106 Part 1 Financial Account Pe eee Case 4-4 Waltham Oil and Lube Center, Inc. ‘On April | Frank Knight ineorporated and capitalized swith $40,000 of his savings Waltham Oil and Lube Centers, Inc. On the same day, he signed a lease and op- crating agreement 10 operate the recently constructed Waltham Oil ane Lube Center” located in Waltham, Massachusetts. The facility and name were owned by National Oil and. Lube 2 nationwide chain of centers offering thro franchisees au- tomobile oil change and lubrication services, ‘The lease and operating agreement required Knight to deposit $40,000 with National as evidence of his good faith and to pay for certain p 1g costs in- curred by National on behalf ofthe Waltham Center. In addition, the lease portion of the agreement called for Knight to pay beginning on May | and at the beginning of each month thereafter a flat lease rental payment of $1,$00 per month plus $10 payable at the end of each month for every automobile Waltham Center serviced during the month: National was responsible for pay- ment of local property taxes. Knight was responsible for maintaining the facility in good working condi- tion and the payment for all operating expenses, The 12-month lease agreement was automatically renewed unless a 30-day notice of cancellation was given by ei= ther party. The operating portion of the agreement required Knight to purchase all of his oil and lubricat- ing supplies and equipment from National. For its part, National agreed to provide Knight with training mate Tials, operating consulting services, and national advertising support. During April, Knight ordered fordelivery on April 30 office furniture costing $6,000 that had a useful life of 10 years, deposited an additional $10,000 capital in the business's new checking account, and paid $1,200 for a variety of 12-month insurance coverages begin« ning May 1. Knight opened the Waltham Center for business om May 1. On the same day, National deducted from Knight's $40,000 deposit $35,650 for the opening oil and grease inventory ($6,320), uniforms and other op rating supplies inventory ($4,130), and an equipment Burchase down payment ($25,000), The total cost of ‘the equipment was $75,000, In addition, National als deducted the May rental ($1,500) from the ‘epost 's $4,350 of the deposit was held by National to apply against any future nonpayment op amounts due National The $75,000 worth of grease and oil guns, hy. raulic jacks, and other equipment Knight bough from National was Knight's to keep, After applying the $35,200 deduction from his deposit toward this cost, Knight owed National $49,800 for the equipment. This balance was financed by giving National a noninterest. bearing note payable on the first of the month ata rate of $830 a month for 60 months. A National sales representat » ment was expected to have a useful life of five years The sales representative also suggested the $75,000 ‘equipment be depreciated on a group basis, That is, Knight would apply a single depreciation method and life to all of the equipment as if it was a single piece of equipment with no salvage value, This method, he ex plained, would reduce Knight’s bookkeeping costs ‘The business got off to a quick start, During the three-month period May through July, Knight and his staff serviced 2,340 cars, In addition to his service business, Knight was able to rent parking spaces 10 local citizens on a monthly basis between 7 p.m. 7am, Due to a local ordinance banning oversight street parking, these citizens were required to find off street parking. On August 2, Knight decided to assess how well he hhad done during the first three months of operations To this end, he gathered the following information: fe told Knight thee Bank account records showed deposits after March | oFS108,600. According to notations on the checks Knight believed $3,300 was generated by parking space rentals, The rest he assumed was oil and lubrication services revenue, Bank Account records showed payments for oil and Brease inventory purchases from National totaling 88.230; parts “and full-time employee past : utilities, $1,700; miscellaneous expers .000; lease payment, $26,400; equipment pi ments, $2,490; and withdrawals by Knight of $4500 Fat ersonal knowledge, Knight knew tit ° ‘a ly he was owed $340 by overnight parks Center ay Cot focal merchants who used! Wall” "to service their delivery trucks. He #8 #*aware the but 52,100. 4. Based! on a phys com July: 31 that th $5,290 on hand, Ow aunt his family had serviced the Waltham Center! As he prey he should pockin fers prepaying their August rental. As of July 31, Knight had not deposited these checks jn the business bank account Questions 1. Prepare journal entries for the period May 1 to July 31. "The retail value of these services was $450. Chapter 4 Accounting Records und Syxtems VOT Based on an examination of your journal entries, at the end of July, what is the balance, if any, of the lowing accounts, a Ca b. Accumulated depreciation Prepaid a Cash bal Accounts ree Jon an examination of your journal entries, for the three-month period May | to July 31, what is the amount of the following a, Withdrawals b. Cost of sales rarking revenues pense c. Total revenues How should Knight account for the $400 August parking checks? Possible bad debts? Family use of the Waltham Center's services?