Reference no: EM131816644
Problem - Majestic Caterers was founded in September 2007 by Barbara Roberts and Lisa Grotto as a catering service in central Arizona. Majestic broke even for the year ended December 31, 2007; however, in 2008, the company experienced a high growth rate. Roberts and Grotto would like to expand their catering enterprise to include a restaurant.
Roberts applied for an expansion loan at the local bank, and the bank has requested audited financial statements prepared on the accrual basis. Prior to this loan application, Majestic's financial records have been kept on a cash basis in order to accurately reflect Majestic's priority of cash flow. Roberts and Grotto hired the services of an independent accountant, Paul Maynard, to assist them in converting Majestic's 2008 financial statements, prepared on the cash basis, to 2008 accrual basis.
From a review of the company's records and files, as well as discussions with Roberts and Grotto, Maynard has gathered the following data concerning Majestic's transactions during 2008 and the cash basis financial statements. In addition, the company's Statement of Financial Position at December 31, 2007, has been restated to an accrual basis as presented in the next page.
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Summary of Cash Transactions for 2008
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Receipts
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Cash sales
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$464,000
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Collections from customers
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160,000
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Proceeds from one-year, 12% note,
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Received January 1, 2008
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80,000
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Disbursements:
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Payments for supplies
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161,600
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Wages paid to employees
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248,000
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Payments to the utility company
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44,000
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Insurance premiums paid
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36,000
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Rent paid to landlord
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72,000
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Interest on 12% note, paid on July 1, 2008
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4,800
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Equipment purchased on January 1, 2008
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100,000
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- Uncollected customers' bills totaled $139,600 at December 31, 2008
- On January 1, 2008, a supplier of Majestic advanced the company $80,000 on a one-year, 12 percent note payable with semi-annual interest payments to be made on July 1, 2008 and at maturity on January 1, 2009.
- Unpaid bills to suppliers totaled $22,400 at December 31, 2008.
- Supplies costing $16,000 were on hand at December 31, 2008.
- Wages owed to employees at December 31, 2008 were $11,200.
- The December utility bill of $3,900 was unpaid at December 31, 2008.
- The insurance premium was paid for a one-year liability and property damage policy effective February 1, 2008.
- The rent of $6,000 per month was paid to the landlord on the first of every month.
- Maynard recommends depreciating the company's equipment, which was purchased January 1, 2008, for $100,000, over its useful life of ten years using the straight-line method of depreciation. The equipment has no estimated residual value. (In its first year of operation, 2007, Majestic leased equipment.)
- Majestic has an effective income tax rate of 40 percent. There were no differences between financial reporting and income tax reporting for the year ended December 31, 2007. No taxes were paid in 2008.
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Majestic Caterers Balance Sheet As of December 31, 2007
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Assets
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Cash
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$51,200
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Accounts receivable
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48,800
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Supplies Inventory
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48,000
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Total Assets
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$148,000
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Liabilities and shareholders' equity
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Accounts payable -- Supplies
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$56,000
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Common stock
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92,000
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Total liabilities and shareholders' equity
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$148,000
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Required: Using the accrual basis of accounting, prepare Majestic Caterers' Income Statement and Balance Sheet for the year ended December 31, 2008.