John Smith established an animal clinic (PetGo) on December 1, 2016, by purchasi

Question

John Smith established an animal clinic (PetGo) on December 1, 2016, by purchasing all of its common stock for $125,000 (no par value). The same day PetGo paid $2,500 to an attorney who prepared its legal documents and filed incorporation documents (Administration Expense); paid $90,000 for medical instruments, furniture, and equipment; and signed a three-year lease on office space for $5,000 per month, payable the first day of each month, and paid that the first month rent. During December 2016, PetGo received $18,500 from clients for office visits, surgery, medical supplies, and drugs. PetGo had billed clients an additional $6,000 for care delivered in December but did not receive payments until January 2017. During December, PetGo also paid $1,700 for drugs and medical supplies, $500 for office supplies, and $13,750 for wages and benefits. At the end of December, PetGo had $200 drugs and medical supplies and zero office supplies in inventory. PetGo adopts straight-line depreciation method for its fixed assets assuming 10-year useful life and zero salvage value.

Prepare an income statement for 2016 (4 Points)

2. Prepare a balance sheet as of Dec 31, 2016 (5 Points)

3. Calculate PetGo's free cash flow for 2016 (2 Points)

4. Was PetGo successful during its first month of operation? Explain (2 Points)

5. PetGo was doing pretty well for 2017. During the year, PetGo sold $50,000 giftcard to customers and recorded $50,000 sales revenue. Was PetGo doing the correct accounting treatment? Explain (2 Points)

Explanation / Answer

PetGo was able to generate surplus in its first month of operation after meeting all its expenses including incorporation and depreciation expenses. Though the accounting figures shows that PetGo was successful, it is also important to ascertain stake holder expectation, customer satisfaction and prospects of sustained growth.

PetGo Adjusted Trial Balance as on Dec 31, 2016 Account Titles Debit Credit Common Stock $                                        1,25,000 Cash $            30,050 Incorporation expenses $              2,500 Fixed Assets $            90,000 Rent for Office space $              5,000 Revenue $                                            24,500 Accounts Receivable $              6,000 Drugs and Medical Supplies $              1,500 Office supplies $                  500 Wages and benefits $            13,750 Inventory -Medical supplies $                  200 Depreciation $                  750 Accumulated depreciation $                                                  750 Total $        1,50,250 $                                        1,50,250 Income Statement for 2016 Revenue: Revenue from Operations $                                            24,500 Less: Expenses Drugs and Medical supplies consumed $                                              1,500 Office supplies $                                                  500 Rent for office space $                                              5,000 Incorporation Expenses $                                              2,500 Wages and benefits $                                            13,750 Depreciation $                                                  750 Net Income (A) - (B) $                                                  500 Balancesheet as on Dec 31, 2016 Liabilities Assets Common Stcok $        1,25,000 Fixed Assets $                                90,000 Retained Earnings $                  500 Less: Accumulated Depreciation $                                      750 Current Liabilities: Net Book Value $                                89,250 Accounts Payable- Equipmentss(9000 -4400) Accounts Payable- Supplies (3000 -500) Current Assets Accounts Receivable (11200-3100) $                                   6,000 Ending Inventory $                                      200 Cash $                                30,050 Total $        1,25,500 Total $                             1,25,500 Free Cashflow for 2016 Net Income $                                                  500 Add Non Cash items Depreciation $                                                  750 $                                              1,250 Adjustment for working capital changes Increase in Inventory $                -200 Increase in Accounts Receivable $            -6,000 $                                            -6,200 Net Cash from operations $                                            -4,950 Less: Capital expenditures $                                          -90,000 Free Cashflow $                                          -94,950 Was PetGo successful during its first month of operation? Explain

PetGo was able to generate surplus in its first month of operation after meeting all its expenses including incorporation and depreciation expenses. Though the accounting figures shows that PetGo was successful, it is also important to ascertain stake holder expectation, customer satisfaction and prospects of sustained growth.

PetGo was doing pretty well for 2017. During the year, PetGo sold $50,000 giftcard to customers and recorded $50,000 sales revenue. Was PetGo doing the correct accounting treatment? Explain Revenue and sales should be accounted on the basis of whether significant risks and rewards are transferred to the buyer in the case of sale and whether services has been rendered in the case of services. It is not necessary that all the customers who has received gift cards is availed of services.

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