Primary Assumptions Made in Preparing Financial Statements Joe Hale opened a machine repair business in leased retail space, paying the fi rst month’s rent of $300 and a $1,000 security deposit with a check on his personal account. He took the tools, worth about $7,500, from his garage to the shop. He also bought some equipment to get started. The new equipment had a list price of $5,000, but Joe was able to purchase it on sale at Sears for only $4,200. He charged the new equipment on his personal Sears charge card. Joe’s fi rst customer paid $400 for services rendered, so Joe opened a checking account for the company. He completed a second job, but the customer has not paid Joe the $2,500 for his work. At the end of the fi rst month, Joe prepared the following balance sheet and income statement:

Joe’s Machine Repair Shop Balance Sheet July 31, 2010 Cash $ 400 Equipment 5,000 Equity $5,400 Total $5,400 Total $5,400 Joe’s Machine Repair Shop Income Statement For the Month Ended July 31, 2010 Sales $ 2,900 Rent $ 300 Tools 4,200 4,500 Net loss $(1,600)

Joe believes that he should show a greater profi t next month because he won’t have large expenses for items such as tools.

Required Identify the assumptions that Joe has violated and explain how each event should have been handled. Prepare a corrected balance sheet and income statement.

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