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Accounting Cases

- Irene Sherlyta Gloria - Mahmudah


- M. Arief Amruzar - Muadz Akbar Iskandar
- Martina Ratna Uli
CASE 2-3
LONE PINE CAFÉ (A)*

On March 31, 2010, the partnership that had been organized to operate the Lone Pine Café
was dissolved under unusual circumstances, and in connection with its dissolution,
preparation of a balance sheet became necessary.
The partnership was formed by Mr. and Mrs. Henry Antoine and Mrs. Sandra Landers,
who had become acquainted while working in a Portland, Oregon, restaurant.
On November 1, 2009, each of the three partners contributed $16,000 cash to
the partnership and agreed to share in the profits proportionally to their contributed capital
(i.e, one-third each). The Antoines’ contribution represented practically all of their saving.
Mrs. Landers’ payment was the proceeds of her late husband’s insurance policy.
On that day also the partnership signed a one-year lease to the Lone Pine Café, located in
a nearby recreational area. The monthly rent on the café was $1,500. This facility
attracted the partners in part because there were living accommodations on the floor above
the restaurant. One room was occupied by the Antoines and another by Mrs.
Landers.
CASE 2-3
LONE PINE CAFÉ (A)*

The partners borrowed $21,000 from a local bank and used this plus $35,000 of partnership
funds to buy out the previous operator of the café. Of this amount, $53,200 was
for equipment and $2,800 was for the food and beverages then on hand. The partnership
paid $1,428 for local operating licenses, good for one year beginning November 1,
and paid $1,400 for a new cash register. The remainder of the $69,000 was deposited in
a checking account.
Shortly after November 1, the partners opened the restaurant. Mr. Antoine was the cook, and
Mrs. Antoine and Mrs. Landers waited on customers. Mrs. Antoine also ordered the food,
beverages, and supplies, operated the cash register, and was responsible for the checking
account.
The restaurant operated throughout the winter season of 2009-2010. It was not very
successful. On the morning of March 31, 2010, Mrs. Antoine discovered that Mr. Antoine and
Mrs. Landers had disappeared. Mrs. Landers had taken all her possessions, but Mr. Antoine
had left behind most of his clothing, presumably because he could not remove it without
warning Mrs. Antoine. The new cash register and its contents were also missing. No other
partnership assets were missing. Mrs. Antoine concluded that the partnership was dissolved.
(The court subsequently affirmed that the partnership was dissolved as of March 30.)
CASE 2-3
LONE PINE CAFÉ (A)*

Mrs. Antoine decided to continue operating the Lone Pine Café. She realized that
an accounting would have to be made as of March 30 and called in Donald Simpson,
an acquaintance who was knowledgeable about accounting.
In response to Mr. Simpson’s questions, Mrs. Antoine said that the cash register had
contained $311 and that the checking account balance was $1,030. Ski instructors who were
permitted to charge their meals had run up accounts totaling $870. (These accounts
subsequently were paid in full.) The Lone Pine Café owed suppliers amounts totaling $1,583.
Mr. Simpson estimated that depreciation on the assets amounted to $2,445. Food and
beverages on hand were estimated to be worth $2,430. During the period of its operation, the
partners drew salaries at agreed-upon amounts, and these payments were up to date.
The clothing that Mr. Antoine left behind was estimated to be worth $750. The partnership
had also repaid $2,100 of the bank loan.
Mr. Simpson explained that in order to account for the partners’ equity, he would prepare
a balance sheet. He would list the items that the partnership owned as of March 30,
subtract the amounts that it owned as of March 30, subtract the amounts that it owed
to out-side parties, and the balance would be the equity of the three partners. Each
partner would be entitled to one-third of this amount.
LONE PINE CAFÉ
CASE 2-3
LONE PINE CAFÉ (A)*

Questions 1:

Prepare a Statement of Financial Position for


the Lone Pine Café as of November 2, 2009.
CASE 2-3
LONE PINE CAFÉ (A)*
INFORMATIONS GIVEN:
Transactions in Nov 1, 2009
Initial Partner’s Contribution $ 48,000 consists of:

- Mr. Antoine = $ 16,000


- Mrs. Antoine = $ 16,000
- Mrs. Landers = $ 16,000
Transactions in Nov 2, 2009
Monthly Rental
 = $ 1,500
Bank Loan
 = $ 21,000
Second Equipment
 s = $ 53, 200
Foods & Beverages
 = $ 2,800
Local Operating License (for 1 year)
 = $ 1,428
New Cash Register
 = $ 1,400
The remainder of total money will be deposited in checking account

Mr. Antoine & Mrs. Landers were disappeared on the morning of March 31, 2010.

