1. **Problem Statement:** Prepare a balance sheet for Julie Rowe as of 12/31/2010 after purchasing assets and borrowing money. Calculate how much she borrowed from the bank. 2. **Formula and Rules:** A balance sheet follows the accounting equation: $$\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$$ Assets include cash, inventory, equipment, etc. Liabilities include loans. Owner's equity is the owner's investment. 3. **Calculate Total Assets:** - Service truck: $40,000$ - Storage tank: $1,000$ - Computer and office equipment: $4,000$ - Gas and supplies: $4,750$ - Inventory kits: $19,250$ - Cash saved: $10,000$ Total assets = $40,000 + 1,000 + 4,000 + 4,750 + 19,250 + 10,000 = 79,000$ 4. **Calculate Liabilities:** - Loan from father: $10,000$ - Loan from bank: Let this be $x$ 5. **Owner's Equity:** - Julie's savings invested: $10,000$ 6. **Balance Sheet Equation:** $$79,000 = 10,000 + x + 10,000$$ $$x = 79,000 - 20,000 = 59,000$$ Julie borrowed $59,000$ from the bank. --- 1. **Problem Statement:** Prepare an income statement for Julie's first year (1/1/2011–12/31/2011). 2. **Formula and Rules:** Income statement formula: $$\text{Net Income} = \text{Revenue} - \text{Expenses}$$ Depreciate fixed assets over 5 years with zero salvage value: $$\text{Annual Depreciation} = \frac{\text{Cost}}{5}$$ Interest payments: - Father loan interest for 12 months at 6%: $$10,000 \times 0.06 = 600$$ - Bank loan interest for 1 year at 7% on $59,000$: $$59,000 \times 0.07 = 4,130$$ 3. **Calculate Revenues:** - Gross revenue: $87,000$ - Refunds: $200$ - Net revenue: $$87,000 - 200 = 86,800$$ 4. **Calculate Expenses:** - Gas, oil, repairs, tires: $7,900$ - Telephone: $600$ - Kits purchased: 1,000 kits at $35 each = $35,000$ - Freight: $2,000$ - Depreciation: - Truck: $40,000/5 = 8,000$ - Storage tank: $1,000/5 = 200$ - Computer and office equipment: $4,000/5 = 800$ - Total depreciation = $8,000 + 200 + 800 = 9,000$ - Interest: - Father: $600$ - Bank: $4,130$ - Sister's salary: - 1 day/week × 50 weeks = 50 days - $50/day × 50 = 2,500$ Total expenses: $$7,900 + 600 + 35,000 + 2,000 + 9,000 + 600 + 4,130 + 2,500 = 61,730$$ 5. **Calculate Net Income:** $$86,800 - 61,730 = 25,070$$ --- 1. **Problem Statement:** Prepare a balance sheet as of 12/31/2011. 2. **Calculate Ending Assets:** - Cash: To be calculated - Inventory kits: $19,250$ - Supplies inventory: $4,750$ - Fixed assets (net of depreciation): - Truck: $40,000 - 8,000 = 32,000$ - Storage tank: $1,000 - 200 = 800$ - Computer and office equipment: $4,000 - 800 = 3,200$ Total fixed assets net = $32,000 + 800 + 3,200 = 36,000$ 3. **Calculate Liabilities:** - Father loan principal: $10,000$ - Bank loan principal after 1 payment: - Annual principal payment = $59,000 / 5 = 11,800$ - Remaining principal = $59,000 - 11,800 = 47,200$ 4. **Calculate Owner's Equity:** - Beginning equity: $10,000$ - Add net income: $25,070$ - Less withdrawals: $25,000$ Owner's equity: $$10,000 + 25,070 - 25,000 = 10,070$$ 5. **Calculate Cash:** Assets = Liabilities + Owner's Equity $$\text{Cash} + 19,250 + 4,750 + 36,000 = 10,000 + 47,200 + 10,070$$ $$\text{Cash} + 60,000 = 67,270$$ $$\text{Cash} = 7,270$$ --- 1. **Problem Statement:** Prepare a statement of owner's equity for the first year. 2. **Formula:** $$\text{Ending Equity} = \text{Beginning Equity} + \text{Net Income} - \text{Withdrawals}$$ 3. **Calculation:** $$10,000 + 25,070 - 25,000 = 10,070$$ --- 1. **Problem Statement:** Discuss how Julie made her principal payment despite withdrawals exceeding net income. 2. **Explanation:** Julie likely used part of her initial cash savings or cash flow from operations to cover the principal payment. Although net income was positive, withdrawals reduced equity. She must monitor cash flow carefully to ensure loan payments can continue without jeopardizing business liquidity. --- **Final answers:** - Bank loan borrowed: $59,000$ - Net income for first year: $25,070$ - Ending cash balance: $7,270$ - Ending owner's equity: $10,070$