1 The lessor allowed Skip access to the space during the month of March to set up the gym. In practice, this is

known as a rent holiday and requires more complicated accounting treatment. Please ignore this complication and

treat the payments as monthly rental expense of $10,500.

Ever since the debut of the hit TV show American Ninja Warrior, obstacle gyms have become

increasingly popular. Filled with various obstacles made popular by the show such as salmon

ladders and warped walls these gyms are designed to make fitness exciting and fun. Skip

Martinez, a popular and frequent contestant on the show, decided to capitalize on his popularity

by starting a gym in his hometown of Seattle.

The Business Venture

Skips vision was to have a gym filled with various apparatus similar to those found on the

television show and to offer classes to both adults and children that build the skills necessary to

overcome the obstacles.

1, In early February 2019, Skip established a corporation called Martinez Corporation, investing

$150,000 of his own funds in the corporation (receiving common stock in exchange).

2, He then sold an additional $75,000 of common stock to a few close family members and friends.

3, To establish the corporation, Skip had to pay $6,700 in legal fees, which he paid with the corporations funds.

4. He then found a perfect location for his gym an old aircraft hangar in a former naval station that was no longer in use. The former naval station had been converted into a city park and was advantageously located close to a densely populated residential area in the city of Seattle.

5. He signed a one-year renewable lease that required monthly payments of $10,500 due on the first of each month beginning on April 1.1 He also had to pay a $15,000 refundable security deposit.

6. Skip identified a supplier of obstacle course equipment and purchased $72,000 in equipment with cash, for use in the gym. Because of the size and weight of the equipment, he had to pay an additional $4,200 in shipping costs.

7. Some of the equipment also needed installation and since Skip was not much of a handyman, he hired his friend Jessie Gruff to install the obstacle course equipment. He paid Jessie $3,000 for her labor.

8. After installing the equipment, Jessie approached Skip and said, You know, Skip, I could

probably build similar, scaled-down versions of this equipment for in-home gyms. It would be

pretty easy with some basic raw materials lumber, metal piping, etc. Maybe you should consider selling equipment to members so they could practice at home.2

Skip thought this was a great idea. Jessie made up a list of basic materials that she would need and Skip purchased them for $27,000 cash. He also purchased $13,500 worth of tools and shop equipment for Jessie to use in building the scaled-down in-home equipment. Skip then allocated a small area of the gym as

Jessies shop area.

9. Skip also purchased a number of other items for the gym: 400 towels for his members to use at a cost of $4,000; and an assortment of furniture and office equipment (e.g., computers, bar code scanners, etc.) at a total cost of $17,600. Skip paid cash for all these items and began to worry about the corporations dwindling bank account.

10. Skip decided to allow customers to pay memberships either monthly or annually, both payable in advance. The monthly rate was $150/month and the annual rate was $1,650 thus, members could save $150 by paying for a year in advance. Memberships allowed members free use of the gym and obstacles. The only exception was that portions of the gym were restricted when classes were being held. Classes were an additional charge of $30/person per class and were held once a day, six days a week.

11. As the day of the gyms grand opening approached, Skip received some free advertising when alocal radio station interviewed him about his experience on the show. During the interview, the radio host asked Skip about potential injury from running obstacle courses. This question made Skip very nervous and he consulted his cousin, Leah Billaty, who was an attorney and also an investor in the corporation. Leah quickly advised Skip to obtain insurance for the gym.

On April 1, Skip took out a liability policy that cost $18,000, paid in advance, that covered the gym for one year. On that same day, he opened his doors for business.

Initially, membership sign-ups were slow but as the year progressed, the gym gained more and

more members. By the end of December, Skip was feeling pretty good about his gym. The

corporations bank account had increased and memberships had grown from zero to over 250

members and most classes were full. Skip was considering opening another location and/or

expanding the equipment manufacturing business. But he felt he needed more information about how the business was doing. A friend named Drew Pretzel, who also happened to be an accountant, suggested that he probably needed a set of financial statements. Together with Drew, Skip set out to prepare financial statements for the year ended December 31, 2019.

He first gathered the following additional information regarding the activities of the gym during

the year:

1. Shortly after opening, Skip paid $1,800 to make flyers about the gym and its classes. He

distributed all of the flyers to schools and universities in the area during the year.

2. Because of the long hours that the gym was opened, Skip hired several part-time

employees. In total, he paid the employees $51,000 in cash during the year. At year-end,

the gym owed their part-time employees an additional $2,300 for time they worked in

December but that was paid in January.

3. The gym paid $6,000 for utilities during the year. All amounts owed were paid in full at

year-end.

4. The gym paid the rent on the hangar as required on the first of each month.

2020 Creating Financial Statements Project page 5

5. Cash received for gym memberships totaled $177,900. In addition, the gym collected

$48,600 in cash for class fees.

6. The gym paid Jessie $18,000 in wages for the time spent building equipment. All wages

were paid in full by year-end.

7. An additional $24,700 in materials (for use in manufacturing the gym equipment) was

purchased on account during the year.

8. The gym sold several pieces of Jessies in-home equipment to members at a total price of

$52,500. Most sales were in cash except for a few sales, which were made to early, avid

gym members. These members still owed the gym $3,600 for equipment that had been

delivered to them during the year. (This amount is included in the $52,500 sales total).

9. The company paid its vendors $11,400 for the materials purchased in #7.

In addition, after some questioning by Drew, Skip determined the following:

A. A portion of the membership fees (reported in #5) were for annual memberships that

continued into the following year. Skip determined that the value of the unexpired portion

of these membership equaled $27,500.

B. At year-end, there were only 300 towels on hand.

C. Skip estimated that the gym equipment would last six years and would not be usable at the

end of the six years. He also estimated that the furniture and office equipment used by the

gym would last four years and would have no value at the end of the four years.

D. The tools and equipment used in manufacturing the in-home gym equipment would likely

last three years and would have no value at the end of the three years.

E. Jessies shop occupied some of the hangar space and therefore, Skip thought some of the

rent and utilities should be considered part of the equipment manufacturing operations. He

estimated that the shop took up about 10% of the hangars square footage.

F. At year-end, there was approximately $9,600 of raw materials (used in manufacturing the

in-home gym equipment) on hand. There were no uncompleted equipment projects at year

end but there were several pieces of unsold, finished product. Jessie estimated the cost of

this product at $13,500.

Required:

1. Record all of the transactions described above through December 31, 2019. Use T-accounts

with the aim of preparing financial statements. When done, close out all of the temporary

accounts to Retained Earnings. Please turn in your completed and clearly labeled T accounts. Include a reference by each t-account entry if it pertains to one of the numbered

transactions. IGNORE TAXES.

2. Prepare the following financial statements for the year ended December 31, 2019:

2020 Creating Financial Statements Project page 6

a. An income statement (4 points)

b. A balance sheet (4 points)

c. A cash flow statement (using the "direct" method)