Saira Morrow operates Dressage Riding Academy, Inc. The academy’s primary source

Question

Saira Morrow operates Dressage Riding Academy, Inc. The academy’s primary sources of revenue are riding fees and lesson fees, which are provided on a cash basis. Saira also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains these accounts: Cash, Accounts Receivable, Unearned Service Revenue, and Service Revenue. The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in the following accounts: Horses, Buildings, and Equipment. The academy employs stable helpers and an office employee, who receive weekly salaries. At the end of each month, the mail usually brings bills for advertising, utilities, and veterinary service. Other expenses include feed for the horses and insurance. For its expenses, the academy maintains the following accounts: Supplies, Prepaid Insurance, Accounts Payable, Salaries and Wages Expense, Advertising Expense, Utilities Expense, Maintenance and Repairs Expense, Supplies Expense, and Insurance Expense. Saira’s sole source of personal income is dividends from the academy. Thus, the corporation declares and pays periodic dividends. To account for stockholders’ equity in the business and dividends, two accounts are maintained: Common Stock and Dividends. During the first month of operations, an inexperienced bookkeeper was employed. Saira asks you to review the following eight entries of the 50 entries made during the month. In each case, the explanation for the entry is correct.

May 1 Cash 12,300 Unearned Service Revenue 12,300 (Issued common stock in exchange for $12,300 cash) May 5 Cash 210 Service Revenue 210 (Received $210 cash for lesson fees) May 7 Cash 410 Service Revenue 410 (Received $410 for boarding of horses beginning June 1) May 9 Supplies Expense 1,230 Cash 1,230 (Purchased estimated 5 months’ supply of feed and hay for $1,230 on account) May 14 Equipment 70 Cash 700 (Purchased desk and other office equipment for $700 cash) May 15 Salaries and Wages Expense 330 Cash 330 (Issued check to Saira for personal use) May 20 Cash 117 Service Revenue 126 (Received $126 cash for riding fees) May 31 Maintenance and Repairs Expense 60 Accounts Receivable 60 (Received bill of $60 from carpenter for repair services performed)

What was the correct net income for May, assuming the bookkeeper originally reported net income of $3,690 after posting all 50 entries?

What was the correct cash balance at May 31, assuming the bookkeeper reported a balance of $10,230 after posting all 50 entries?

Explanation / Answer

CALCULATION OF NET INCOME

NET INCOME = $3690 + $330(SAIRA'S DRAWING) +

$1230(HAY AND FEED EXPENSES ACCOUNTS PAYABLE )

=$5250 CORRECT NET INCOME (EXPENSES ARE OVERSTATED BY $1560)

CALCULATION OF CASH BALANCE

CASH BALANCE = $10230 + (117 - 126) + 1700

=$11921 CORRECT CASH BALANCE (CASH WAS UNDERSTATED BY $1691)

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