The Garden Spot: Year One

It was almost midnight on December 31, and Mary Jo Barnes was reflecting on her first year as owner and
manager of The Garden Spot, a small garden shop she had opened on January 1 in Charlottesville, Virginia.
She and her husband, Josh, had both worked in a large city in the northeastern United States for the past
10 years and had decided to relocate to Charlottesville to establish a different lifestyle. Barnes had a degree in
horticulture and wanted to devote her working days to something she enjoyed and was passionate about. So
she decided to start her own business and opened a small retail garden shop selling plants, trees, shrubs, and
flowers.

Barnes recalled what a busy day she had on that first day in January:

1. She had met with her lawyer to incorporate the business, and she and Josh invested $60,000 in the
company in exchange for shares of common stock. They had contemplated borrowing the $60,000
from Barnes’s parents but had decided instead to use some of the money they had saved over the past
10 years.
2. She had met with a loan officer from National Bank and obtained a $40,000 loan. The loan was to be
repaid in equal principal payments over four years. The interest rate was 10%, and interest was payable
at the end of each year when the principal payment was made.
3. After breaking for a quick lunch at the local sandwich shop, she had visited a local used car dealer and
had purchased a truck for $12,000 cash. The truck appeared to be in excellent condition, and Barnes
expected she would be able to use it for five years.
4. Next, she had gone to a local hardware store to buy the necessary equipment for her business, paying
$10,000 cash for equipment she also expected she would use for five years.

She had been incredibly busy that first year. The Garden Spot had engaged in so many activities that Barnes
could hardly remember them all. Fortunately, she had kept all receipts and had made good notes. As she looked
through them, she made a list of what had occurred during that year:

5. Purchases of inventory throughout the year had cost $260,000, $235,000 of which was paid in cash and
$25,000 was purchased on account.
6. Sales of $400,000, $315,000 of which were cash sales and $85,000 of which were sales on account. The
inventory sold had originally cost a total of $240,000.
7. Operating expenses incurred (advertising, rent, utilities, legal, and payroll) were $140,000, all paid in
cash.
 8. Payment of $14,000 made to National Bank, $10,000 of which was for repayment of the loan principal
and $4,000 of which was for payment of interest.

Barnes recalled that employees did work in December for which payment of $5,000 would be included in
their paychecks during the first week of January.

On December 31, Barnes had paid $990 in estimated income taxes for the year.

Barnes needed to prepare the financial statements for The Garden Spot for that first year. She wanted a
nice, tidy summary of its performance, and the financial statements would offer that summary. But she also
needed to provide a set of financial statements to National Bank, as she was required to do annually based on
her loan agreement. She needed to get busy.

Required

1. Prepare journal entries for items 1 through 8.

2. Post this information to T-accounts.
3. Record the necessary adjusting entries and post to T-accounts.
4. Prepare an income statement that summarizes results of operations for the year.
5. Prepare a balance sheet as of December 31.
6. Prepare a statement of cash flow for the year.
7. Based on your review of the financial statements, what is your assessment of The Garden Spot’s
performance during its first year of operations?