Case Problem Solutions
Chapter 3
| 3-4 | 3-5 |

 Case 3-4 Loan Request
1. It would appear that Janet took the $20,000 cash she originally contributed to the business and used it to buy mowing equipment and a truck.

 Assets   =   Liabilities    +    Owner's Equity
+   5,000
+   15,000
-    20,000

2.

Wilson Landscaping
Income Statement
For the Six Months Ended September 30, 1995
Revenues:
    Landscaping $33,400
    Lawn care 24,000                           $57,400
Expenses:  
    Gas and oil $15,700
    Insurance 2,500
    Rent 6,000
    Salaries 22,000                             46,200
Net Income                                        $11,200

3. Both the mowing equipment and the truck will benefit Wilson's business for a number of years and she should attempt to allocate their cost over their estimated useful lives. She has overstated her net income by ignoring depreciation on the two long-term assets. Depreciation is an expense that should be recognized over the lives of the long-term assets.

4.

Wilson Landscaping
Balance Sheet
September 30, 1995

 Assets
Current Assets
   Cash $1,200
  Account receivable 23,000
Total Current Assets                    $24,200
Property, Plant & Equipment  
   Mowing equipment $5,000
   Truck 15,000
        Total Property, Plant & Equipment                      20,000
Total Assets                     $44,200
Liabilities and Stockholders' Equity
Current Liabilities  
    Accounts payable                     $13,000
Capital Stock $20,000
Retained Earnings 11,200
    Total Stockholders' Equity                       31,200
Total Liabilities and Stockholders' Equity                      $44,200

The two items of most concern on the balance sheet are the large Accounts Receivable and Accounts Payable. Over 40% of Wilson's revenues remain uncollected at the end of the season: $23,000 of Accounts Receivable on total revenues of $57,400. If a significant portion of this becomes uncollectible, Wilson may experience trouble in paying her open accounts.

5. Memorandum to the request for a loan:
To: Janet Wilson
From: Joe Banker
Date: October 15, 1995
Subject: Loan Request
     Congratulations on a very successful first year in your new business. In conjuntion with the business, I have reviewed your recent request for a $20,000 loan to expand your fleet of trucks and mowing equipment.
     Your income statement for the first year shows a profitable operation. Because you did not recognize depreciation on the long-term assets, I am concerned, however, that the income reported of $11,200 may overstate the actual profitability of your business. If we were conservative and estimated a five-year life for each of these assets, depreciation would amount to a total of $4,000 for the year.
     The balance sheet also presents some concerns to me. First, 40% of your accounts receivable remain uncollected at the end of the season. Before extending a loan I would need to feel assured that a very high percentage of this amount will be realized in the near future. Second, you have a sizeable amount of accounts payable outstanding at the present time. Given the small cash balance of $1,200, your ability to repay the creditors is very directly tied to whether you will be able to collect the amounts due from your customers.
      Given my concerns regarding the large balances in both accounts receivable and accounts payable, I will not be able to approve your request for a loan at this time. I would be happy to meet with you to discuss further your request and specifically to review your plans for collection of your open accounts.

Case 3-5 Delay in the Posting of a Transaction
1. Entries entered into the journal but not posted to the ledger accounts will not be reflected in the financial statements. Failure to post the expense/cash disbursment entry will mean cash will be higher on the trial balance prepared by the controller and expenses will be lower. By ignoring a total of $76,500 in various expenses, net income will be increased by the same amount.
2. The controller is not correct in saying that the omission of the expense entry "will not hurt anyone." First, there is the basic issue as to whether the company should rightfully be required to pay bonuses on a profit level that was not attained. Second, there is the related issue as to the effect of this deceptive practice on various constituencies of the company. What about the stockholders? They have entrusted responsibility for managing the business in a fair and ethical manner to the officers of the corporation. This particular practice would be a serious violation of this trust. Finally, there are any number of outside users of the financial statements that could be misled by this practice. For example, a banker relies on the income statement of a company to provide a clear and accurate picture of the results of operations. The failure to accurately reflect the expenses of the period is certainly misleading.
3. There is a definite moral and ethical responsibility on the part of the assistant controller to confront the controller about the suggestion. A direct confrontation in this particular case may be warranted. The assistant controller should point out that this practice not only violates accounting principles but is also a very serious violation of the trust shown in both individuals by the stockholders. The assistant controller should explain why this practice is not acceptable. If the situation becomes confrontational, and the controller orders the assistant not to make the entry, there would be a responsibility to talk to the controller's boss about the problem.