Fishy Farm Fishy Farm is a small business located

 Fishy
Farm

Fishy Farm is a small business located in
the mountains of southwestern Virginia.
The business is actually a commercial fish hatchery dedicated to raising
the finest freshwater sport fish in the area including trout, bass and
perch. The area has an abundance of
fresh water clear mountain streams, which provide the natural resource for fish
breading and raising.

JB Nathan is the founder and owner of Fishy
Farm. An avid fisherman himself, JB has
always had an interest in this type of business. He was able to purchase land and convert it
into a fish hatchery by building breeding and holding fish tanks near several
mountain streams which flowed through his property. Formally, JB worked for a state fish hatchery
about 50 miles to the north in Possum Creek, and used this hands on experience
to start his own business.

JB hired an independent accountant to keep
his records for the last few years, but felt, just like raising fish, he could
learn how to do the bookkeeping activities on his own. Before taking on this additional duty, he
wanted to practice recording several accounting activities related to the
company and determine if he could develop the appropriate financial
statements. He decided to begin with the
balance sheet that was prepared for him as of the close of business on December
31, 20×0. He was going to review all of
the activities which took place during the month of January 20×1 and see if he
could develop a correct income statement for the month and a new balance sheet
as of January 31, 20×1. This was
probably a good month to experiment with the accounting process, because
business was slow during the colder winter months. He wanted to be sure he was comfortable with
the accounting process before things began to get real busy with fish breeding
in the spring.

During January he purchased a new water
filtration system which will clean and aerate the water in the holding tanks
and make it suitable for recycling. The
fresher water should promote better conditions for faster fish growth and allow
JB to sell larger fish more quickly. The
equipment cost $16,000 and he paid 10% down and signed an 8% 5-year note for
the balance due. He was also able to
sell a used pump to a neighbor for its book value of $350.

JB works alone on Fishy Farm although
sometimes work gets busy in the spring and summer months. When necessary he gets his wife or neighbors
to help him with moving equipment or stocking fish tanks. He pays himself a salary out of the business
and feels he earns enough to make a comfortable living. He will never go hungry; it is not many
businesses where the owner can eat the inventory. JB has a skillet and filet knife right next
to his office desk.

The following exhibit is the balance sheet
for Fishy Farm.

Fishy Farm
Balance Sheet
December 31, 20×0

Item

Total

Assets

Current
Assets

Cash

$ 10,500

Accounts
Receivable

2,200

Supplies

4,000

Inventory

24,600

Prepaid Expenses

1,800

Total
Current Assets

$ 43,100

Long
Term Assets

Land

$ 52,000

Vehicle (net)

8,400

Building (net)

140,000

Fish Tanks (net)

75,000

Equipment (net)

43,500

Total
Long Term Assets

$318,900

Total
Assets

$362,000

Liabilities
and Equity

Current
Liabilities

Accounts Payable

$17,200

Notes Payable (
7.2% Line of Credit)

6,500

Unearned Revenue

1,000

Total
Current Liabilities

$ 24,700

Long-Term
Liabilities

Notes Payable

115,000

Mortgage Payable

137,000

Total
Long-Term Liabilities

252,000

Equity

Capital
Stock

75,000

Retained
Earnings

10,300

Total
Equity

85,300

Total
Liabilities and Equity

$362,000

Three years ago JB invested $75,000 in the
business from savings he had built up over his last 10 years of work. He has always maintained a very disciplined
life style and tried to save his money so he could reach his goal of owning his
own business. He is happier being in a
business he enjoys versus having a lot of money. He also likes to work outdoors and be able to
set his own schedule. When he set up his
business, since he was born and raised in the area, he was able to get good
deals on the land and other assets that he purchased. JB also has had long term relations with the
bankers and they gave him favorable rates on loans in the purchase of the land,
buildings and equipment.

JB kept a list of activities the business
was involved in during the month of January.

JB wrote checks for the following
activities:

·
Labor and salary $3,550
·
Utility bill from December $440
·
Telephone
$80
·
Ralston Food Supplier (for a payment of a
bill on fish food) $1,380
·
Insurance $300
·
Property Taxes $250
·
Eggs of all Kinds (for purchase of fish
eggs and small fish for inventory purposes from a regional supplier) $3,300
·
Payment of $1,000 on the long-term note
payable with $800 going to interest on the loan.
·
Payment of $1,500 on the mortgage with $300
toward the principle balance.

JB received cash for the following
activities:

·
Sale of 20,000 fish to the state of
Virginia for$14,250. The cost of those
fish to JB were $6,800.
·
Payment from Frank’s Fishing Pond for a
sale from last year in the amount of $1,200.
The cost of those fish sold were $500.
·
Payment of $700 from Premier Game Fish as
an advance payment for the sale of 300 of the best bass fish in March. Those fish will cost JB $250 to raise.

Some other activities JB was aware of
during the month were:

·
Depreciation on the vehicle was $100, on
the building was $750, on the fish tanks was $900 and the equipment was $500.
·
$150 of prepaid advertising was used up.
·
An advanced fish sale of $600 was completed with the cost of those
fish equaling $200.
·
Received January utility bill of $520
·
Sale of 6,000 fish on account to the state
of West Virginia for $5,000. The cost of
those fish to JB were $2,000.
·
Purchased on account from Game Fish
Breeders 10,000 baby bass for $1,400.

Note: For business purposes use an income
tax rate of 40%.

Required:

1. Develop
journal entries for all of the accounting transactions in January for Fishy
Farm.

2. Create
an income statement for the month of January for Fishy Farm.

3. Reconstruct
the balance sheet for Fishy Farm as of January 31, 20×1.

4. Identify
and discuss issues that JB should be concerned about regarding taking over the
accounting function of the business.

5. If
you were a banker, would you lend money to Fishy Farm? Why or why not?