Loan Request Simon Fraser started a landscaping and lawn-care business in April 2010 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 fi rst season in business:

Fraser Landscaping Trial Balance September 30, 2010 Debits Credits Accounts Payable — $13,000 Accounts Receivable $23,000 Capital Stock 20,000 Cash 1,200 Gas and Oil Expense 15,700 Insurance Expense 2,500 Landscaping Revenue 33,400 Lawn Care Revenue 24,000 Mowing Equipment 5,000 Rent Expense 6,000 Salaries Expense 22,000 Truck 15,000 00000 0 Totals $90,400 $90,400 Simon is pleased with his fi rst 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 fi rst year that he has come to you in your role as a lending offi cer 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? Determine the effect on the accounting equation from the transaction that you think took place.

2. Prepare an income statement for the six months ended September 30, 2010.

3. The mowing equipment and truck are assets that will benefi t 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 fi rst year? How would this have affected the income statement?

4. Prepare a classifi ed balance sheet as of September 30, 2010. 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.

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