Case 2-1 Solutions

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Case 2-1 Solutions

Requirement (1):

Using the account titles provided for you in Exhibit 2.1 and referring back to the Narrative as needed, please prepare journal entries (using good form) as necessary for the transactions and events described in the accompanying exhibits for this case. That is, you should prepare only those specific entries required to record the transactions described in these materials. You are not to consider adjusting entries that would be recorded after the events described in these exhibits.

[The accompanying footnote reads:Before preparing your entries, take some time to review Exhibit 2.1 and consider the nature of the accounts provided (asset, liability, equity, revenue, or expense).]

SOLUTIONS:(See page 93 for general discussion about this requirement.)

Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Friday, May 1
(i) & (ii) / No entry required.*
Monday, May 11
(i), (ii), & (iii) / No entry required.* / pp. 93-94
Friday, May15
No entry required.* / p. 95
Thursday, May 21
No entry required.* / p. 95
Wednesday, May 27
No entry required.* / p. 95
Monday, June 1
(i) / Cash / $45,000.00 / pp. 81,82 [1]
Accounts Receivable / $6,500.00
Office Supplies / $1,500.00
Office Equipment / $9,500.00
Capital Stock / $62,500.00
(ii) / Prepaid Rent / $10,800.000 / p. 95 / p. 81 [2]
Cash / $10,800.00
*Be sure to allocate points for students who appropriately make no entries.
(CONTINUED) / Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Monday, June 1 (cont.)
(iii) / Prepaid Insurance / $2,400.00 / p. 95 / p. 81 [3]
Cash / $2,400.00
(iv) / Vehicles / $28,000.00 / pp. 81,82 [4]
Cash / $7,000.00
Note Payable / $21,000.00
(v) / Prepaid Insurance / $600.00 / pp. 95-96 / p. 81 [5]
Cash / $600.00
(vi) / No entry required.*
Tuesday, June 2
(i) / Cash / $3,000.00 / p. 96 / pp. 81,82 [6]
Unearned Consultation Fees / $3,000.00
(ii) / Furniture & Fixtures / $17,250.00 / p. 97 / pp. 81,82 [7]
Accounts Payable / $17,250.00
Wednesday, June 3
(i) / Advertising Expense / $1,500.00 / p. 97 / pp. 81,82 [8]
Cash / $1,500.00
(ii) / Office Supplies / $1,140.00 / p. 97 / pp. 81,82 [9]
Accounts Payable / $1,140.00
(iii) / No entry required.* / p. 97
(iv) / Prepaid Advertising / $4,250.00 / pp. 97-98 / p. 81 [10]
Cash / $4,250.00
*Be sure to allocate points for students who appropriately make no entries.
(CONTINUED) / Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Thursday, June 4
Cash / $4,800.00 / p. 98 / pp. 81,82 [11]
Unearned Consultation Fees / $4,800.00
Friday, June 5
Promotional Supplies / $4,925.00 / pp. 98-99 / pp. 81,82 [12]
Accounts Payable / $4,925.00
Monday, June 8
Promotional Expense / $625.00 / p. 99 / pp. 81,82 [13]
Cash / $625.00
Wednesday, June 10
(i) / Accounts Payable / $4,925.00 / p. 99 / pp. 81,82 [14]
Promotional Supplies / $45.00
