In February 2009, Mr. Alan Pickering contracted to purchase a mineral spring in the Missouri Ozarks. The property, known locally as Verona Springs, included a 6 million gallon-per-day spring that produced exceptionally pure water. Mr. Pickering planned to bottle the water and sell it in the nearby cities of Springfield, Columbia, St. Louis, and Kansas City. On March 1, 2009, Mr. Pickering and several relatives purchased 500,000 shares in the company for $1 per share. On that same day, the corporation borrowed $300,000 from the local bank. The bank note required five annual $60,000 principal repay- ments beginning March 1, 2010. Interest payments of 6% of the outstanding balance on the previous March 1 were required on March 1 of each year, also beginning March 1, 2010. The firm then wrote a check for $525,000 to buy the 65 acres of land that included Verona Springs. The water was nearly free of pollutants, but it arose into a small pond before flow- ing to a nearby stream. In the pond, the water was exposed to falling leaves and other contaminants. To maintain purity, Mr. Pickering hired a local firm to drill a flowing artesian well near the spring (in a flowing artesian well, pressure from an underground aquifer forces water to flow naturally to the surface). The company paid $1,000 cash for the drilling on March 10, 2009. Mr. Pickering expected the well to last at least 10 years before redrilling would be needed. During March, Verona Springs had a building constructed above and around the well. Inside the building, the firm installed filtration, purification, and bottling equip- ment and a holding tank. The company paid the $240,000 cost by check on March 31, 2009, when the equipment became operational. The firm expected the building and equipment to last 10 years. On April 5, the firm purchased a truckload of 18,200 one- gallon plastic water bottles and lids for $3,200, and 3,100 shipping boxes for $3,100 ($1.00 per box). The $6,300 for those purchases was payable in 30 days. During April, the firm also purchased miscellaneous supplies for $500 and paid in cash. The firm began bottling water by hiring three local residents to work part-time. During April, they bottled and shipped 18,000 gallons of mineral water (3,000 cases that each contained six 1-gallon bottles). Verona sold the 3,000 cases to regional su- permarkets for $5.00 per case. One chain paid for 1,000 cases by check upon receipt; the others purchased on account, payable in 30 days. In late April, the firm paid the three employees a total of $1,500 in cash for their work and also paid a trucking firm $900 in cash to deliver the water. On April 30, the firm had negligible quantities of bottles, lids, boxes, and supplies in inventory. For the two-month period March 1, 2009, to April 30, 2009, prepare (a) journal entries, (b) an income statement, (c) a balance sheet, and (d) a statement of cash flows. Evaluate the company’s performance. Is the large decline in cash a concern? How would the three financial statements change if Verona Springs bought 5,100 boxes for $5,100 ($1.00 per box) and if 2,000 boxes remained in inventory? How would the three financial statements change if, in addition to paying a total of $5,100 for boxes, Verona Springs also spent a total of $4,800 for bottles and lids (a total of $9,900 for boxes, bottles, and lids, instead of $6,300), $2,500 instead of $1,500 for labor, $1,600 instead of $900 for shipping, and then shipped a total of 5,000 cases at $5.00 per case (1,000 cases for cash; 4,000 cases on credit)? Also assume negligible quantities of boxes, bottles, lids, and supplies in inventory. Identify costs that may not have been included in the case.
In February 2009, Mr. Alan Pickering contracted to purchase a mineral spring in the Missouri Ozarks. The property, known locally as Verona Springs, included a 6 million gallon-per-day spring that produced exceptionally pure water. Mr. Pickering planned to bottle the water and sell it in the nearby cities of Springfield, Columbia, St. Louis, and Kansas City. On March 1, 2009, Mr. Pickering and several relatives purchased 500,000 shares in the company for $1 per share. On that same day, the corporation borrowed $300,000 from the local bank. The bank note required five annual $60,000 principal repay- ments beginning March 1, 2010. Interest payments of 6% of the outstanding balance on the previous March 1 were required on March 1 of each year, also beginning March 1, 2010. The firm then wrote a check for $525,000 to buy the 65 acres of land that included Verona Springs. The water was nearly free of pollutants, but it arose into a small pond before flow- ing to a nearby stream. In the pond, the water was exposed to falling leaves and other contaminants. To maintain purity, Mr. Pickering hired a local firm to drill a flowing artesian well near the spring (in a flowing artesian well, pressure from an underground aquifer forces water to flow naturally to the surface). The company paid $1,000 cash for the drilling on March 10, 2009. Mr. Pickering expected the well to last at least 10 years before redrilling would be needed. During March, Verona Springs had a building constructed above and around the well. Inside the building, the firm installed filtration, purification, and bottling equip- ment and a holding tank. The company paid the $240,000 cost by check on March 31, 2009, when the equipment became operational. The firm expected the building and equipment to last 10 years. On April 5, the firm purchased a truckload of 18,200 one- gallon plastic water bottles and lids for $3,200, and 3,100 shipping boxes for $3,100 ($1.00 per box). The $6,300 for those purchases was payable in 30 days. During April, the firm also purchased miscellaneous supplies for $500 and paid in cash. The firm began bottling water by hiring three local residents to work part-time. During April, they bottled and shipped 18,000 gallons of mineral water (3,000 cases that each contained six 1-gallon bottles). Verona sold the 3,000 cases to regional su- permarkets for $5.00 per case. One chain paid for 1,000 cases by check upon receipt; the others purchased on account, payable in 30 days. In late April, the firm paid the three employees a total of $1,500 in cash for their work and also paid a trucking firm $900 in cash to deliver the water. On April 30, the firm had negligible quantities of bottles, lids, boxes, and supplies in inventory.
- For the two-month period March 1, 2009, to April 30, 2009, prepare (a)
journal entries , (b) an income statement, (c) a balance sheet, and (d) a statement of cash flows. - Evaluate the company’s performance.
- Is the large decline in cash a concern?
- How would the three financial statements change if Verona Springs bought 5,100 boxes for $5,100 ($1.00 per box) and if 2,000 boxes remained in inventory?
- How would the three financial statements change if, in addition to paying a total of $5,100 for boxes, Verona Springs also spent a total of $4,800 for bottles and lids (a total of $9,900 for boxes, bottles, and lids, instead of $6,300), $2,500 instead of $1,500 for labor, $1,600 instead of $900 for shipping, and then shipped a total of 5,000 cases at $5.00 per case (1,000 cases for cash; 4,000 cases on credit)? Also assume negligible quantities of boxes, bottles, lids, and supplies in inventory.
- Identify costs that may not have been included in the case.
Trending now
This is a popular solution!
Step by step
Solved in 7 steps
