Joe Hale opened a machine repair business in leased retail space, paying the first month’s rent of $300 and a $1,000 security deposit with a check on his personal account. He took the tools, worth...

Joe Hale opened a machine repair business in leased retail space, paying the first month’s rent of $300 and a $1,000 security deposit with a check on his personal account. He took the tools, worth about $7,500, from his garage to the shop. He also bought some equipment to get started. The new equipment had a list price of $5,000, but Joe was able to purchase it on sale at Sears for only $4,200. He charged the new equipment on his personal Sears charge card. Joe’s first customer paid $400 for services rendered, so Joe opened a checking account for the company. He completed a second job, but the customer has not paid Joe the $2,500 for his work. At the end of the first month, Joe prepared the following balance sheet and income statement:

Joe believes that he should show a greater profit next month because he won’t have large expenses for items such as tools.

Required

Identify the assumptions that Joe has violated and explain how each event should have been handled. Prepare a corrected balance sheet and income statement.