Naeva Hotel In February 2020, Sanae and Takao Yamazaki purchased Naeva Hotel. Located in a hot spring 180 kilo-meters north of Tokyo, the hotel had been in operation since 2003 when it was converted from a farmhouse. The hotel has 11 guest rooms on the second and third floors. The main floor has two sitting rooms, one with a large fireplace, a dining room, and kitchen. The price of a room includes breakfast and dinner, which are served in the dining room. The hotel serves no lunch, and all the meals are available only to overnight guests. This format is popular among hikers and skiers. Many guests return more than once. The Yamazakis had no formal business training or experience of running their own business. However, Sanae was once a chef in a restraint while Takao, a retired teacher, was a weekend carpenter working on home improvement projects. The Yamazakis worked full time operating the hotel. In addition, they hired two part-time employees who helped them with cooking, cleaning, and miscellaneous chores. Overall, they were pleased with the success of their business and felt that they had learned a great deal about running an hotel during their first year. On New Year's Day, Takao read an article in the local newspaper stating that the previous year had been bad for tourism. The article noted that several businesses had gone out of business and many others had been forced to renegotiate loans. Takao was concerned. The cash balance in the bank account had increased by $199,000. But intuitively he knew this might not be the same as profits. So he decided to ask his accountant. T. Suzuki, CPA, had been retained by the Yamazakis for their tax consultation. Nevertheless, she was surprised to see Takao enter her office. Takao explained: "This article has me a bit concerned. Now I'm wondering if we did have a good business over the last 10 months." "It sounds as if you could use a set of financial statements," Suzuki said. "You know, an income statement and a balance sheet. They will tell you how well your business did last year and where you stand at year end. I'll stop by your hotel tomorrow to get the information I need." The only records the Yamazakis kept for their business were a bank book, which included detailed explanations of all cash payments and receipts, and a file of transaction receipts. Suzuki gathered the information she needed and returned to her office to prepare the financial statements. The first thing Suzuki did was prepare a balance sheet as of February 28, when the Yamazakis took ownership of Naeva Hotel (see Exhibit 1). She noted that they had invested $364,000 of their own money and had borrowed the remaining amount from a bank (= called a mortgage loan) to finance the business. Next, she prepared a summary of cash deposits and withdrawals based on the Yamazakis' bank book (see Exhibit 2). Once she had completed these statements, Suzuki began to piece together the information she needed to prepare an income statement for the 10 months ending December 31. a. The Yamazakis did not accept credit cards or other forms of credit. Also, when they began operating the hotel, they instituted a policy of requiring a $100 deposit for advance reservations. By December 31, they had collected deposits totalling $31,000 for reservations in January and February of the following year. These advance payments had been deposited in the Yamazakis' bank account and were included in the $574,000 total collected from customers. b. Suzuki determined that, out of the $60,000 paid toward the Yamazakis' mortgage, $33,000 was interest and the remaining $27,000 was for principal. c. The $6,000 paid for insurance provided fire and casualty coverage for the period from March 1, when they opened the hotel, through February 28 of the next year. d. The Yamazakis purchased food and supplies on account. At year end, they owed a total of $18,000 to various suppliers. In addition, they estimated that year-end inventories of food and supplies totalled $6,000. Hint: Note that, in this case, the transactions of food supplies are the only ones influencing Account Payable. Using a T-account, you can find the purchase of food supplies. e. Employee wages, utilities, and advertising expenses had been paid in full by year end. f. Suzuki determined that depreciation of the property, furnishings, and equipment totalled $76,000 during the 10-month period ending Dec. 31. She recorded all of them into one accumulated depreciation account. Note: A mortgage loan is a type of bank loans usually with a real estate as collateral. A borrower repays the loan with a series of payment of an equal amount over a long period. This payment includes both principal and interest. Required: 1. Record the information provided to ledger T accounts (use the given ledger sheet). 2. Prepare an income statement for the 10-month period from March 1 through December 31, and a balance sheet as of December 31, 2020. 3. 2 x Net income Calculate Return on Equity (ROE) which is defined as Beg. O.E.+ End. O.E. Did Naeva Hotel have a "good" year? Explain. 