Case Study 8:Janet Rowe's Soil Testing Business

Janet Rowe graduated from high school five years ago with a background in agronomy. Janet had worked for a lawn care service until a year ago, when she decided to start her own business selling soil testing kits to homeowners. Janet had saved $20,000 during the past five years. She decided to invest the $20,000 in a proprietorship to sell the soil testing kits in her local community.

Janet spent $2,000 for gas and other supplies. Janet calculated she needed at least $3,000 to make ends meet before she received the first check. Janet also spent $20,000 to purchase kits that will be placed in inventory. Janet's sister agreed to keep the books. Janet's father let her use the family garage for an office and agreed not to charge rent the first year.

Janet purchased the following capital items to start the business. First, she purchased a service truck that cost $45,000, which she estimates will last for another five years. Second, she purchased her own storage tank for gasoline to be used for the truck, and that cost another $1,000. Third, she purchased a computer and some other office equipment for a total of $4,000.

Janet's father was willing to lend her $15,000. The principal is to be repaid in 18 months. The interest rate is 4 percent per year. At the end of 12 months Janet will repay her father the interest for 12 months, but no principal. At the end of 18 months Janet will pay her father interest for 6 months, plus all principal owed on the loan. Janet borrowed the balance of what she needed from First National Bank. The loan was to be repaid in five equal, annual principal payments, with interest at an annual rate of 5 percent.

At the end of the first year Janet's expenses were as follows: gas, oil, repairs and tires $10,000 and telephone $600. During her first year she purchased 1,000 kits at $50.00/kit that were in addition to the $20,000 spent on kits to start the business. The freight on the kits was $5,000. At the end of the first year of the business she had $20,000 in inventory.

Her gross revenue from the business was $100,000. Kits sold that had been returned for a refund had been sold for $100.00. She had been making $50,000 per year when working at her previous job, and she calculated that she should make at least that much to justify the time spent in the business. Her sister spent about one day per week doing the office work, and Janet felt that she should be reimbursed at a rate of $50 per day for her efforts. Her sister worked 50 weeks and went on vacation for two weeks.

Questions

1.Create a balance sheet as of the first day of business for Janet. The balance sheet is to be prepared after she purchased the assets needed to start the business and borrowed the money from her father and the bank. The date for the balance sheet is 12/31/2020.How much did she have to borrow from the bank?

2.Create an income statement for Janet's first year of business, 1/1/20211512/31/2021. Make the following assumptions:

Depreciate all fixed assets over five years and assume a salvage value of $0.

Janet makes her payment to the bank. She also pays her father interest only on the loan from him. She makes both payments on 12/30/2021.

Assume Janet does not pay Social Security tax on her sister's salary and that she does not have to pay any state and federal income taxes.

3.Create a balance sheet as of the end of the first year for Janet's business. Use the information provided on Janet Rowe's beginning balance sheet and income statement to complete an ending balance sheet for Janet Rowe. The ending balance sheet date is as of 12/31/2021. Note: You will need to calculate Janet's cash balance on 12/31/2021, because it is not $3,000. Make the following assumptions:

The ending inventory is the same amount as her beginning inventory, $20,000.

The ending inventory for Janet's supplies is the same amount as her beginning inventory, $2,000.

Janet lives with her parents, which reduces her need for living expenses. She decided to withdraw $30,200 for family living expenses, because she is living at home with her parents.

Janet was running a little low on cash at the end of 2021, so she charged $6,000 on the company credit card.

4.Prepare a statement of cash flows and a statement of owner's equity for Janet's first year of business.

5.Janet's principal payment on her long-term debt and her withdrawal for family living expenses exceeded her net income after taxes, but she did make the principal payment on the loan. How did she make the payment? Discuss Janet's situation as she assesses her ability to make her payments in 2022.