Cash / $4,880.00
(ii) / Accounts Payable / $1,140.00 / p. 100 / pp. 81,82 [15]
Office Supplies / $22.80
Cash / $1,117.20
(iii) / Cash / $6,500.00 / pp. 100-01 / p. 81 [16]
Accounts Receivable / $6,500.00
Promotional Expense / $48.80 / pp. 81,82 [17]
Promotional Supplies / $48.80
Thursday, June 11
Accounts Receivable / $8,277.00 / p. 101 / pp. 81,82 [18]
Contract Services / $8,277.00
(CONTINUED) / Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Thursday, June 11 (cont.)
Contract Services / $8,075.00 / p. 82 [19]
Accounts Payable / $8,075.00
Accounts Receivable / $7,472.00 / pp. 81,82 [20]
Contract Services / $7,472.00
Contract Services / $7,290.00 / p. 82 [21]
Accounts Payable / $7,290.00
Friday, June 12
(i) / Salaries Expense / $800.00 / pp. 81,82 [22]
Cash / $800.00
(ii) / Cash / $3,500.00 / pp. 81,82 [23]
Unearned Consultation Fees / $3,500.00
(iii) / Dividends Paid / $195.20 / pp. 101-02 / pp. 81,82 [24]
Promotional Supplies / $195.20
Saturday, June 13
(i) / Cash / $7,472.00 / p. 81 [25]
Accounts Receivable / $7,472.00
(ii) / Accounts Payable / $15,365.00 / p. 102 / pp. 81,82 [26]
Cash / $15,365.00
(iii) / Contract Services / $17,335.00 / p. 102 / p. 82 [27]
Accounts Payable / $17,335.00
(CONTINUED) / Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Saturday, June 13
(iii) cont. / Accounts Receivable / $17,768.00 / pp. 81,82 [28]
Contract Services / $17,768.00
Monday, June 15
(i) / Cash / $7,000.00 / p. 81 [29]
Accounts Receivable / $7,000.00
(ii) / Accounts Receivable / $14,324.00 / p. 102 / pp. 81,82 [30]
Contract Services / $14,324.00
Contract Services
C / $13,975.00 / p. 82 [31]
Accounts Payable / $13,975.00
Thursday, June 18
(i) / Cash / $1,277.00 / p. 81 [32]
Accounts Receivable / $1,277.00
(ii) / Accounts Payable / $17,335.00 / pp. 81,82 [33]
Cash / $17,335.00
Monday, June 22
Promotional Expense / $146.40 / p. 103 / pp. 81,82 [34]
Promotional Supplies / $146.40
Friday, June 26
(i) / Salaries Expense / $800.00 / pp. 81,82 [35]
Cash / $800.00
(CONTINUED) / Page Number
Exhibit 2.2 / Additional / T-Account
Reference / Account Title / Debit / Credit / Discussion / Reference
Friday, June 26 (cont.)
(ii) / Accounts Receivable / $11,622.00 / p. 103 / pp. 81,82 [36]
Contract Services / $11,622.00
Contract Services
C / $11,339.00 / p. 82 [37]
Accounts Payable / $11,339.00
(iii) / Accounts Payable / $25,314.00 / p. 103 / pp. 81,82 [38]
Cash / $25,314.00
Monday, June 29
(i)a / No entry required.*
(i)b / No entry required.*
(i)c / Promotional Expense / $1,470.00 / p. 103 / pp. 81,82 [39]
Cash / $1,470.00
(i)d / No entry required.* / pp. 103-04
Tuesday, June30
(i) / Office Supplies / $350.00 / p. 104 / p. 81 [40]
Cash / $350.00
Dividends Paid / $5,000.00 / pp. 81,82 [41]
Cash / $5,000.00
(ii) / No entry required.*
(iii) / No entry required.* / pp. 104-05
*Be sure to allocate points for students who appropriately make no entries.