4. Prepare cash flow statement using the direct approach. Hint: You can regroup Cash T-account. EXHIBIT 1 Balance Sheet As of Feb. 28, 2020 Assets Cash Food and supplies Total current assets Property Furnishings and equipment Total assets $ 16,000 8,000 24,000 1,080,000 246,000 $ 1,350,000 Liabilities and Owners' Equity Accounts payable Total current liabilities $ 6,000 6,000 Mortgage payable Total liabilities 980,000 986,000 Owners' equity Total liabilities and owners' equity 364,000 $ 1,350,000 EXHIBIT 2 Summary of Cash Deposits and Withdrawals Mar 1, 2020 -- Dec 31, 2020 Deposits Receipts collected from customers Total deposits $ 574,000 $ 574,000 Withdrawal Mortgage payments Insurance Food and supplies Wages Utilities Advertising Withdrawals by owners Total withdrawals $ 60,000 6,000 91,000 94,000 26,000 12,000 86,000 $375,000 Naeva Hotel In February 2020, Sanae and Takao Yamazaki purchased Naeva Hotel. Located in a hot spring 180 kilo-meters north of Tokyo, the hotel had been in operation since 2003 when it was converted from a farmhouse. The hotel has 11 guest rooms on the second and third floors. The main floor has two sitting rooms, one with a large fireplace, a dining room, and kitchen. The price of a room includes breakfast and dinner, which are served in the dining room. The hotel serves no lunch, and all the meals are available only to overnight guests. This format is popular among hikers and skiers. Many guests return more than once. The Yamazakis had no formal business training or experience of running their own business. However, Sanae was once a chef in a restraint while Takao, a retired teacher, was a weekend carpenter working on home improvement projects. The Yamazakis worked full time operating the hotel. In addition, they hired two part-time employees who helped them with cooking, cleaning, and miscellaneous chores. Overall, they were pleased with the success of their business and felt that they had learned a great deal about running an hotel during their first year. On New Year's Day, Takao read an article in the local newspaper stating that the previous year had been bad for tourism. The article noted that several businesses had gone out of business and many others had been forced to renegotiate loans. Takao was concerned. The cash balance in the bank account had increased by $199,000. But intuitively he knew this might not be the same as profits. So he decided to ask his accountant. T. Suzuki, CPA, had been retained by the Yamazakis for their tax consultation. Nevertheless, she was surprised to see Takao enter her office. Takao explained: "This article has me a bit concerned. Now I'm wondering if we did have a good business over the last 10 months." "It sounds as if you could use a set of financial statements," Suzuki said. "You know, an income statement and a balance sheet. They will tell you how well your business did last year and where you stand at year end. I'll stop by your hotel tomorrow to get the information I need." The only records the Yamazakis kept for their business were a bank book, which included detailed explanations of all cash payments and receipts, and a file of transaction receipts. Suzuki gathered the information she needed and returned to her office to prepare the financial statements. The first thing Suzuki did was prepare a balance sheet as of February 28, when the Yamazakis took ownership of Naeva Hotel (see Exhibit 1). She noted that they had invested $364,000 of their own money and had borrowed the remaining amount from a bank (= called a mortgage loan) to finance the business. Next, she prepared a summary of cash deposits and withdrawals based on the Yamazakis' bank book (see Exhibit 2). Once she had completed these statements, Suzuki began to piece together the information she needed to prepare an income statement for the 10 months ending December 31. a. The Yamazakis did not accept credit cards or other forms of credit. Also, when they began operating the hotel, they instituted a policy of requiring a $100 deposit for advance reservations. By December 31, they had collected deposits totalling $31,000 for reservations in January and February of the following year. These advance payments had been deposited in the Yamazakis' bank account and were included in the $574,000 total collected from customers. b. Suzuki determined that, out of the $60,000 paid toward the Yamazakis' mortgage, $33,000 was interest and the remaining $27,000 was for principal. c. The $6,000 paid for insurance provided fire and casualty coverage for the period from March 1, when they opened the hotel, through February 28 of the next year. d. The Yamazakis purchased food and supplies on account. At year end, they owed a total of $18,000 to various suppliers. In addition, they estimated that year-end inventories of food and supplies totalled $6,000. Hint: Note that, in this case, the transactions of food supplies are the only ones influencing Account Payable. Using a T-account, you can find the purchase of food supplies. e. Employee wages, utilities, and advertising expenses had been paid in full by year end. f. Suzuki determined that depreciation of the property, furnishings, and equipment totalled $76,000 during the 10-month period ending Dec. 31. She recorded all of them into one accumulated depreciation account. Note: A mortgage loan is a type of bank loans usually with a real estate as collateral. A borrower repays the loan with a series of payment of an equal amount over a long period. This payment includes both principal and interest. Required: 1. Record the information provided to ledger T accounts (use the given ledger sheet). 2. Prepare an income statement for the 10-month period from March 1 through December 31, and a balance sheet as of December 31, 2020. 3. 2 x Net income Calculate Return on Equity (ROE) which is defined as Beg. O.E.+ End. O.E. Did Naeva Hotel have a "good" year? Explain. 4. Prepare cash flow statement using the direct approach. Hint: You can regroup Cash T-account. EXHIBIT 1 Balance Sheet As of Feb. 28, 2020 Assets Cash Food and supplies Total current assets Property Furnishings and equipment Total assets $ 16,000 8,000 24,000 1,080,000 246,000 $ 1,350,000 Liabilities and Owners' Equity Accounts payable Total current liabilities $ 6,000 6,000 Mortgage payable Total liabilities 980,000 986,000 Owners' equity Total liabilities and owners' equity 364,000 $ 1,350,000 EXHIBIT 2 Summary of Cash Deposits and Withdrawals Mar 1, 2020 -- Dec 31, 2020 Deposits Receipts collected from customers Total deposits $ 574,000 $ 574,000 Withdrawal Mortgage payments Insurance Food and supplies Wages Utilities Advertising Withdrawals by owners Total withdrawals $ 60,000 6,000 91,000 94,000 26,000 12,000 86,000 $375,000