Business was not successful.


The Court affirmed the partnership was dissolved as of March 30, 2010

 CASE 2-3
LONE PINE CAFÉ (A)*
 Checking Account Balance calculation:
= Total Incoming Cash – Total Outgoing Cash
= (Partner’s Capital + Bank Loan) – (Equipment + Foods & Beverages + Licenses + Cash Register)
= ( $ 48,000 + $ 21,000) – ($ 53,200 + $ 2,800 + $ 1,428 + $ 1,400)
= ( $69,000) – ($ 58,828)
= $ 10,172

 Equipment:
= Café Equiment + New Cash Register
= $ 53,200 + $ 1,400
= $ 54,600
Lone Pine Café
Statement of Financial Position
As of November 2, 2009

Assets Liabilities
Current Assets Bank Loan $ 21,000
Cash $ 10,172
Total Liabilities $ 21,000
Foods & Beverages $ 2,800
Prepaid expense $ 1,428
Total Current Assets $ 14,400

Owners’ Equity
Non Current Assets Mr. Antoine’s capital $ 16,000
Equipment $ 54,600 Mrs. Antoine’s capital $ 16,000
Total Non Current Assets $ 54,600 Mrs. Landers’s capital $ 16,000
Total Equity $ 48,000

Total Assets $ 69,000 Total Liabilities & Equity $ 69,000


CASE 2-3
LONE PINE CAFÉ (A)*

Questions 2:

Prepare a Statement of Financial Position as of


March 30,2010.
CASE 2-3 (Answer of Q2)
LONE PINE CAFÉ (A)*
INFORMATION GIVEN:
Conditions after “The Disappearance of Mr. Antoine and Mrs. Landers”
(until March 30)
Cash register contained $ 311
Checking account balance $ 1,030

A/R: Servicing Ski Instructor $ 870

Owed Suppliers $ 1,583

Asset Depreciation $ 2,445

Food and Beverages on hand $ 2,430

Partners drew salaries at agreed-upon amounts

Clothes left by Mr. Antoine $ 750

Repaid the bank loan $ 2,100


CASE 2-3 (Answer of Q2)
LONE PINE CAFÉ (A)*
INFORMATION GIVEN:
 Total Cash:
= Cash in Cash Register + Checking Account
= $ 311 + $ 1,030
= $ 1,341

Prepaid Expense:

= $ 1,428 *7/12
= $ 833

 Total Capital of 3 Partners:


= Total Assets – (Total Liabilities)
= (Cash + A/R + Foods & Bev + Prepaid Expense + Equipment) – (Account Payable + Bank Loan)
= ($ 1,341 + $ 870 + $ 2,430 + $ 833 + ($54600-$2445) ) – ($ 1,583 + ($ 21,000 - $ 2,100) )
= ($57,629) - ($20,483)
= $ 37,146
= $ 12,382 for each Partner
Lone Pine Café
Statement of Financial Position
As of March 30, 2010

Assets Liabilities
Current Assets Current Liabilities
Cash $ 1,341 Account Payable $ 1,583
Account Receivable $ 870 Non Current Liabilities
Food & Beverages $ 2,430 Bank Loan $ 18,900
Prepaid expense $ 833 Total Liabilities $ 20,483
Total Current Assets $ 5,474 Owners’ Equity
Non Current Assets Mr. Antoine’s Capital $ 12,382
Equipment s $ 54,600 Mrs. Antoine’s Capital $ 12,382
Less: Accum. Depreciation $ (2,445) Mrs. Landers’ Capital $ 12,382
Total Non Current Assets $ 52,155 Total Equity $ 37,146
Total Assets $ 57,629 $ 57,629
Total Liabilities & Equity
CASE 2-3
LONE PINE CAFÉ (A)*