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Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (2)

Requirement (2):

2.Using the journal entries that you prepared in requirement (1), post the entries to “T” accounts and calculate the overall account balances as of 6/30/09.

SOLUTIONS: “T” accounts are organized here by type of account (i.e., assets, liabilities, stockholder’s equity, revenue, or expense) and follow the order in which they would be listed in the financial statements. In order to facilitate grading, we suggest that you request that the students use this same order when submitting their work. The numbers in brackets [ ], which are listed to the bottom right of the t-account entries, correspond to the related journal entries on pp. 75-80 and are cross-referenced in the t-account reference column.

ASSETS
Cash / Accounts Receivable / Office Supplies / Promotional Supplies
DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
0.0005/31 / 0.0005/31 / 0.0005/31 / 0.0005/31
45,000.00[01]}] / 6,500.00[01]}] / 1,500.00[01]}] / 4,925.00[12]}]
10,800.00[02] / 6,500.00 [16] / 1,140.00[09]}] / 45.00[14]
2,400.00[03] / 8,277.00[18]}] / 22.80[15] / 48.80[17]
7,000.00[04] / 7,472.00[20]}] / 350.00[40]}] / 195.20[24]
600.00[05] / 7,472.00 [25] / 146.40[34]
3,000.00[06] }] / 17,768.00[28]}]
1,500.00[08] / 7,000.00 [29]
4,250.00[10] / 14,324.00[30]}]
4,800.00[11] }] / 1,277.00 [32]
625.00[13] / 11,622.00[36]}]
4,880.00[14] / 43,714.00[36]}] / 2,967.20[01]}] / 4,489.60[01]}]
1,117.20[15]
6,500.00[16] }] / Prepaid Advertising / Prepaid Insurance / Prepaid Rent
800.00[22] / DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
3,500.00[23] }] / 0.0005/31 / 0.0005/31 / 0.0005/31
7,472.00[25] }] / 4,250.00[10]}} / 2,400.00[03]}} / 10,800.00[02]}}
15,365.00[26] / 600.00[05]}}
7,000.00[29] }] / 4,250.00[10]}} / 3,000.0011/30 / 10,800.0011/30
1,277.00[32] }]
17,335.00[33] / Office Equipment / Furniture & Fixtures / Vehicles
800.00[35] / DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
25,314.00[38] / 0.0005/31 / 0.0005/31 / 0.0005/31
1,470.00[39] / 9,500.00[01]}} / 17,250.00[07]}} / 28,000.00[04]}}
350.00[40]
5,000.00[41]
78,549.00[32] }] / 99,606.20[37]
21,057.20[02] / 9,500.0011/30 / 17,250.0011/30 / [2/30 / 28,000.00[2/30

(CONTINUED)

LIABILITIES
Accounts Payable / Note Payable / Unearned Consultation Fees
DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
0.0005/31 / 0.0005/31 / 0.0005/31
17,250.00[07]0 / 21,000.00[04]0 / 3,000.00[06]0
1,140.00[09]0 / 4,800.00[11]0
4,925.00[12]0 / 3,500.00[23]0
4,925.00[14]}}
1,140.00[15]}}
8,075.00[19]0
7,290.00[21]0
15,365.00[26]}}
17,335.00[27]0
13,975.00[31]0
17,335.00[33]}}
11,339.00[37]0
25,314.00[38]}}
17,250.00[37]0 / 21,000.00[04]0 / 11,300.00[04]0
STOCKHOLDER’S EQUITY / REVENUES
Capital Stock / Dividends Paid / Contract Services
DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
0.0005/31 / 0.0005/31 / 0.0005/31
62,500.00[01]}} / 195.20[24]} / 8,277.00[18]}
5,000.00[41]} / 8,075.00[19]
7,472.00[20]}
7,290.00[21]
17,335.00[27]}
62,500.00[36]}} / 5,195.20[41]} / 41]} / 17,768.00[28]}
14,324.00[30]}
EXPENSES / 13,975.00[31]}
Advertising Expense / Promotional Expense / Salaries Expense / 11,622.00[36]}
DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT / 11,339.00[37]}
0.0005/31 / 0.0005/31 / 0.0005/31 / 1,449.00 [41]}
1,500.00[08]} / 625.00[13]} / 800.00[22]}
48.80[17]} / 800.00[35]}
146.40[34]}
1,470.00[39]}
1,500.00[13]} / 2,290.20[41]} / 1,600.00[41]}

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Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (3)

Requirement (3):

Using the ending balances in the “T” accounts from requirement (2), prepare a 6/30/09 unadjusted trial balance for AA2R.

SOLUTIONS:Accounts are organized here by type of account (i.e., assets, liabilities, stockholder’s equity, revenue, or expense) and follow the order in which they would typically be listed in the financial statements.In order to facilitate grading, we suggest that you request that the students use the same order when submitting their work.

