Making a decision as a bank loan officer: analyzing and stating financial statements that have major deficiencies.

Julio Estela started a small boat repair service company during the current year. He is interested in obtaining $$100,000$ loan from your bank to build a dry dock to store boats for customers. At the end of the year, he prepared the following statements, based on information stored in a large filing cabinet:

The following is a summary of completed transactions :

A$)$ received the following contributions$($at Fair value$)$ to the business from the owner when it was started in exchange for $1000$ shares of one dollar par value, common stock in the new company:

Building $$21,000$ Land $$20,000$

Tools and equipment $17,000$ Cash $1000$

B$)$ earned service fees during the current year of $$87,000$; of the cash collected, $20,000$ was for deposits from customers on work to be done by Julio in the next year.

C$)$ received the cash dividends on shares of ABC industrial stock. Purchased by Julio Estela six years earlier $($the stock was not owned by the company$)$

D$)$ Incurred operating expenses during the current year of $$61,000$

E$)$ Determined amount of supplies on hand $($unused$)$ at the end of the year as $$700.$

F$)$ A temporary employee, subsequently fired, stole $$500$ cash from the business. There was no insurance coverage for theft.

G$)$ purchased tools and equipment during the year.

Required:

$1.$ Did Julio prepare the income statement on the cash basis or an accrual basis? Explain how you can tell. Which basis should be used? Explain why.

$2.$ Reconstruct the correct entries under accrual accounting principles and post the effects to the T$-$accounts

$3.$ Prepare an accrual based income statement, statement of stockholders equity$($only one shareholder$),$ and a classified balance sheet. Explain $($using footnotes$)$ The reason for each change that you make to the income statement.

$4.$ What additional information would assist you in formulating your decision regarding the loan to Julio?

$5.$ Based on the revised financial statements, and any additional information needed, write a letter to Julio, explaining your decision at this time regarding the loan.