Questions 3:

Disregarding the marital complications, do you


suppose that the partners would have been able
to receive their proportional share of the equity
determined in Question 2 if the partnership was
dissolved on March 30, 2010? Why?
CASE 2-3 (Answer of Q3)
LONE PINE CAFÉ (A)*

If the Partnership was dissolved on March 30, 2010


The Partners would not been able to receive their proportional share
of the equity shown in the Statement of Financial Position, because:
- Their assets will not bring enough cash to pay the liabilities and
Partners. Below is liquidation value estimation for Lone Pine Café on
forced sale.
LIQUIDATION VALUE ESTIMATION

Current
Assumed
Assets Statement of Liquidation Value
Recovery
Financial Position
Cash $1,341 100% $1,341
Account Receivable $870 100% $870
Inventory $2,430 0% $0
Prepaid Expense $833 0% $0
Café Equipment $52,155 35% $18,254
TOTAL $57,629 $20,465
CASE 2-3 (Answer of Q3)
LONE PINE CAFÉ (A)*

- The Lone Pine Café has obligation to precede payment to


secured creditor (in this case is Bank), then payment to
unsecured creditor (in this case is Supplier).
Payment to Partners/Shareholders will be placed in
the final sequence therefore we suppose that it is very
unlikely the Partners would have been able to receive
their proportional share of the equity ($ 12,382 each)
as determined in Statement of Financial
Position as of March 30, 2010.
CASE 3-2
LONE PINE CAFÉ (B)*
In addition to preparing the balance sheet described in Lone Pine Café (A),
Mr. Simpson, the accountant, agreed to prepare an income statement. He said that such
a financial statement would show Mrs. Antoine how profitable operations had been, and thus
help her to judge whether it was worthwhile to continue operating the restaurant.
In addition to the information given in the (A) case, Mr. Simpson learned that cash received
from customers through March 30 amounted to $43,480 and that cash payments were
as follows:
Monthly payments to partners* $ 23,150
Wages to part-time employees 5,480
Interest 540
Food and beverage suppliers 10,016
Telephone and electricity 3,270
Miscellaneous 2,55
Rent payment 7,500
CASE 3-2
LONE PINE CAFÉ (B)*

Questions 1:

Prepare an Income Statement for the period of


the café’s operations through March 30,2010.
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
- Case B is related to Case A.

INFORMATION GIVEN:

 Sales Revenue = Cash Sales + Credit Sales


= $ 43,480 + $ 870
= $ 44,350

 Food & Beverage Expense


= Beginning Inventory + Cash Purchase + Credit Purchase - Ending Inventory
= $ 2,800 + $ 10,016 + $ 1,583 – $ 2,430
= $ 11,969
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
There are 2 accounting methods to book Salary to Partners in Partnership /
Incorporated Company:

1. Salary to Partners are booked directly as expense, and will hit the Income Statement.

2. Salary to Partners are not recognize as expense, but will be recognized as


Partners Drawing, and it will be recorded in Statement of Changes in Equity.
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
1. Salary to Partners are booked directly as expense, and will hit
the Income Statement.
LONE PINE CAFÉ
INCOME STATEMENT
For Period of Nov 2, 2009 – March 30, 2010

Sales Revenue $44,350


COGS (Foods & Beverages) $11,969
Gross Profit $32,381

Operating Expenses:
Salary to Partner $23,150
Part-Time Employee Wages $5,480
Telephone & Electricity Expense $3,270
Rent Expense $7,500
Depreciation Expense $2,445
Operating License Expense $595
Miscellaneous Expense $255
Total Operating Expenses $42,695
Earning Before Interest & Taxes -$10,314
Interest Expense $540
Net Income -$10,854
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
2. Salary to Partners are not recognize as expense, but it will be recognized as Partners Drawing,
and will be recorded in Statement of Changes in Equity.
LONE PINE CAFÉ
INCOME STATEMENT
For Period of Nov 2, 2009 – March 30, 2010

