Like many new graduates in 2016, Marie Little struggled to finda sustained professional job. In early March she had finally founda good position, but was laid off by June. This ended her briefcorporate career, finding herself once again without income. Mariepacked her personal items from her office cubicle, passing too manyempty spaces created by temporary tan walls. It was a long walkthrough the lending company’s hall, but she began to think aboutstarting her own business…as far away from mortgage institutions aspossible. She began to think; “If I own the business they cannotlay me off and I can actually create a business where I can use mydegree.” Like many hired by the giant lender, she had no financialexperience. Her job had been to sell a mortgage product and pushher customers into a longer term refinance agreement with upfrontprofitable fees for her financial institution. Financial knowledgewas not a premium, the institution wanted sales.
Marie had graduated from the College of Arts, Science, andLetters with a bachelor’s degree majoring in art, but had alsotaken a few elective courses in web design. During her summerbreaks she had working for a marketing firm in their webadvertising department. The job had been interesting, which was whyshe enrolled in the three elective web design and developmentcourses. She decided to rely on her summer job experience indeveloping web pages for clients. The five years she spent gettingan art degree would also be helpful, and could be easily applied toher technical web design skills. And it would certainly be a lotless boring than selling the same mortgage product…over and overagain. After a week of notes and thoughts, she began to formalizeher strategy into a business plan. The purpose of Marie’s firmwould be to create original, on the edge web sites, webadvertisements, and consult on existing web page designs. She knewof several similar companies in the southeast area of the state,and planned to focus on the metro area, eventually expanding intomost of the southern part of the state.
On June 20, 2016, she transferred all of her savings, $22,000,to a new bank account with the company name, and two days later sheadded $31,000 borrowed from her Mom to the account. After thatthings moved quickly as she rented a second floor office, with aone lease for $3,400 a month, paying one month’s rent in advance asa security deposit to apply to the end of the lease, and $3,400 forJuly 2016. She purchased some used computer equipment with softwarefrom her last employer, and ordered stationary and office suppliesthat cost $3,600 when they were delivered on June 29.
Websites by Marie opened for business on July 2, 2016. AlthoughMarie was not an accountant, she took stock of her company’sfinancial position as she began to seek her first contracts. Thecompany had spent all but $12,600 of the cash that had been putinto the bank account, but it had some assets as well.
Assets Liabilities and Owner’s Equity
Cash in bank $12,600 Loan $31,000
Office supplies 3,600 Marie’s equity 22,000
Equipment and software 30,000
Prepaid rent 6,800
Marie was a little worried that the cash had gone so quickly,but she also had confidence in herself and her willingness to workhard.
In the first few days, Marie lined up two webpage designprojects from local businesses. She spent part of each day workingon the projects, and the remainder of her time was spent lookingfor new clients. By early August she had hired four other designersat work and a steady stream of new work coming in by way ofreferrals. She also felt far too busy to attend to any financialaspects of the business. When clients paid, the money went into thebank account. The associates were paid weekly, and she paid rentand other bills when they were received. In the ninth week ofoperations, Marie’s Mom telephoned her to ask how things weregoing, and she could not answer the question with any confidence.It was time for an accounting, and the end of August would be agood time to do it.
Little found the following information she had accumulatedduring the two months of operations:
Clients had paid $40,000 for completed work, and two clientsstill owed a total of $8,900 for work that had been completed anddelivered to them. On August 31st, a client paid $2,000 in advancefor future work, however, there were no projects underway as theoffice closed on August 31 for the Labor Day weekend.
Additional office supplies had been purchased for cash of$1,000, and office supplies and stationery that had cost $2,800were still on hand.
Rent of $6,800 for August and September was paid in cash.Utility bills of $1,900, a repair of equipment of $2,900, andsalaries paid to designers of $21,100 (including Marie Little) werealso paid in cash, with $10,000 in salaries accrued, but not paidto date.
Additional equipment and software was purchased on August 27 for$14,000, with half of that amount being paid in cash and theremainder due one month later.
As Marie thought about the first two month’s operations, she wasperplexed by the fact that cash in the bank had decreased eventhough she was sure the business was operating profitably.
She also wondered how to account for the following:
She had agreed to pay her mom interest on his loan of 4% peryear, but no interest had been paid so far.
The equipment and software were working out well, but Littleknew that they had a technological life of no more than three yearsfrom the time that she had purchased them.
In brief, Marie felt that the first two months had beensuccessful, but she was puzzled about how to draft meaningfulreports to mail to her brother.
You are a friend of Marie and a recent graduate of the MBAprogram. You are looking for work as a business consultant. Knowingyour excellent credentials, Marie has asked you to help her get herbusiness finances in order, report on the status of her businessand make any recommendations that you can to help her make herbusiness a success. She cannot pay you but she would be willing tohelp you set up your own webpage. Having taken financial accountingand eager to show off your newly acquired business skills, youaccept her offer. You want the report to be very professional soyou decide to perform the following:
Prepare an unadjusted trial balance at August 31 fromthe T accounts. The trial balance should have extra columns to postadjusting entries and references to come up with an adjusted trialbalance.
Prepare adjusting entries and post them to the trialbalance and T accounts.
Other assumptions:
The books are to be prepared using the accrual method ofaccounting.
The tax rate is 21%.
Depreciation is computed using the straight line method.
The business started on 6-20-15 when it was formed
