Reference no: EM131997626

Question - Anita Spencer is the founder and manager of Spencer Playhouse. The business needs to obtain a bank loan to finance the production of its next play. As part of the loan application, Anita Spencer was asked to prepare a balance sheet for the business. She prepared the following balance sheet, which is arranged correctly but which contains several errors with respect to such concepts as the business entity and the valuation of assets, liabilities, and owner's equity

Assets Liabilities & Owner's Equity

Cash . . . . . . . . . . . . . . . . . . . $ 21,900 Liabilities:

Accounts Receivable . . . . . . 132,200 Accounts Payable. . . . . . . . . $ 6,000

Props and Costumes . . . . . . 3,000 Salaries Payable . . . . . . . . . . 29,200

Theater Building . . . . . . . . . . 27,000 Total liabilities . . . . . . . . . . $ 35,200

Lighting Equipment . . . . . . . 9,400 Owner's equity:

Automobile . . . . . . . . . . . . . . 15,000 Anita Spencer, Capital . . . . . . 173,300

Total . . . . . . . . . . . . . . . . . . . $208,500 Total . . . . . . . . . . . . . . . . . . . . . $208,500

In discussions with Anita Spencer and by reviewing the accounting records of Spencer

Playhouse, you determine the following facts:

1. The amount of cash, $21,900, includes $15,000 in the company's bank account, $1,900 on hand in the company's safe, and $5,000 in Anita Spencer's personal savings account.

2. The accounts receivable, listed as $132,200, include $7,200 owed to the business by Artistic Tours. The remaining $125,000 is Anita Spencer's estimate of future ticket sales from September 30 through the end of the year (December 31).

3. Anita Spencer explains to you that the props and costumes were purchased several days ago for $18,000. The business paid $3,000 of this amount in cash and issued a note payable to Actors' Supply Co. for the remainder of the purchase price ($15,000). As this note is not due until January of next year, it was not included among the company's liabilities.

4. Spencer Playhouse rents the theater building from Kievits International at a rate of $3,000 a month. The $27,000 shown in the balance sheet represents the rent paid through September 30 of the current year. Kievits International acquired the building seven years ago at a cost of $135,000.

5. The lighting equipment was purchased on September 26 at a cost of $9,400, but the stage manager says that it isn't worth a dime.

6. The automobile is Anita Spencer's classic 1978 Jaguar, which she purchased two years ago for $9,000. She recently saw a similar car advertised for sale at $15,000. She does not use the car in the business, but it has a personalized license plate that reads "PLAHOUS."

7. The accounts payable include business debts of $3,900 and the $2,100 balance of Anita Spencer's personal Visa card.

8. Salaries payable include $25,000 offered to Mario Dane to play the lead role in a new play opening next December and $4,200 still owed to stagehands for work done through September 30.

9. When Anita Spencer founded Spencer Playhouse several years ago, she invested $20,000 in the business. However, Live Theatre, Inc., recently offered to buy her business for $173,300.

Therefore, she listed this amount as her equity in the above balance sheet.

Instructions -

a. Prepare a corrected balance sheet for Spencer Playhouse at September 30, 2015.

b. For each of the nine numbered items above, explain your reasoning in deciding whether or not to include the items in the balance sheet and in determining the proper dollar valuation.