Question 1 (25 marks)
Gary Green has started a lawn mowing business (GG Grass of Home Mowing) as a temporary job/business which he intends to run until he starts his business degree at the University of South Australia in four months. Gary has never owned or run a business before. To start the business on 1 April 2014, he deposited $1,000 into a new bank account opened in the name of the business. The $1,000 consisted of a $600 loan from his father and $400 of his own money. Gary rented some equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns.
At the end of each month Gary sent invoices to his customers. On 31 July, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers.
At 31 July, Gary’s business account cheque book shows a balance of $690, and his customers still owe him $500. During the period, he collected $4,250 from customers. His cheque book lists payments for supplies totalling $400, and he still has fuel and supplies that cost a total of $50 on hand. He paid his employees $1,900, and he still owes them $200 for their final week of work.
Gary rented some equipment from Scholes Machine Shop. On 1 April, he signed a six-month rental agreement on lawnmowers and paid $600 for the full period. Scholes will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Gary has kept the equipment in excellent condition. In fact during May, Gary paid $300 to repair one of the mowers.
To transport employees and equipment to jobs, Gary used a trailer that he bought for $300. He believes that the period’s work used up one-third of the trailer’s service potential. The business cheque book lists a payment of $460 for private cash withdrawals by Gary during the period. In July Gary paid back the money his father had lent to him.
Gary estimates that he spent approximately 70 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from.
a) Prepare the business Income Statement for the period. (9 marks)
b) Prepare the classified Balance Sheet at the end of the period. (11 marks)
c) Was Gary’s venture successful? Give the reasons for your answer. 150 – 250 words only. (5 marks)