Professional Documents
Culture Documents
Darwin Clemente
Raymond Martinez
Jojo Sebastian
Submitted to;
Prof. Virgilio Avila
Background and POV
Synthesis
The case concerns Music Mart, Inc., a CD and tape store which
was founded by John Smith . The store was initially started
through the personal funding of John Smith worth $ 25,000 that
was initially deposited in a bank, consequently taking $ 25,000
worth of stock certificates in return.
Several transactions followed, as reflected in the store’s last
balance sheet dated January 4.
Point of View
This case shall be tackled from the point of view of the user of
the accounting report or information, more specifically from the
point of view of the manager.
Problem and Objectives
Problem Statement
The case is concerned as to how the succeeding
transactions/events as provided for in the case will have an
effect on Music Mart’s balance sheet?
Objectives
The study of this case shall have the following objectives:
1. To accurately record the succeeding transactions/events on
the store’s account based on generally accepted accounting
principles.
2. To be able to appreciate how each transaction/event
affects the store’s balance sheet.
3. To be able to have an assessment, based on the updated
balance sheet, of the store’s financial position.
Areas of Consideration
Based on the facts provided for in the case, the group arrived at
the following assumptions:
Total
Total $37,750.00
$37,750.00
Music Mart
Balance Sheet
As of Jan. 4
Transaction 1
The store purchased two lots of land of equal Total Liabilities & Owner's Equity
size for a total of $ 24,000. it paid $ 6,000 in cash
$62,470.00
and gave a 10-year mortgage for $ 18,000.
Music Mart
Balance Sheet
Transaction 6
The store sold one of the two lots of land for $ 12,000. It received $ 3,000 cash, and in
addition, the buyer assumed $ 9,000 of the mortgage; that is, Music Mart is no longer
responsible for this half.
Music Mart
Balance Sheet
Transaction 7 No Effect
Smith withdrew $ 1,000 cash from the store’s bank account for his personal use.
Music Mart
Balance Sheet
Transaction 9
Smith took merchandise costing $ 750 from the store’s inventory for his personal
use.
Music Mart
Balance Sheet
Transaction 10 No Effect
The store paid off $ 6,000 of its note payable (disregard interest).
Music Mart
Balance Sheet
Transaction 12 No Effect
Smith sold one-third of the stock he owned in Music mart, Inc. for $ 11,000 cash.
Music Mart
Balance Sheet
Transaction 13
Merchandise costing $ 850 was sold for $ 1,310, which was received in cash.
Music Mart
Balance Sheet
As of the end of January
Based on the store’s latest balance sheet, its operations was able to realize a $ 680
worth of retained earnings despite the earlier withdrawal made by John
Smith and the subsequent use of the store’s merchandise for his personal use.
Specific recommendations are provided in the following discussions:
That John Smith, ideally, should maintain a separate personal accounting
record in order to effect the separation of entity. Though the case has a gray
area in the sense that it is a corporation while maintaining that John Smith is the
sole incorporator, the owner/incorporator should make his personal transactions
separate and distinct from the business in order to effectively monitor the
business’ performance.
Prepaid expenses like the three-year insurance policy purchased by Music Mart
are recorded based on the amount of the un-expired cost. In this case, the full
amount is reflected in the balance sheet.
Dividends due for shareholders are to be taken from the business’ earnings. In
the Music Mart case, the withdrawal made by John Smith was treated in the
same manner.
Conclusion and Recommendation
Non-monetary assets should be recorded at cost in compliance with
the accepted accounting concepts. Thus, in this case, transaction 10 ,
where Smith learned that the portion of lot he sold was sold by the
buyer at a higher amount did not have any effect in the store’s balance
sheet. Otherwise, organizations will have a very difficult time assessing
an asset’s market value only to update its accounting records. With
this, it would be of utmost importance for decision makers to note that
the book value of certain assets does not necessarily correspond to the
asset’s fair market value.
In summary, a balance sheet can be considered as one of the most
important accounting reports for it provides a clear picture on the dual
effect of a particular transaction on the business’ financial position.
However, accounting reports or accounting in general is not concerned
with measuring a particular entity’s actual value or worth mainly
because only those which can be expressed in monetary terms are
reflected in every accounting report.
References
References:
Book:
Accounting: Text and Cases by Robert N. Anthony, David F. Hawkins,
and Kenneth A Merchant, Mc Graw-Hill International Editions,
Accounting Series, 11th. Edition.
Internet:
http://www.sovereign-
freedom.com/asset_protection/modern_corporation_sole_3.htm