Accrual Accounting Exercise
Weber’s Pest Removal Service
Weber’s Pest Removal Service was founded on January 1, 2011. The company provides
two services to local businesses: pest removal and pest prevention.
The pest removal service offers to eradicate ants, termites, rats, and other vermin that
have infested your house or business. The fee charged depends on the type of infestation
that the customer has, and the extent of the problem.
The pest prevention service is a quarterly service intended to prevent ants and termites
from entering the customer’s house or business. Weber’s uses their patented Pest
Prevention Elixirs (PPE’s), a type of poison, for this service.
During the first six months of operations, Weber’s engaged in the following transactions
(accounting policies discussed below):
1.
On January 1st (2011), issued 175,000 shares of common stock to friends and
family for $2.00 per share.
2.
On January 1st Weber’s signs a lease for a year. The lease requires a security
deposit of $10,000, and monthly rent payments of $10,000 due on the first day
of each month. On January 1, Weber’s pays their landlord $20,000.
3.
On January 1st, borrowed $100,000 @ 6% (semi-annual interest rate) from
Independent Bank. Interest and principle is due on 6/30/2011 (no
compounding – assume 30 days in a month).
4.
During January, purchased 100 pounds of poison inventory, for $48,000 in cash
($480 per pound).
5.
During the months of January – February performed pest prevention services
receiving $50,000 on account. Weber’s used 40 pounds of poison.
6.
On January 31, Weber’s updates their accounting records to record any
outstanding payables, and to update prepaid items for their use.
7.
During the months of February and March, Weber’s makes their rent payments
on the first day of the month.
8.
On February 28, Weber’s updates their accounting records to record any
outstanding payables, and to update prepaid items for their use.
9.
During March, purchased 50 pounds of poison inventory, for $24,000 on
account ($480 per pound).
10.
On March 31, Weber’s updates their accounting records to record any
outstanding payables, and to update prepaid items for their use.
11.
During the months of April and May, Weber’s makes their rent payments on
the first day of the month.
12.
During the months of April - May, performed pest prevention services,
charging their customers $50,000. Customers pay $20,000 on May 31.
Weber’s used 40 pounds of poison.
13.
On April 30, Weber’s updates their accounting records to record any
outstanding payables, and to update prepaid items for their use.
14.
During the month of May, 10 pound of Poison inventory spoiled and were
destroyed.
15.
During the months of January through May, employees were paid $25,000 in
cash for work performed.
16.
On May 1st Weber’s signs a non-cancelable contract to provide pest prevention
services on the first day of every month at a catering hall. The contract calls
for the catering hall to make monthly payments of $25,000 due on the 30th day
of the month.
17.
On May 1st, Weber’s uses 10 pound of poison in performing services for the
catering hall.
18.
On May 31st, Weber’s receives $25,000 check from the catering hall
19.
On May 31, Weber’s updates their accounting records to record any
outstanding payables, and to update prepaid items for their use.
20.
On June 1st Weber’s uses 10 pound of poison in performing services for the
catering hall.
21.
During the month of June, employees earned an additional $15,000 in
compensation but were not paid.
22.
On June 30, Weber’s receives a $25,000 check from the catering hall.
23.
Weber’s forgets to pay their rent for June on the 1st day and mails the check on
June 30.
24.
Throughout the six months ending June 30th, incurred and paid $10,000 worth
of selling and general administrative expenses.
25.
On June 30th Weber’s pays $6,000 of dividends.
26.
On June 30th Weber’s receives a $10,000 advanced payment for pest removal
services to be performed in July.
27.
June 30th - Weber’s updates their accounting records to record any outstanding
payables, and to update prepaid items for their use.
28.
June 30th - Weber’s pays back the loan borrowed from Independent Bank and
pays the interest.
Questions:
1. Record the events described above on the attached Balance Sheet Equation (BSE)
worksheet. We provided you with suggested account headings at the top. Feel free to
recreate the spreadsheet in excel. Please note, be careful to only recognize the expense
part of a transaction at the point in time when the expense has been incurred!
2. When you have completed the event analysis, compute the ending balances for each
account.
Note:
(a) You may not need all of the account columns or event rows provided,
you may need to add columns or rows.
