stockholders equity at March 31 is $27,450.

The estimate of $2,450 of net income is the difference between the initial
investment of $25,000 and $27,450. This was not a valid basis for determining
net income because changes in stockholders equity between two points in time
may have been caused by factors unrelated to net income. For example, there
may be dividends and/or additional capital investments by the stockholders.
Actual net income for March can be determined by adding dividends to the
change in stockholders equity during the month as shown below:

Stockholders equity, March 31, per balance sheet.............................................

$27,450
Stockholders equity, March 1..............................................................................
25,000
Increase in stockholders equity............................................................................
2,450
Add: Dividends.....................................................................................................
1,000
Net income..............................................................................................................
3,450
Alternatively, net income can be found by determining the revenues earned
[described in (d) below] and subtracting expenses.

(d)

Revenues earned can be determined by adding expenses incurred during the

month to net income. March expenses were Rent, $1,000; Wages, $400;
Advertising, $750; and Utilities, $100 for a total of $2,250. Revenues earned,
therefore, were $5,700 ($2,250 + $3,450). Alternatively, since all revenues are
received in cash, revenues earned can be computed from an analysis of the
changes in cash as follows:
Beginning cash balance...................................................................
..............................................................................................$25,000
Less: Cash payments
Caddy shack..............................................................
Golf balls and clubs..................................................
Rent............................................................................
Advertising................................................................
Wages.........................................................................
Dividends...................................................................
11,800
Cash balance before revenues........................................................
................................................................................................13,200
Cash balance, March 31.................................................................
18,900
Revenues earned..............................................................................
5,700

$8,000
800
1,000
600
400
1,000