Reference no: EM13755361

Fishy Farm is a small business located in the mountains of southwestern Virginia.  The business is actually a commercial fish hatchery dedicated to raising the finest freshwater sport fish in the area including trout, bass and perch.  The area has an abundance of fresh water clear mountain streams, which provide the natural resource for fish breading and raising. 

JB Nathan is the founder and owner of Fishy Farm.  An avid fisherman himself, JB has always had an interest in this type of business.  He was able to purchase land and convert it into a fish hatchery by building breeding and holding fish tanks near several mountain streams which flowed through his property.  Formally, JB worked for a state fish hatchery about 50 miles to the north in Possum Creek, and used these hands on experience to start his own business.

JB hired an independent accountant to keep his records for the last few years, but felt, just like raising fish, he could learn how to do the bookkeeping activities on his own.  Before taking on this additional duty, he wanted to practice recording several accounting activities related to the company and determine if he could develop the appropriate financial statements.  He decided to begin with the balance sheet that was prepared for him as of the close of business on December 31, 20x0.  He was going to review all of the activities which took place during the month of January 20x1 and see if he could develop a correct income statement for the month and a new balance sheet as of January 31, 20x1.  This was probably a good month to experiment with the accounting process, because business was slow during the colder winter months.  He wanted to be sure he was comfortable with the accounting process before things began to get real busy with fish breeding in the spring.

During January he purchased a new water filtration system which will clean and aerate the water in the holding tanks and make it suitable for recycling.  The fresher water should promote better conditions for faster fish growth and allow JB to sell larger fish more quickly.  The equipment cost $16,000 and he paid 10% down and signed an 8% 5-year note for the balance due.  He was also able to sell a used pump to a neighbor for its book value of $350. 

JB works alone on Fishy Farm although sometimes work gets busy in the spring and summer months.  When necessary he gets his wife or neighbors to help him with moving equipment or stocking fish tanks.  He pays himself a salary out of the business and feels he earns enough to make a comfortable living.  He will never go hungry; it is not many businesses where the owner can eat the inventory.  JB has a skillet and filet knife right next to his office desk.

The following exhibit is the balance sheet for Fishy Farm.

Fishy Farm

Balance Sheet

December 31, 20x0

Item		Total
Assets
Current Assets
Cash	$ 10,500
Accounts Receivable	2,200
Supplies	4,000
Inventory	24,600
Prepaid Expenses	1,800
Total Current Assets		$ 43,100
Long Term Assets
Land	$  52,000
Vehicle (net)	8,400
Building (net)	140,000
Fish Tanks (net)	75,000
Equipment (net)	43,500
Total Long Term Assets		$318,900
Total Assets		$362,000
Liabilities and Equity
Current Liabilities
Accounts Payable	$17,200
Notes Payable ( 7.2% Line of Credit)	6,500
Unearned Revenue	1,000
Total Current Liabilities		$  24,700
Long-Term Liabilities
Notes Payable	115,000
Mortgage Payable	137,000
Total Long-Term Liabilities		252,000
Equity
Capital Stock	75,000
Retained Earnings	10,300
Total Equity		85,300
Total Liabilities and Equity		$362,000

Three years ago JB invested $75,000 in the business from savings he had built up over his last 10 years of work.  He has always maintained a very disciplined life style and tried to save his money so he could reach his goal of owning his own business.  He is happier being in a business he enjoys versus having a lot of money.  He also likes to work outdoors and be able to set his own schedule.  When he set up his business, since he was born and raised in the area, he was able to get good deals on the land and other assets that he purchased.  JB also has had long term relations with the bankers and they gave him favorable rates on loans in the purchase of the land, buildings and equipment.

JB kept a list of activities the business was involved in during the month of January.

JB wrote checks for the following activities:

• Labor and salary $3,550
• Utility bill from December $440
• Telephone $80
• Ralston Food Supplier (for a payment of a bill on fish food) $1,380
• Insurance $300
• Property Taxes $250
• Eggs of all Kinds (for purchase of fish eggs and small fish for inventory purposes from a regional supplier) $3,300
• Payment of $1,000 on the long-term note payable with $800 going to interest on the loan.
• Payment of $1,500 on the mortgage with $300 toward the principle balance.

JB received cash for the following activities:

• Sale of 20,000 fish to the state of Virginia for$14,250. The cost of those fish to JB were $6,800.
• Payment from Frank's Fishing Pond for a sale from last year in the amount of $1,200. The cost of those fish sold were $500.
• Payment of $700 from Premier Game Fish as an advance payment for the sale of 300 of the best bass fish in March. Those fish will cost JB $250 to raise.

Some other activities JB was aware of during the month were:

• Depreciation on the vehicle was $100, on the building was $750, on the fish tanks was $900 and the equipment was $500.
• $150 of prepaid advertising was used up.
• An advanced fish sale of $600 was completed with the cost of those fish equaling $200.
• Received January utility bill of $520
• Sale of 6,000 fish on account to the state of West Virginia for $5,000. The cost of those fish to JB were $2,000.
• Purchased on account from Game Fish Breeders 10,000 baby bass for $1,400.

Note: For business purposes use an income tax rate of 40%.

Required:

1. Develop journal entries for all of the accounting transactions in January for Fishy Farm.

2. Create an income statement for the month of January for Fishy Farm.

3. Reconstruct the balance sheet for Fishy Farm as of January 31, 20x1.

4. Identify and discuss issues that JB should be concerned about regarding taking over the accounting function of the business.

5. If you were a banker, would you lend money to Fishy Farm?  Why or why not?