An Affair 2 Remember
Unadjusted Trial Balance
6/30/2009
Debit / Credit
Cash / $21,057.20 / ABNORMAL*
Accounts Receivable / 43,714.00
Office Supplies / 2,967.20
Promotional Supplies / 4,489.60
Prepaid Advertising / 4,250.00
Prepaid Insurance / 3,000.00
Prepaid Rent / 10,800.00
Office Equipment / 9,500.00
Furniture & Fixtures / 17,250.00
Vehicles / 28,000.00
Accounts Payable / 17,250.00
Note Payable / 21,000.00
Unearned Consultation Fees / 11,300.00
Capital Stock / 62,500.00
Dividends Paid** / 5,195.20
Contract Services / 1,449.00
Advertising Expense / 1,500.00
Promotional Expense / 2,290.20
Salaries Expense / 1,600.00
$134,556.20 / $134,556.20

*See requirement (4) on next page.

**The "dividendspaid" account is a temporary account that is closed to retained earnings at the end of the

accounting period. A debit to "dividends paid" is, in essence, a debit or decrease to "retained earnings."

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Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (4)

Requirement (4):

For each account listed on the unadjusted trial balance prepared in requirement (3), identify the type of account and upon which financial statement it would be reported. Consider also, whether any account balance is abnormal. (That is, an account balance that is expected to carry a debit balance has a credit balance and vice versa.) If you determine that a particular account balance is abnormal, label it as such and explain what the abnormal balance communicates.

SOLUTION:

Cash / Asset / Balance Sheet / ABNORMAL*
Accounts Receivable / Asset / Balance Sheet
Office Supplies / Asset / Balance Sheet
Promotional Supplies / Asset / Balance Sheet
Prepaid Advertising / Asset / Balance Sheet
Prepaid Insurance / Asset / Balance Sheet
Prepaid Rent / Asset / Balance Sheet
Office Equipment / Asset / Balance Sheet
Furniture & Fixtures / Asset / Balance Sheet
Vehicles / Asset / Balance Sheet
Accounts Payable / Liability / Balance Sheet
Note Payable / Liability / Balance Sheet
Unearned Consultation Fees / Liability / Balance Sheet
Capital Stock / Equity / Balance Sheet
Dividends Paid / Equity* / Balance Sheet
Contract Services / Revenue / Income Statement
Advertising Expense / Expense / Income Statement
Promotional Expense / Expense / Income Statement
Salaries Expense / Expense / Income Statement

*The “Dividends Paid” account is a temporary account that is closed to retained earnings at the end of the accounting period. A debit to “Dividends Paid” is, in essence, a debit or decrease to “retained earnings.”

Cash has an abnormal balance. A positive (normal) cash balance would be a debit balance. The credit balance in cash indicates that withdrawals (credits) are greater than deposits (debits). This abnormality can indicate an overdraft at the bank. As it turns out, students discover in Case 2-2 that the line of credit will be utilized and the overdraft is eliminated. However, if this was not the case, this overdraft would need to be reclassified as a liability.

1

Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (5)

Requirement (5):

Using your unadjusted account balances from requirement (3), calculate the following items as of 6/30/2009.

1. Total dollar amount of AA2R’s assets.
2. Total dollar amount of AA2R’s liabilities.
3. Total equity (using the balance sheet equation).
4. The unadjusted net income (or net loss).

SOLUTION:

Although all of the previous questions are answered using the student’s “unadjusted” account balances, it is important for them to really grasp that these are not the final numbers, and so the following summary answers do not represent the final measures of June’s performance! They have much more to record in Case 2-2 and the numbers will change accordingly.

(a) Total dollar amount of AA2R’s assets.

Assets:
Accounts Receivable / $43,714.00
Furniture & Fixtures / 17,250.00
Office Equipment / 9,500.00
Office Supplies / 2,967.20
Prepaid Advertising / 4,250.00
Prepaid Insurance / 3,000.00
Prepaid Rent / 10,800.00
Promotional Supplies / 4,489.60
Vehicles / 28,000.00
$123,970.80

(b) Total dollar amount of AA2R’s liabilities.

Liabilities:
Accounts Payable / $17,250.00
Cash (overdraft) / 21,057.20
Note Payable / 21,000.00
Unearned Consultation Fees / 11,300.00
$70,607.20

(c) Total equity (using the balance sheet equation).

