Ray Young owns and operates a repair service called Ray’s Rapid Repairs. It is the end of the year, and his bookkeeper has recently resigned to move to a warmer climate.

Knowing only a little about accounting, Ray prepared the following financial statements, based on the ending balances in the company’s accounts on December 31, 2000:

Ray’s Rapid Repairs Income Statement For Year Ended December 31, 2000 Repai SERVICE PEVEMUCS srsscatn anna sinttionatioeeneaicicdereenessent $ 29,000 Operating expenses:
PENOXDOTISG vasmrcrsuntincas dss hain $ 3,800 Salaries ExPense ......ccsssesssssssssesssorsssesssenness 9,900 MJtilitiestexpenise: cnn connecter aon 1,100 R. Young, withdrawals....ccccsscsssssecssessesseens 16,000 lotalroperating expenses:..acciteasnriesaietaiscns rent (30,800)
PSE OSS sracr eee eee ten ran chsh aciiaweh conte nse $ (1,800)
Ray’s Rapid Repairs Balance Sheet December 31, 2000 Assets Liabilities and Owner's Equity CASH occescnectenet haters sven catysnconaeonsee $ 1,600 ACCOUNTS PAaVADIe......sccsocssesosorssoonsszscssieses $ 2,600 Repair supplies ..........ssesssee 2,300 Note payable (due 1/1/03)... 10,000 Repair equipment............c00 15,000 Total Liabilities... essesssesssesseesseeseeenee $12,600 Rel OungaCapital sericea ram remrncts 6,300 Total Liabilities and MORAL ASSEES eae ncesccaesanconsepsees $18,900 Owner's Equity .....ecssesssesseessecseesserneente $18,900 *Beginning capital — net loss Ray is upset and says to you: “I don’t know how | could have had a net loss in 2000.
Maybe | did something wrong when | made out these financial statements. Could you »
help me? My business has been good in 2000. In these times of high prices, people have been getting their appliances and other items repaired by me instead of*buying new ones.
| used to have to rent my repair equipment, but business was so good that | purchased $15,000 of repair equipment at the beginning of the year. | know this equipment will last 10 years even though it won’t be worth anything at the end of that time. | did have to sign a note for $10,000 of the purchase price, but the amount (plus $1,200 annual interest) will not be due until the beginning of 2003.1 still have to rent my repair shop, but |
paid $3,800 for two years of rent in advance at the beginning of 2000, so | am OK there.
And besides, | just counted my repair supplies, and | have $1,000 of supplies left from 2000 which | can use in 2001.”
He continues: “I’m not too worried about my cash balance. | know that customers owe me $700 for repair work | just completed in 2000. These are good customers and always pay, but | never tell my bookkeeper about this until | collect the cash. | am sure |
will collect in 2001, and that will also make 2001 revenues look good. In fact, it will almost offset the $600 | just collected in advance (and recorded as a revenue) from a customer for repair work | said | would do in 2001.1 still have to write a check to pay my bookkeeper for his last month’s salary, but he was my only employee in 2000. In 2001 |
am going to hire someone only on a part-time basis to keep my accounting records. You can have the job, if you can determine whether the net loss is correct and, if not, what it should be and what | am doing wrong.”
Required: (1) Set up T-accounts (including the balances shown in the financial statements)
for the following accounts: Repair Service Revenues, Rent Expense, Salaries Expense, Repair Supplies, Repair Equipment, and Note Payable.
(2) Using the T-accounts from (1) plus whatever other T-accounts you need, prepare any year-end adjustments you think are appropriate for 2000. Show any supporting calculations.
(3) Prepare a corrected 2000 income statement, statement of changes in owner’s equity, and ending classified balance sheet (report form).
(4) Write a brief report to Ray Young, summarizing your suggestions for improving his accounting practices.