Making a Decision as a Bank Loan Officer: Analyzing and Restating Financial Statements That Have Major Deficiencies (A Challenging Case)
Julio Estela started and operated a small boat repair service company during 2012. He is interested in obtaining a $100,000 loan from your bank to build a dry dock to store boats for customers in the winter months. At the end of the year, he prepared the following statements based on information stored in a large filing cabinet:

The following is a summary of completed transactions:
a . Received the following contributions (at fair market value) to the business from the owner when it was started in exchange for 1,000 shares of stock in the new company:
Building $21,000 Land $20,000
Tools and equipment 17,000 Cash 1,000
b. Earned service fees during 2012 of $87,000; of the cash collected, $20,000 was for deposits from customers on work to be done by Julio in the next year.
c. Received the cash dividends on shares of ABC Industrial stock purchased by Julio Estela six years earlier (the stock was not owned by the company).
d. Incurred expenses during 2012 of $61,000.
e. Determined amount of supplies on hand (unused) at the end of 2012 as $700.
Required:
1. Did Julio prepare the income statement on a cash basis or an accrual basis? Explain how you can tell. Which basis should be used? Explain why.
2. Reconstruct the correct entries under accrual accounting principles and post the effects to T-accounts.
3. Prepare an accrual-based income statement, balance sheet, and statement of cash flows. Explain (using footnotes) the reason for each change that you make to the income statement.
4. What additional information would assist you in formulating your decision regarding the loan to Julio?
5. Based on the revised statements and additional information needed, write a letter to Julio explaining your decision at this time regarding theloan.

Transcribed Image Text:

ESTELA COMPANY Profit for 2012 Service fees collected during 2012 Cash dividends received Total $ 55,000 10,000 65,000 $22,000 Expense for operations paid during 2012 Cash stolen 500 1,000 3.200 New tools purchased during 2012 (cash paid) Supplies purchased for use on service jobs (cash paid) Total 26,700 $ 38,300 Profit Assets Owned at the End of 2012 Cash in checking account Building (at current market value) Tools and equipment Land (at current market value) $ 29,300 32.000 18,000 30,000 130,000 Stock in ABC Industrial Total $239,300