Assets / Liabilities / Owners Equity
$123,970.80 / ($70,607.20) / = $53,363.60

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Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (5)

(d) The unadjusted net income (or net loss).

Contract Service Fees Earned / *$1,449.00
Advertising Expense / (1,500.00)
Promotional Expense / (2,290.20)
Salaries Expense / (1,600.00)
Unadjusted net loss / $(3,941.20)

*See discussion of the Contract Services account contained in Exhibit 2.1 (Project, p. 43). The costs incurred for wedding-related services are debited to this account with the offsetting credit applied to Accounts Payable. Billing for reimbursement of these same costs (plus a moderate handling fee) is also credited to this Contract Services account, with the offsetting debit applied to Accounts Receivable. The summary entries for all bills to date are as follows:

(i)

Contract Services∆$58,014.00

Accounts Payable$58,014.00

(ii)

Accounts Receivable$59,463.00

Contract ServicesΩ$59,463.00

These two entries are always recorded at the same time when client bills are mailed. Because Ellen bills for cost plus her handling fee, the Contract Services account would then always reflect a credit balance that equals the handling fee. In this instance, the total handling fee charged to date is $1,449.00.

Numbers for the prior entries were taken from Exhibit 2.3 a-e (Project, pp. 50-54) and are detailed below. (The numbers in the brackets [ ], which are listed to the bottom right of the following t-account entries, correspond to the related journal entries on pp. 75-80 and are cross-referenced in the t-account reference column.)

Contract Services
DEBIT / CREDIT
0.0006/30
8,277.00[18]}
8,075.00[19] }
7,472.00[20]}
7,290.00[21] }
17,335.00[27]}
17,768.00[28]}
14,324.00[30]}
13,975.00[31]}
11,622.00[36]}
11,339.00[37]}
58,014.00[37]} / 59,463.00[36]}
1,449.00 [41]}

1

Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirements (5)&(6)

You may also explain the Contract Services account by adding the terms “revenue” and “expense” to the prior entries as follows:

(i)

Contract Services “Expense” ∆$58,014.00

Accounts Payable$58,014.00

(ii)

Accounts Receivable$59,463.00

Contract Services “Revenue” Ω$59,463.00

Contract Services RevenueΩ$59,463.00

Contract Services Expense∆( 58,014.00)

Contract Service Fees Earned$ 1,449.00

As suggested by requirement (9), this model is risky. If all goes well and the receivables are collected in full, there is no issue. However, the Narrative explains that in order to maintain good vendor relations, Ellen pays vendors’ invoices upon receipt (after reviewing for accuracy). This works fine to the extent that her clients pay their balances owed! As the story unfolds, Ellen will experience her first collection trouble with the Nickels/King customer account. In requirement (9), students are asked to discuss this risk in the business model and provide suggestions to reduce it.

Another question you may pose at this point of classroom discussion is, “What possible future events could lead to a change in the $3,941.20 unadjusted loss?”

• There may be additional services that were performed in June that have not yet been billed and therefore not yet recorded.
• There may be consulting fees that have been “earned” that are still on the balance sheet as “unearned.”
• There may be expenses incurred in June that will not be paid until July and have therefore not yet been recorded (i.e., accrued expense).
• There may be deferred expenses that were paid in advance in June and now, as time has passed, a portion of the prepayment has been consumed.

Requirement (6):

Using the balance you computed for total equity in requirement 5(c), determine how much of this balance is

1. total contributed capital
2. total retained earnings

SOLUTION:

1. Total contributed capital.

Capital Stock = $62,500 (balance per Rqmt. #3)

1

Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirement (6)

b.Total retained earnings.

Stronger students will wonder about the classification of the $5,195.20 of Dividends Paid, and rightly so. Most students will breeze right pass this situation and treat it as being drawn out of retained earnings because that is how the textbook likely shows it. Given the fact that the business has experienced a net loss, however, a dividend or “distribution of profit” does not make sense! Instead, it would appear that the distribution is, in fact, a return of Ellen’s original contribution of capital. That is, given the three sources of funds subsequently discussed (requirement #7- cash overdraft), from where else could it come? Can we really “distribute profit” whenwe experienced overall a net loss?

