Samir Sarkov incorporated Sentry Security Services and began operations on January 1, 2020. After a busy year, Samir thinks his business has done well, at least in terms of the volume of work done. However, he has asked for your help in determining the financial results.
The company’s accounting records, such as they are, have been kept by Samir’s son. Although he kept good records of all the cash received and spent by the business during the year, he has no formal training in accounting. At the end of the year, he prepared the following statement:

After reviewing the records, you confirm that the amounts are correct, and you also discover these additional facts:

1. The business does most of its work for cash, but at the end of the year customers owe $5,000 for security services that were provided on account.

2. The amount borrowed from the Provincial Bank is a three-year loan, with an interest rate of 10% per year.

3. The amount paid to the bank during the year includes $1,500 of interest on the loan and $5,000 of principal.

4. The rental contract for the company’s space covers a two-year period and requires payments of $500 per month, paid at the beginning of each month. In addition, the last month’s rent had to be paid in advance. All the required payments have been made as scheduled.

5. The security equipment was purchased at the beginning of the year and has an estimated five-year lifespan, after which it will be worthless.

6. In addition to the wages that were paid during 2020, $250 is owed to employees for overtime that was worked during the last few days of the year. This will be paid early in 2021.

7. The security services truck payments consist of $21,000 paid to purchase the truck at the beginning of the year plus $4,000 paid for gas, oil, and repairs during the year. Samir Sarkov expects to use the truck for four years, after which he thinks he should be able to get about $1,000 for it as a trade-in on a new truck.

8. The $2,000 for insurance resulted from paying premiums on two policies at the beginning of the year. One policy cost $700 for one year of insurance coverage; the other policy cost $1,300 for two years of coverage.

9. In addition to the $15,000 of parts and supplies that were purchased and paid for during the year, creditors have billed the business $500 for parts and supplies that were purchased and delivered but not paid for.

10. A count at the end of the year shows that $1,750 of unused parts and supplies were still on hand.

Required

a. Prepare an accrual-basis statement of income for the year ended December 31, 2020, and a classified statement of financial position for Sentry Security Services at the end of the year.

b. Comment on the company’s performance during its first year of operations and its financial position at the end of the year.

Transcribed Image Text:

SENTRY SECURITY SERVICES Statement of Cash Receipts and Disbursements For the year ended December 31, 2020 Cash Receipts: Invested in the business by the Sarkov family $25,000 Received from customers for services provided 75,000 Borrowed from the Provincial Bank 15,000 $115,000 Cash Disbursements: 6,500 Paid to the Provincial Bank Rent paid 6,500 18,000 Security equipment purchased Wages paid 37,000 Security services truck payments made 25,000 Insurance premiums paid 2,000 15,000 Security system parts and supplies purchased 110,000 $ 5,000 Cash remaining (equals the bank balance)