Question 5.

Mr. Brewer opened a machine repair business in leased retail space, paying the first months rent of $300 and a $1,000 security deposit with a check from his personal checking account. He took tools, worth about $7,500, from his garage to the shop. He also bought some equipment to get started. The new equipment had a list price of $5,000, but Mr. Brewer was able to buy it on sale at Harbor Freight for only $4,200. He charged the new equipment on his personal credit card. Mr. Brewers first customer paid $400 by check, so he had to open a checking account for the business. He completed work for a second customer, but by the end of the month this customer had not paid Mr. Brewer the $2,500 for the work.

At the end of the first month, Mr. Brewer prepared the following balance sheet and income statement:

BREWERs MACHINE REPAIR SHOP

Balance Sheet

September 30, 2022

Cash	$ 400
Equipment	5,000	Equity	$5,400
Total	$5,400	Total	$5,400

BREWERS MACHINE REPAIR SHOP

Income Statement

For the month ending September 30, 2022

Sales		$ 2,900
Rent	$ 300
Tools	4,200	4,500
Net Loss		$(1,600)

Mr. Brewer believes that he would be showing a profit next month because he wont have large expenses, such as the tools.

1)As the accountant-friend of Mr. Brewer, identify the assumptions that he has violated and explain how each event should have been handled.

2)Prepare a corrected balance sheet and income statement for Mr. Brewer.