(b) Label each event in the first column, using the designations provided
in the case (i.e., 1 or O1, etc.)
(c) For each event that affects Retained Earnings (RE), provide a brief
description in the last column (i.e., Revenue, Advertising expense).
(d) If an identified event does not affect the BSE, indicate the firm would
not record a transaction.
3. Prepare financial statements for Weber’s for the period 1/1/2011 – 6/30/2011.
(Specifically prepare the balance sheet & income statement.)
4. Focus on the catering transaction on May 1. Suppose Weber’s offers a discount of 1%
if receivables are paid in 10 days, and the customer takes advantage of this discount
each month. How would this affect total revenues, total expenses, total net income,
and total assets for the period ending 6/30/2011?
5. Focus on the catering transaction on May 1. Suppose Weber’s offers the customer a
prepayment option, where the customer pays 90,000 in advance for the first four
months of services, and the customer takes advantage of this option. How would this
affect total revenues, total expenses, total net income, and total assets for the period
ending 6/30/2011? (This is independent of 4 above.)
Assets
Cash
1
350,000
2
-20,000
3
100,000
4
-48,000
5
8
9
Prepaid
Assets
Poison
Inven.
Other
Assets
Liabilities
Loans Int.
Pay.
Pay
Wages
Pay.
Accts
Pay
Stockholder’s Equity
Common
Retained R/E Explanation
Stock
earnings
20,000
100,000
48,000
50,000
-19,200
revenue
cogs
1,000
-10,000
-1,000
Rent exp
Int exp
1,000
-10,000
-1,000
Rent exp
Int exp
-19,200
-10,000
-20,000
Other
Liab.
350,000
50,000
6
7
A/R
20,000
-10,000
24,000
24,000
Assets
Cash
A/R
10
Poison
Inven.
Other
Assets
Liabilities
Loans Interest
Pay.
Pay
-10,000
1,000
11
-20,000
12
20,000
30,000
-19,200
-10,000
1,000
14
-4,800
15
-25,000
16
No transaction.
17
-4,800
25,000
Wages
Pay.
Accts
Pay
Other
Liab.
Stockholder’s Equity
Common
Retained R/E Explanation
Stock
earnings
-10,000
-1,000
Rent exp
Int exp
50,000
-19,200
revenue
COGS
-10,000
-1,000
Rent exp
Int exp
-4,800
Loss on spoilage
-25,000
Wage exp
-4,800
25,000
COGS
revenue
20,000
13
18
Prepaid
Assets
25,000
-25,000
Assets
Cash
A/R
19
Prepaid
Assets
Poison
Inven.
Other
Assets
Liabilities
Loans
Int.
Pay.
Pay
Wages
Pay.
Accts
Pay
Other
Liab.
Stockholder’s Equity
Common
Retained R/E Explanation
Stock
earnings
-10,000
1,000
20
-4,800
25,000
21
15,000
-10,000
-1,000
Rent exp
Interest exp
-4,800
25,000
COGS
revenue
-15,000
Wages payable
22
25,000
23
-10,000
-10,000
Rent exp
24
-10,000
-10,000
SG&A
25
-6,000
-6,000
dividends
26
10,000
-1,000
Int exp
-25,000
10,000
27
28
1,000
-106,000
265,000
80,000
10,000
19,200
-100,000
0
-6,000
0
15,000
24,000
10,000
350,000
-24,800
Balance sheet
Cash
265,000
Wages pay.
15,000
A/R
80,000
A/P
24,000
Prepaid assets
10,000
Other liabilities
10,000
Poison inv.
19,200
Common stock
350,000
RE
-24,800
Total Liab. &
Equity
374,200
Total Assets
374,200
Income statement
Revenue
150,000
COGS
-48,000
Rent expense
-60,000
Wages expense
-40,000
SG&A
-10,000
Loss on spoilage
-4,800
Interest expense
-6,000
Net income
-18,800
Dividend
RE
-6,000
-24,800
Question 4
Total assets
total revenue
total expense
total income
Impact
-500
-500
no impact
-500
Question 5
Total revenue
Total expense
Total net income
Total assets
Total liabilities
-5,000
no impact
-5,000
40,000
45,000