We typically let the students think and ponder this fact, and it makes for a great classroom discussion opportunity. It is important to point out to them that, at this point in time, we don’t know if the company has generated a profit or not (as the above net loss is an unadjusted measure), and we are far from being done with finalizing our accounting for the month of June. As such, tell them that for purposes of this question, they should go ahead and treat the dividend payment as a reduction to Retained Earnings. In Case 2-2, more information will be provided to them and a final determination can be made about how to best classify these distributions to Ellen.

SOLUTION:

Students can take two approaches:

Approach 1: Use the balance sheet equation. (Requirement (5c))

Assets[1] - / Liabilities / = Owners Equity
$123,970.80 - / $70,607.20 / = $53,363.60

Contributed Capital + Retained Earnings = Total Equity

$62,500.00 + X = $53,363.60

(Requirement (6a)) (Requirement (5c))

Solve for X = ($9,136.40) (deficit)

Approach 2: Independently calculate retained earnings using the account balances from requirement (3) and the Net Income calculated in requirement (5d).

Retained Earnings:

Beginning Retained Earnings$ 0.00(first year)

Less: Net Loss (3,941.20)(Requirement (5d))

Less: Dividends Paid (5,195.20)(Requirement (3))

Ending Retained Earnings(deficit) $(9,136.40)at 06/30/2009

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Teaching Notes: Project Wedding Planner Case 2-1 Solutions- Requirements (6)&(7)

Proof:

Assets = / Liabilities + / Owner’s Equity
Contributed + Earned
$123,970.80 = / $70,607.20 + / $62,500.00 + ($9,136.40)

Requirement (7):

Consider each of the liabilities identified in requirement 5(b) above and comment on how the liability will eventually be settled.

SOLUTION:

Accounts Payable: This account balance is typically paid or settled with cash within 30 days. If the various invoices making up this balance are paid quickly enough, Ellen may be able to take a discount for a negotiated % of the purchase price. This, of course, depends on the terms provided by each individual vendor. In the narrative, Ellen has made it clear that she wants to maintain “good vendor relations” and paying amounts owed on a timely basis would clearly be part of this process. Currently, the business is short of cash. Hopefully, AA2R will soon collect some of the outstanding customer accounts receivable giving it the liquidity necessary to pay these accounts. If not, the company has the line of credit at the bank, or Ellen, as owner, may have to loan or contribute additional funds to keep the business afloat.

Unearned Consultation Fees: This account balance represents amounts collected by AA2R in advance of the wedding. Students are told in footnote 3 in Exhibit 2.2 (Project, p. 45) to assume that Ellen performs the services to generate the consultant fees evenly over the wedding “count-down” period which ends on the wedding day. As such, this liability does not represent a dollar amount owed to a vendor, but services that are owed to customers! At the time that Ellen was paid, it was too early to recognize revenue since the earnings process had not yet started. Consequently, this revenue has not been earned and must be deferred or postponed as a liability on the balance sheet. As Ellen provides her services, this liability (obligation) is removed and the revenue is recorded on the income statement. The revenue is gradually recognized on the income statement as the services or the “income-generating activity” is performed. This liability will therefore be settled not by a cash payment, but by the performance of services.

Note Payable: This account balance represents the amount owed to the car dealership for the purchase of the new van on June 1. Similar to the “accounts payable,” this liability will require a cash outlay. However, unlike the “accounts payable,” it will not be paid in full, but instead, monthly payments of principal and interest will be paid. Ellen has signed a loan agreement allowing the monthly payments to be deducted directly from the business checking account.

Cash (overdraft): This account balance represents the cash deficit that appears to have resulted when AA2R spent more money than it deposited (when looking at the unadjusted numbers). AA2R is obligated to make up for this shortfall. This deficit will be eliminated either by (i) borrowing (line of credit), (ii) new capital contributions by Ellen, or (iii) collection of accounts receivable. This is a great time to point out the parallel between these three “sources of funds” and the balance sheet