Simon Fraser started a landscaping and lawn-care business in April by investing $20,000 cash in the business in exchange for capital stock. Because his business is in the Midwest, the season begins in April and concludes in September. He prepared the following trial balance (with accounts in alphabetical order) at the end of the first season in business:
Simon is pleased with his first year in business. ‘‘I paid myself a salary of $22,000 during the year and still have $1,200 in the bank. Sure, I have a few bills outstanding, but my accounts receivable will more than cover those.’’ In fact, Simon is so happy with the first year that he has come to you in your role as a lending officer at the local bank to ask for a $20,000 loan to allow him to add another truck and mowing equipment for the second season.
Required
1. From your reading of the trial balance, what do you believe Simon did with the $20,000 in cash he originally contributed to the business? Reconstruct the journal entry to record the transaction that you think took place.
2. Prepare an income statement for the six months ended September 30.
3. The mowing equipment and truck are assets that will benefit the business for a number of years. Do you think that any of the costs associated with the purchase of these assets should have been recognized as expenses in the first year? How would this have affected the income statement?
4. Prepare a classified balance sheet as of September 30. As a banker, what two items on the balance sheet concern you the most? Explain your answer.
5. As a banker, would you loan Simon $20,000 to expand his business during the second year? Draft a memo to respond to Simon’s request for the loan, indicating whether you will make the loan.