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Year 2

Mary Jo Barnes found it hard to believe that she had wrapped up her second year as owner and manager of The Garden Spot, a small garden shop she had opened on January 1 of the prior year in Charlottesville, Virginia. She thought things had been going well at The Garden Spot and was excited about what the future might hold.

Before retiring for the evening, Barnes needed to prepare the financial statements for her second year of operation. A lot had happened during the year, and she wanted to make sure she captured it all accurately in preparing those financial statements. After all, she would use those financial statements to assess the financial performance of her company during the year, as well as to take stock of its financial position at the end of the year. She knew that those financial statements would be important to loan officers at National Bank, where the company had obtained two loans, and to Jake Lawrence, who had made an equity investment in the company early during its second year in operation.

Barnes began to go through her notes, receipts, and other documents, and compiled the following list of events that had occurred during the year:

1. Early in the year, as she had contemplated the future growth of the company, she realized that she would need some additional financing. She recalled the enthusiasm of her former colleague Lawrence when she told him two years ago that she was starting The Garden Spot. He had expressed interest in investing in the company at that point, but Barnes had preferred that she and her husband, Josh, be the sole investors. But with the future growth prospects of the company, Barnes had reached out to Lawrence, and he had invested $20,000 in the company in exchange for shares of common stock.

2. During the first year, Barnes had been operating the business on that part of the property where she and Josh lived. When it became apparent that the company needed more space, the company purchased a parcel of land adjacent to their property on July 1 for $100,000. The company financed the purchase with a $90,000 loan from National Bank and paid the remaining $10,000 with cash. The loan was to be repaid in equal principal payments over 10 years. The interest rate was 8%, and interest was payable at the end of each year when the principal payment was made.

3. Purchases of inventory were made throughout the year costing $310,000, $240,000 of which was paid in cash and $70,000 was purchased on account.

4. Sales totaled $500,000, $400,000 of which were cash sales, and $100,000 of which were sales on account. The inventory sold had originally cost a total of $300,000.

5. Operating expenses incurred were $150,000, all paid in cash.

6. Payment made to National Bank totaled $13,000, $10,000 of which was for repayment of the loan principal, and $3,000 of which was for payment of interest. These payments were related to the loan the company had obtained on January 1 during its first year of operation.

7. As planned, the $5,000 of wages payable from the prior December were included in employees paychecks in January of the current year. Payment for all work that employees did in December of the current year was included in employees paychecks during December, so there were no wages payable at year end.

8. Collections from customers on account totaled $60,000 during the year.

9. On July 1, Barnes paid $5,000 to a local marketing firm for a series of ads that would run through June 30 of the following year.

10. The amount the company still owed to suppliers as of December 31 totaled $35,000.

11. In November, the company received a $10,000 deposit from another customer for plants to be delivered the following February.

12. Also in November, the company signed a contract with a customer for $20,000 of plants to be delivered the following February.

13. When reviewing the list of customers that still owed the company, Barnes recalled a conversation she had had during the year with one of those customers, who owed The Garden Spot $2,000, during which the customer discussed the challenges he was facing in paying his bills. While Barnes wasnt ready to give up completely on collecting, she had serious doubt about whether The Garden Spot would be able to collect the $2,000.

14. On January 1, Barnes had sold some of the equipment for $600 cash. The equipment that was sold had originally cost $1,000 and had a net book value of $800 at the time of sale ($200 in depreciation for this equipment had been recorded in Year 1).

15. In December, Barnes was approached by a real estate developer, who offered her $120,000 for the land she had purchased at the beginning of the year. She decided not to sell the property, but was pleased that the land she had bought had appreciated so quickly and was now worth more than she had paid for it.

16. On December 31, the company declared that it would pay dividends of $8,000 on January 31 of the following year. Barnes also thought there could be some additional entries she would need to record, although she wasnt sure.

17. Did she need to record depreciation on truck and equipment? She recalled doing do during her first year of operations.

18. Did she need to record depreciation on the land she had purchased during the year?

19. Did she need to record any interest expense on the loan she had obtained to help finance the purchase of the land? She had recorded interest expense on the loan she had taken out when she opened for business, but she had made an interest payment during the year on that loan. She would not pay any interest on the loan for the land until June 30 of the following year when she made the loan payment.

20. Did she need to make any adjustments to the prepaid advertising account?

21. Did she need to make any adjustments to the deferred revenue account?

22. Did she need to record anything related to this years income taxes? The companys income tax rate for the year was 15%, but Barnes had decided to wait until April 15 of the following year to pay the current years income taxes.

Required:

5. Prepare a balance sheet as of December 31.

6. Prepare a statement of cash flow for the year.

7. Based on your review of the financial statements, what is your assessment of The Garden Spots performance during its second year of operations?