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Accounting Cycle Case

Group Project #2; 25 points

Due: Friday, February 25, 2011

Ryan Blade was an entrepreneur and had developed a very profitable lawn mowing business as a teenager. Upon his graduation from high school, Ryan attended State University, where he completed a major in Turfgrass Management. Since he planned to go into business for himself, he took a few business courses, including introductory courses in financial and managerial accounting. After graduating in May 2009, Ryan started a lawn maintenance business.

On June 1st, Ryan established the corporation, Blue Green Lawn Service, Inc. Initial capital was supplied by Ryan’s parents, who invested $50,000 in return for common stock. Ryan planned to pay them $500 a month in dividends.

On June 2nd, Ryan purchased a chemical application truck and a truck to transport the mowers. The purchase price was $50,000. He also purchased lawn-mowing equipment for $30,000. Ryan paid cash for 20% of the total purchase price and received an 18-month note for the remainder. Annual interest rate on the note was 6%. Ryan remembered that he would have to depreciate assets with lives longer than one year. He estimated a useful life of eight years and an estimated salvage value of $2,000 on the trucks. He expected the equipment to last five years with no salvage value at the end of that period. Ryan elected to use straight line depreciation on the fixed assets.

Ryan needed an office building and storage space for his equipment. He rented a small mixed-use industrial building on the outskirts of town on June 5th. He paid $2,000 for June rent. The terms of the rental agreement required him to make monthly rent payments of $2,000 by the twentieth day of the month for the next month’s rent. Thus, he made July’s rent payment on June 20th.

With the rental transaction complete, Ryan contacted the local light and phone companies for hookup. He was informed that he would be billed on the third day of the month for the preceding month’s usage. Ryan made a cash purchase of $500 for office supplies.

Ryan also spent the first week of June developing his customer base. He offered two types of services: (1) lawn mowing and (2) chemical application. Within a few days time, Ryan had executed service contracts with 100 customers for lawn mowing services. 80 customers also signed up for the chemical application services (the rest claimed they were going “green” and declined the chemical service). All of his customers lived in a planned community that had the same sized lots, so he was able to charge the same rate for each type of service.

The lawn-mowing contract specified that each lawn would be mowed weekly throughout the summer for a total cost of $750. The contract called for 15 weeks of mowing and Ryan was able to start the second week of June (i.e., each customer’s lawn was mowed three times in the month of June). The chemical application contract called for four applications (one each month, June through September), for a total cost of $320. All customers prepaid in cash at the time of sign-up, and by June 7th, Ryan collected $100,600and deposited this amount into Blue Green Lawn Service’s bank account.

On June 8th, Ryan purchased the chemicals to be used for the chemical applications for $10,000 on account. The cost of each application of chemicals is $25. His bill to the chemical supply company is to be paid on June 25th. (Ryan hoped to add customers throughout the summer and so he purchased enough chemicals for 100 customers).

Ryan set up a charge account with a local gas station for purposes of charging the gas and oil and any repairs for the lawn mowing equipment needed during the season. Ryan’s employees visited the gas station daily and made the necessary purchases. Under the arrangement, Ryan would receive weekly usage reports from the gas station and would be billed monthly for the total of all purchases. Because of this arrangement, Ryan did not have to maintain a stock of these supplies.

Ryan hired five employees. Each employee was to be paid $250 each Friday for a 5 day workweek. After checking with his parents, Ryan decided to pay himself a weekly salary of $750. Ryan was paid 4 times in June and his employees received 3 paychecks. (Note, assume June 30th falls on a Monday.)

On June 15th, a college friend, Marissa, who was setting up her own business, contacted Ryan. In need of a lawn maintenance service, but short on immediate cash flow, Ryan agreed to provide the same services he provided his residential customers, but to bill her monthly for services provided the previous month. Word soon got out and 9 more entrepreneurial college buddies took advantage of these terms. Ryan was able to add all 10 businesses immediately into the rotation and their lawns were mowed twice in June and the chemical application was applied once. Ryan charged his business clients the same amount for each service as he charged his residential customers. (The business clients would be entitled to an additional week during the month of September to give them their 15 weeks of lawn services).

Business went as planned during June. All lawns were mowed and chemicals applied. On June 25th, Ryan paid the bill from the chemical supply store. On June 30th, Ryan counted his office supplies and determined that $100 in office supplies remained. He also mailed his parents their first dividend check.

During the first week of July, Ryan billed his business clients and received his utility bills for the month of June. Phone and electricity services totaled $200. Ryan also received a bill from the gas station for $2,000. All bills were to be paid by July 15th and Ryan expected his business clients to pay their invoices by July 20th.

Ryan felt confident he could remember enough accounting to do Blue Green’s monthly reporting, but Ryan’s parents insisted that an independent accounting firm be retained to prepare the monthly financial statements. Ryan has engaged your firm. The specifications of your firm’s contract with Blue Green follow on page 3. A fee of $200 would be billed, however your firm did not provide any services for Blue Green in the month of June.

Ryan has arrived at your office early in July with all of his receipts, bills and bank deposit slips from the month of June.

Requirements*:

  1. Post all period transactions to T accounts (use dates to label) and transfer balances to Trial Balance column of worksheet. T account and Worksheet templates have been provided on the Courseware server or on Concourse.
  2. Post all adjusting journal entries to T accounts (label ADJ.). Enter the balances in the adjustment column of the Worksheet. Compute ending balances for all T accounts and the Adjusted Trial Balance column of worksheet. (Balances should be the same!)
  3. Complete the Income Statement and Balance Sheet columns of the Worksheet.
  4. Post all closing entries to T accounts (label CLO).
  5. Print T accounts and Worksheet to submit.

*For the purposes of this case, income taxes and payroll tax obligations will be ignored.