Question

Q1. Jesse James graduated from high school in Wawanesa and decided to start his own business doing small building and repair jobs. Jesse knew that incorporating a business had many benefits so he set up a corporation with the help of a lawyer. The business was incorporated on July 1, 2019. Jesse had saved $20,000 which he transferred from his personal account into the bank account for Jesse James Home Improvements Ltd. (JJHI) and received shares in return. He then purchased a used Toyota Tundra for $14,000 and tools for $2,500 cash. Shortly, after opening the business Jesse realized there was a large demand for these types of services so he hired an assistant At the end of the calendar year, Jesse realized that there would be income tax owing on his earnings. With the help of his friend (you) the following information was collected for the six months ending December 31, 2019: Deposits for building and repair services into the bank account totalled $48,000 The following cheques had been written: o Wages to his assistant $16,000 o Payroll taxes $600 o Rent $2,500 o Manitoba Hydro S350 o Repairs and maintenance on the Toyota Tundra $1,900 o Gas $800 o Rogers Wireless for cell phone service 5626 Advertising $500 Supplies purchased and used on jobs $850 Uncollected invoices to customers for jobs completed amounted to $4,500. The $500 December rent has not yet been paid. Jesse estimates that the depreciation on truck and tools to be S1,000 and $250 respectively. The average income tax rate for income from his business is 25%. Required: Note: I would suggest preparing the journal entries first in order to help you complete these required. 1. Prepare a statement of earnings for Jesse James Home Improvements Ltd. for the six months ending December 2019. 2. Prepare a statement of financial position for Jesse James Home Improvements Ltd as of at December 31, 2019. 1 3. Jesse has asked you for advice as to how he can use the information on these two statements to decide whether he should apply for a bank loan to expand his business. What would you tell him?

Answer 1

40 41 42 43 52,500 44 45 46 47 48 49 50 Jesse James Home Imrovements Ltd. Statement of Earnings For the Year Ending December 31,2019 Revenues (48000 +4500) Less Expenses Wages expense 16,000 Payroll Taxes 600 Rent expense (2500+500) 3,000 Manitoba Hydro 350 Repairs and maintenance 1,900 Gas 800 Cell Phone service 626 Advertising 500 Supplies expense 850 Bad Debts expense 4,500 Depreciation expense on Truck 1,000 Depreciation expense on Tools 250 Total expenses Net Income Before Tax Less Tax expense (22124*25%) Net Income 51 52 53 54 55 56 57 58 30,376 22,124 5,531 16,593 59 60 61

62 63 64 (20000 - 14000-2500+48000-16000-600-2500-350-1900-800-626-500-850) 65 66 67 68 Jesse James Home Imrovements Ltd. Statement of Financial Position As on December 31,2019 Assets Cash 27,374 Truck 14,000 Less Accumulated Depreciation - Truck -1,000 Tools 2,500 Less Accumulated Depreciation -Tools -250 Total Assets 69 70 71 42,624 72 73 74 500 5,531 75 76 6,031 Liabilities and Shareholder's Equity Rent Payable Income Tax Payable Total Liabilities Shareholder's Equity Common Stock Retained Earnings Total Liabilities & Shareholder's Equity 77 78 20,000 16,593 79 36,593 42,624 80 81

82 c) 83 Yes, he can apply for bank loan as he has earned a profit in the first six months of operation and secondly he has enough cash to pay the monthly instalment of the loan because from the question it appears that he provides mostly services for cash. 84 85 86