Anita Spencer is the founder and manager of Spencer Playhouse. The business need
ID: 2426293 • Letter: A
Question
Anita Spencer is the founder and manager of Spencer Playhouse. The business needs to obtain a bank loan to finance the production of its next play. As part of the loan application, Anita Spencer was asked to prepare a balance sheet for the business. She prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner’s equity.
In discussions with Anita Spencer and by reviewing the accounting records of Spencer Playhouse, you determine the following facts:
The amount of cash, $21,900, includes $15,000 in the company's bank account, $1,900 on hand in the company's safe, and $5,000 in Anita Spencer’s personal savings account.
The accounts receivable, listed as $132,200, include $7,200 owed to the business by Artistic Tours. The remaining $125,000 is Anita Spencer’s estimate of future ticket sales from September 30 through the end of the year (December 31).
Anita Spencer explains to you that the props and costumes were purchased several days ago for $18,000. The business paid $3,000 of this amount in cash and issued a note payable to Actors' Supply Co. for the remainder of the purchase price ($15,000). As this note is not due until January of next year, it was not included among the company's liabilities.
Spencer Playhouse rents the theater building from Kievits International at a rate of $3,000 a month. The $27,000 shown in the balance sheet represents the rent paid through September 30 of the current year. Kievits International acquired the building seven years ago at a cost of $135,000.
The lighting equipment was purchased on September 26 at a cost of $9,400, but the stage manager says that it isn't worth a dime.
The automobile is Anita Spencer’s classic 1978 Jaguar, which she purchased two years ago for $9,000. She recently saw a similar car advertised for sale at $15,000. She does not use the car in the business, but it has a personalized license plate that reads "PLAHOUS."
The accounts payable include business debts of $3,900 and the $2,100 balance of Anita Spencer’s personal Visa card.
Salaries payable include $25,000 offered to Mario Dane to play the lead role in a new play opening next December and $4,200 still owed to stagehands for work done through September 30.
When Anita Spencer founded Spencer Playhouse several years ago, she invested $20,000 in the business. However, Live Theatre, Inc., recently offered to buy her business for $173,300. Therefore, she listed this amount as her equity in the above balance sheet.
Prepare a corrected balance sheet for Spencer Playhouse at September 30, 2015.
SPENCER PLAYHOUSEBalance Sheet
September 30, 2015 Assets Liabilities & Owner's Equity Cash $ 21,900 Liabilities: Accounts receivable 132,200 Accounts payable $ 6,000 Props and costumes 3,000 Salaries payable 29,200 Theater building 27,000 Total liabilities $ 35,200 Lighting equipment 9,400 Owner's equity: Automobile 15,000 Anita Spencer, capital 173,300 Total $ 208,500 Total $ 208,500
Explanation / Answer
Rectification Entries 1 Anita Spencer's Capital Dr 5000 ` Cash Cr 5000 ( Being rectification of cash lying in personal account) 2 revenue Dr 125000 ` Accounts receivable Cr 125000 (To record rectification of sale done on estimate) 3) Props and costumes Dr 15000 ` Notes Payable Cr 15000 ( To recor purchase of props on credit) 4) Rent Expense Dr 27000 ` Theatre Building Cr 27000 ( To record rent expenses earlier capitalised) 5) Depriciation Expense Dr 9400 ` Lighting Equipment Cr 9400 ( To record write off of lighting equipment) 6) Anita Spencers , Capital Dr 9000 Revaluation Income Dr 6000 Automobile Cr 15000 ( To record automobile entry) 7) Accounts Payable Dr 2100 Expenses Cr 2100 ( To record rectfication of anita personal card expenses) 8) Salary Payable Dr 25000 Salary Cr 25000 ( To record rectification of salary booked not incurred) 9) No entry required Based on the above , below is the revised Balance Sheet SPENCER PLAYHOUSE Rectified Balance Sheet 30-Sep-15 Assets Liabilities & Owner's Equity Cash $ 16900 Liabilities: Accounts receivable 7200 Accounts payable $ 6000 Props and costumes 18000 Salaries payable 29200 Notes Payable 15000 Theater building 0 Total liabilities $ 50200 Lighting equipment 0 Owner's equity: Automobile 0 Anita Spencer, capital -8100 Total $ 42100 Total $ 42100