Merando Corporation was formed on January 1, 2014. At December 31, 2014, Bill Jensen, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows.

MERANDO CORPORATION Balance Sheet December 31, 2014 Assets Liabilities and Stockholders’ Equity Cash $20,000 Accounts payable $30,000 Accounts receivable 50,000 Notes payable 15,000 Inventory 36,000 Boat loan 22,000 Boat 24,000 Stockholders’ equity 64,000 Bill willingly admits that he is not an accountant by training. He is concerned that his balance sheet might not be correct. He has provided you with the following additional information.

1 The boat actually belongs to Jensen, not to Merando Corporation. However, because he thinks he might take customers out on the boat occasionally, he decided to list it as an asset of the company. To be consistent, he also listed as a liability of the corporation his personal loan that he took out at the bank to buy the boat.

2 The inventory was originally purchased for $25,000, but due to a surge in demand Bill now thinks he could sell it for $36,000. He thought it would be best to record it at

$36,000.

3 Included in the accounts receivable balance is $10,000 that Bill loaned to his brother 5 years ago. Bill included this in the receivables of Merando Corporation so he wouldn’t forget that his brother owes him money.

Instructions

(a) Comment on the proper accounting treatment of the three items above.

(b) Provide a corrected balance sheet for Merando Corporation. (Hint: To get the balance sheet to balance, adjust stockholders’ equity.)

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