Sales Revenue $44,350


COGS (Foods & Beverages) $11,969
Gross Profit $32,381

Operating Expenses:
Part-Time Employee Wages $5,480
Telephone & Electricity Expense $3,270
Rent Expense $7,500
Depreciation Expense $2,445
Operating License Expense $595
Miscellaneous Expense $255
Total Operating Expenses $19,545
Earning Before Interest & Taxes $12,836
Interest Expense $540
Net Income $12,296
CASE 3-2 (Answer of Q1)
LONE PINE CAFÉ (B)*
STATEMENT OF CHANGES IN EQUITY
For Period of Nov 2, 2009 – March 30, 2010
Mr. Antoine’s Capital $16,000
Mrs. Antoine’s Capital $16,000
Mrs. Landers’s Capital $16,000
Total Partners Capital as of Nov 2, 2009 $48,000

Add:
Net Income (Nov 2, 2009 - Mar 30, 2010) $12,296

Deduct:
Salary to Mr. Antoine $7,717
Salary to Mrs. Antoine $7,717
Salary to Mrs. Landers $7,717
Total Partners' Drawings (Nov 2, 2009 – March 30, 2010) $23,150

Increase/(Decrease) in Partners Capital -$10,854

Total Partners Capital as of March 30, 2010 $37,146


CASE 3-2
LONE PINE CAFÉ (B)*

Questions 2:

What does this Income Statement tell Mrs.


Antoine ?
CASE 3-2 (Answer of Q2)
LONE PINE CAFÉ (B)*

1 Accounting Method: Salary to Partners -> Income Statement


 st

The income statement tells Mrs. Antoine that the partnership has suffered a $10,854 loss of operation.
It would appear that Lone Pine Café cannot support the three partners,
and Mrs. Antoine income is only from monthly salary.

2 Accounting Method: Salary to Partners -> Statement of Changes in Equity


 nd

In assessing the performance of a partnership, we need to pay attention to the Income Statement and
Statement of Changes in Equity. A profitable income statement does not mean it can create a
leverage of capital for all partners, hence the amount of the salary as well as the allocated drawing for the
period of the time needs to be put on consideration as well.
At the end, this method also tells Mrs. Antoine that the partnership has suffered a $10,854 loss.
PROBLEM 3-7
QED ELECTRONICS COMPANY

QED Electronic Company had the following transactions during April while conducting its television and
stereo repair business.
A new repair truck was purchased for $19,000.

Parts with a cost of $1,600 were received and used during April.

Service revenue for the month was $33,400, but only $20,500 was cash sales.

Typically, only 95 percent of sales on account are realized.


Interest expense on loan outstanding was $880.

Wage costs for the month totaled $10,000; however $1,400 of this had not yet been paid to the employees.

Parts inventory from the beginning of the month was depleted by $2,100

Utility bills totaling $1,500 were paid. $700 of this amount was associated with March’s operations.

Depreciation expense was $2,700

Selling expenses were $1,900

A provision for income taxes was established at $2,800, of which $2,600 had been paid to the federal
government.
Administrative and miscellaneous expenses were recorded at $4,700.
PROBLEM 3-7
QED ELECTRONICS COMPANY

Questions:

Prepare a detailed April Income Statement.


PROBLEM 3-7 (Answer of Q1)
QED ELECTRONICS COMPANY
QED ELECTRONICS COMPANY
Income Statement
For Period of April

Revenue
Service Revenue $33,400
Total Revenue $33.400

Expenses
Bad Debt $ 645 =5% * (33400-20500)
Wages $10.000
Parts $ 3.700
=1600+2100
Utility $ 800
Depreciation $ 2.700
Selling $ 1.900
Administrative & Misc $ 4.700
Total Operating Expenses $24.445
Earning before interest & taxes $ 8.955
Interest Expense $ 880
Taxes $ 2.800
Net Income $ 5.275