Spicewood Stables, Inc., was established in Dripping Springs, Texas, on April 1. The company provides stables, care for animals, and grounds for riding and showing horses. You have been hired as the new assistant controller. The following transactions for April are provided for your review. 1. Received contributions from investors and issued $230,000 of common stock on April 1.
2. Acquired a barn for $180,000. On April 2, the company paid half the amount in cash and signed a three-year note payable for the balance.
3. Provided $18,000 in animal care services for customers on April 3, all on credit.
4. Rented stables to customers who cared for their own animals; received cash of $14,000 on April 4 for rent earned this month.
5. On April 5, received $3,350 cash from a customer to board her horse in May, June, and July (record as Deferred Revenue).
6. Purchased and received hay and feed supplies on account on April 6 for $3,800.
7. Paid $2,600 on accounts payable on April 7 for previous purchases.
8. Received $2,040 from customers on April 8 on accounts receivable.
9. On April 9, prepaid a two-year insurance policy for $4,800 for coverage starting in May.
10. On April 28, paid $1,140 in cash for water and utilities used this month.
11. Paid $14,800 in wages on April 29 for work done this month.
12. Received an electric utility bill on April 30 for $1,560 for usage in April; the bill will be paid next month.
Required:
1. Prepare the journal entry for each of the above transactions.
2. Post the transaction activity from requirement 1 to the T-Accounts below. All accounts begin with zero balances because this is the first month of operations.
3. Prepare an unadjusted trial balance as of April 30.
4-a. Refer to the revenues and expenses shown on the unadjusted trial balance. Based on this information, calculate preliminary net income and net profit margin.
4-b. Determine whether the net profit margin is better or worse than the 30.0 percent earned by a close competitor.

Spicewood Stables, Inc.

1. Journal Entries:

April 1:

Debit Cash $230,000

Credit Common Stock $230,000

To record contributions from investors and issuance of stock.

April 2:

Debit Barn $180,000

Credit Cash $90,000

Credit Notes Payable (Long-term) $90,000

To record the acquisition of a barn.

April 3:

Debit Accounts Receivable $18,000

Credit Service Revenue $18,000

To record the provision of animal care services on credit.

April 4:

Debit Cash $14,000

Credit Rent Revenue $14,000

To record the renting of stables to customers for April.

April 5:

Debit Cash $3,350

Credit Deferred Revenue $3,350

To record the receipt of cash from customer in advance.

April 6:

Debit Supplies $3,800

Credit Accounts Payable $3,800

To record the purchase of hay and feed supplies on account.

April 7:

Debit Accounts Payable $2,600

Credit Cash $2,600

To record the payment on account

April 8:

Debit Cash $2,040

Credit Accounts Receivable $2,040

To record the receipt of cash from customers.

April 9:

Debit Prepaid Insurance $4,800

Credit Cash $4,800

To record the prepayment of insurance for 2 years.

April 10:

Debit Utilities Expense $1,140

Credit Cash $1,140

To record the payment for water and utilities.

April 11:

Debit Wages Expense $14,800

Credit Cash $14,800

To record the payment of wages for the month.

April 12:

Debit Utilities Expense $1,560

Credit Utilities Payable $1,560

To record the accrued electric utility bill.

2. T-Accounts:

Cash

Date      Account Title          Debit         Credit

April 1    Common stock    $230,000

April 2  Barn                                         $90,000

April 4  Rent Revenue            14,000

April 5  Deferred Revenue      3,350

April 7  Accounts payable                       2,600

April 8 Accounts receivable    2,040

April 9 Prepaid Insurance                       4,800

April 10 Utilities Expenses                        1,140

April 11 Wages Expense                        14,800

April 12 Balance                                $136,050

Totals                              $249,390 $249.390

Common Stock

Date      Account Title          Debit         Credit

April 1    Cash                                    $230,000

Barn

Date      Account Title          Debit         Credit

April 2   Cash                   $90,000

April 2   Notes payable     90,000

April 12 Balance                                 $180,000

Notes Payable

Date      Account Title          Debit         Credit

April 2   Barn                                      $90,000

Accounts Receivable

Date      Account Title          Debit         Credit

April 3   Service Revenue  $18,000

April 8   Cash                                        $2,040

April 12 Balance                                  $15,960

Service Revenue

Date      Account Title          Debit         Credit

April 3   Accounts receivable              $18,000

Rent Revenue

Date      Account Title          Debit         Credit

April 4   Cash                                      $14,000

Deferred Revenue

Date      Account Title          Debit         Credit

April 5   Cash                                      $3,350

Supplies

Date      Account Title          Debit         Credit

April 6   Accounts Payable  $3,800

Accounts Payable

Date      Account Title          Debit         Credit

April 6   Supplies                                   $3,800

April 7   Cash                       $2,600

April 12 Balance                   $1,200

Prepaid Insurance

Date      Account Title          Debit         Credit

April 9   Cash                    $4,800

Utilities Expenses

Date      Account Title          Debit         Credit

April 10 Cash                      $1,140

Wages Expense

Date      Account Title          Debit         Credit

April 11   Cash                   $14,800

3. Unadjusted Trial Balance as of April 30:

Account Title                Debit         Credit

Cash                          $136,050

Common stock                            $230,000

Barn                            180,000

Notes payable                                 90,000

Accounts receivable   15,960

Service Revenue                              18,000

Rent Revenue                                  14,000

Deferred Revenue                            3,350

Supplies                        3,800

Accounts payable                              1,200

Prepaid Insurance       4,800

Utilities Expenses         1,140

Wages Expense        14,800

Totals                   $356,550     $356,550

4a.  

Service Revenue      18,000

Rent Revenue          14,000

Total revenues     $32,000

Utilities Expenses       1,140

Wages Expense      14,800

Total expenses    $15,940

Net Income          $16,060

Net profit margin = $16,060/$32,000 * 100 = 50.19%

4b. The net profit margin is better than the 30.0% earned by a close competitor.

Explanation:

The adjustment for Electric Utility does not form part of the adjusted trial balance.  If we assume that the payment was eventually made on April 30, the Cash Balance will reduce by $1,560 and the total expenses will increase by the same amount with an equal reduction in the net income to $14,500.  This will also reduce the net profit margin to 45.31%.