In response to the cash crunch he faced for the month of December, Anthony Larson, owner of J. Prep in Charleston [see J. Prep Company (A)], had negotiated a short-term loan for $30,000 with the Charleston Savings Bank. J. Prep had received the loan on December 1; it was for three years, with an interest rate of 8 percent. Principal payments were to be made quarterly, in equal amounts, over the life of the loan. Interest payments also were to be made quarterly.
The remaining transactions for J. Prep for December are contained in Exhibit 1. Mr. Larson discovered that his accountant had begun to depreciate the store equipment in October. The equipment had been installed in late September at cost of $180,000, and had become operational on October 1. The accountant told Mr. Larson that she estimated the equipment had a useful life of five years, and would have no market value at the end of that time.
- Based on the information above and in Exhibit 1, construct the beginning balance sheet, i.e., the balance sheet as of December 1. Set it up as a series of T Accounts, and place the beginning balance in the appropriate place in each account.
- Prepare journal entries for all relevant items.
- Post the journal entries to the ledger (i.e. the T Accounts). Calculate ending balances for the T Accounts.
- Prepare a balance sheet as of December 31.
- Was Mr. Larson’s decision to borrow $30,000 from the bank a good one? Why or why not? How, if at all, has he improved his management of the operating cycle over the situation in the (A) case?