Raul Tello started and operated a small boat repair service company during 2004. He is interested in obtaining a $100,000 loan from your bank to build a dry dock to store boats for customers in the winter months. 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 market value) to the business from the owner when it was started in exchange for 1 ,000 shares of stock in the new company:

b. Earned service fees during 2004 of $87,000; of the cash collected, $20,000 was for deposits from customers on work to be done by Tello in the next year.

c. Received the cash dividends on shares of ABC Industrial stock purchased by Raul Tello six years earlier (not owned by the company).

d. Incurred expenses during 2004, $61,000.

e. Determined amount of supplies on hand (unused) at the end of 2004, $700.
Required: 1. Did Tello prepare the income statement on a 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 Taccounts. 3. Prepare an accrual-based income statement, balance sheet, and statement of cash flows. 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 Mr. Tello? 5. Based on the revised statements and additional information needed, write a letter to Mr. Tello explaining your decision at this time regarding the loan.

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Service fees collected during 2004 Cash dividends received Total TELLO COMPANY Profit for 2004 Expense for operations paid during 2004 Cash stolen New tools purchased during 2004 (cash paid) Supplies purchased for use on service jobs (cash paid) Total Profit $ 55,000 10,000 65.000 $22.000 500 1.000 3.200 26.700 $ 38.300