DecisionMaking Across the Organization Kathy and James Mohr

Decision-Making Across the Organization Kathy and James Mohr, local golf stars, opened the Chip-Shot Driving Range Company on March 1, 2017. They invested $25,000 cash and received common stock in exchange for their investment. A caddy shack was constructed for cash at a cost of $8,000, and $800 was spent on golf balls and golf clubs. The Mohrs leased five acres of land at a cost of $1,000 per month and paid the first month\'s rent. During the first month, advertising costs totaled $750, of which $150 was unpaid at March 31, and $400 was paid to members of the high-school golf team for retrieving golf balls. All revenues from customers were deposited in the company\'s bank account. On March 15, Kathy and James received a dividend of $1,000. A $100 utility bill was received on March 31 but was not paid. On March 31, the balance in the company\'s bank account was $18,900. Kathy and James thought they had a pretty good first month of operations. But, their estimates of profitability ranged from a loss of $6,100 to net income of $2,450. Instructions With the class divided into groups, answer the following.

(a) How could the Mohrs have concluded that the business operated at a loss of $6,100? Was this a valid basis on which to determine net income?

(b) How could the Mohrs have concluded that the business operated at a net income of $2,450? (Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net income?

(c) Without preparing an income statement, determine the actual net income for March.

(d) What was the revenue recognized in March?

Solution

Solution a:

Mohrs have concluded business operating at a loss of $6,100 on the basis of balance in bank account. He followed cash basis of accouting and concluded that bank balance was decrease by $6,100, therefore business incurred a loss of $6,100 = Ending bank balance - Beginning bank balance = $18,900 - $25,000 = ($6,100).

This is not valid basis on which income is determined.

Solution b:

Hence net income for march 2017 considered by moher is equal to addition to retained earnings = $2,450

No this is not a valid basis to determine net income and in $2,450 as dividend also paid by company to Kathy and james for $1,000 and dividend is not be reduced while arriving at net income.

Solution c:

Actual net income for march = $2,450 + $1,000 = $3,450

Solution d:

Revenue recognized in march = Net Income + Expenses recognized in march = $3,450 + ($1,000 + $750 + $400 + $100) = $5,700