On March 1, Victoria wrote a cheque for $1,800 for office supplies that were needed for the business. These supplies are expected to last for six months.
On the same day, Victoria also ordered a new cash register for $6,000 that was guaranteed to last for ten years. In addition to the cost of the machine, there was to be an additional charge for delivery and instalation of $200. A stand was installed to house the register at a further cost of
$650. Training costs were necessary and amounted to $350. The supplier insisted on full payment at the time of delivery.
On March 5, Victoria faxed an order for cushions and fabric costing $7,000. Because her credit rating was unknown, the supplier required a deposit of 10 percent before processing the order and arrangements were made for the balance to be paid 40 percent C.O.D. and 50 percent in 30 days.
Victoria mailed the deposit cheque that afternoon.
On March 7, Victoria was at a fabric supplier and saw a fabric that was exactly what she wanted for a sofa in her own den. She bought the fabric by issuing a company cheque for $300.
Utilities were expected to be $400.00 per month. At the end of March no bills had yet been received.
Of the eight employees that worked for the old business, Victoria promised to hire six of them at $400 per week. However, she was able to hire only two of the sales employees in March and they worked for the last two weeks only. The other four employees started working on April 1.
At March 31, Victoria had paid her employees for only one week.
On March 15, the new cash register was delivered and installed. The cushion and fabric order, which had been placed on March 5, was also delivered. She took cushions which had a cost of
$150 for her own use from this order. The cushions looked great on her couch at home.
During the month of March, Victoria’s total sales amounted to $18,000 which included $8,000 of credit sales. By the end of the month, $2,000 of the credit sales had been paid in full. Victo-ria felt that an allowance for bad debts of $100 was appropVicto-riate.
Instructions
a. The bank manager was interested in Victoria Newman’s progress. Prepare an income state-ment, statement of owner’s equity, and a classified balance sheet for the first month of busi-ness to give to the bank manager.
b. How successful is this business venture? Discuss.
Phyllis Romalotti, now divorced from the great rock star Danny Romalotti, has finally realized a lifelong dream of running her own business. She had always paid income taxes at the rate of about 52 percent. She established Computer Information Systems, a technology service under the name of “Romalong Company”.
On the advice of her lawyer and long-time friend, Michael Baldwin, she started her business on September 1, 2003 using the $50,000 she got as a settlement in the divorce case. She obtained a bank loan from that great bank, Your Friendly Bank, in the amount of $20,000. This loan was taken out in the name of the business. The terms of the loan required that she sign a five-year note bearing interest at 11 percent for the loan. Her payments would be $1,000 per year plus in-terest. The first loan payment would not start until March, 31, 2004.
Michael Baldwin found 1,200 metres of office space for rent at $15,000 per annum. Phyllis signed a two-year lease and gave the landlord a cheque dated September 1, 2003, for the first seven month’s rent. She purchased office equipment for a total of $9,600 which was settled by a company cheque for $4,000 dated September 1, 2003, the day of the purchase, with the final pay-ment being due on June 30, 2004.
Business was great, client income for the first six months amounted to $90,000. Of this amount only 90 percent had been received in cash. The rest was still owing. She had placed numerous ads in the local newspaper which cost the company only $290 per month. She had received such a good rate for the advertising because she had paid for a full year on September 1, 2003, by is-suing a company cheque.
A new computer, for use by the business, was purchased by Phyllis on October 1, 2003. She did not have a company cheque at the time and thus had to issue a personal cheque in the amount of $2,700 for this purchase. She did not claim reimbursement for this amount. Supplies in the amount of $20,000 were bought on account during the period. Cheques had been issued in the amount of $17,000 for the supplies purchases. The balance would be paid on March 15, 2004, at the time of the next cheque run. Of the amount purchased, only $1,500 worth remained on hand on February 28, 2004.
Analytical and Decision Problems and Cases III–45
A cheque for a one-year insurance policy in the amount of $2,400 to cover the period Sep-tember 1, 2003, to August 31, 2004, had been mailed. Phyllis had written a company cheque in the amount $375 for a personal purchase because she had been short of money.
The equipment that had been purchased by the business would be good for about eight years, while the computer was estimated to be obsolete in three years. Salaries in the amount of $8,450 had been paid by February 28, 2004. Phyllis had drawn the sum of $25,000 out of the business for her own use.
Instructions
a. Prepare an income statement for the first six months of the business.
b. Prepare a balance sheet for the company as at February 28, 2004.
c. Prepare a statement of owner’s equity.
Interview the partners of a local small business. Focus on the following:
• Why was the business organized as a partnership?
• Have there been any unforeseen complications resulting from the partnership form of organi-zation?
• Is the partnership form of organization likely to be changed to a corporation in the foresee-able future? If so, why?
(Note: All interviews are to be conducted in accordance with the guidelines discussed in the Pref-ace of this textbook.)
Alan Bruce and Juan Foster are considering forming a partnership to engage in the business of aerial photography. Bruce is a licensed pilot, is currently earning $48,000 a year, and has $50,000 to invest in the partnership. Foster is a professional photographer who is currently earning $30,000 a year. He has recently inherited $70,000 that he plans to invest in the partnership.
Both partners will work full-time in the business. After careful study, they have estimated that expenses are likely to exceed revenue by $10,000 during the first year of operations. In the sec-ond year, however, they expect the business to become profitable, with revenue exceeding ex-penses by an estimated $90,000. (Bear in mind that these estimates of exex-penses do not include any salaries or interest to the partners.) Under present market conditions, a fair rate of return on capital invested in this type of business is 20 percent.
Instructions
a. On the basis of this information, prepare a brief description of the income-sharing agreement that you would recommend for Bruce and Foster. Explain the basis for your proposal.
b. Prepare a separate schedule for each of the next two years showing how the estimated amounts of net income would be divided between the two partners under your plan. (Assume that the original capital balances for both partners remain unchanged during the two-year period. This simplifying assumption allows you to ignore the changes that would normally occur in capi-tal accounts as a result of divisions of net income, or from drawings or additional investments.) c. Write a brief statement explaining the differences in allocation of income to the two partners
and defending the results indicated by your income-sharing proposal.
Upon graduation from university, Ray Bradshaw began work as a staff assistant for a national CA firm. During the next few years, Bradshaw received his CA certificate and was promoted to the level of senior on the firm’s audit staff.
At this time, Bradshaw received an offer from a small local CA firm, Ames and Bolt, to join that firm as a third partner. Both Ames and Bolt have been working much overtime and they would expect a similar workload from Bradshaw. Ames and Bolt draw salaries of $60,000 each and share residual income equally. They offer Bradshaw a $60,000 salary plus one-third of residual income.
The offer provides for Bradshaw to receive a one-third equity interest in the firm and requires him to make a cash investment of $120,000. Balance sheet data for the firm of Ames and Bolt are as follows:
Projected net income of the local CA firm for the next four years is estimated below. These esti-mated earnings are before partners’ salaries and are based on the assumption that Bradshaw joins the firm and makes possible an increased volume of business.
If Bradshaw decides to continue in his present position with the national CA firm rather than join the local firm, he estimates that his salary over the next four years will be as follows:
Instructions
a. Assuming that Bradshaw accepts the offer from Ames and Bolt, determine the amount of his beginning capital and prepare the entry in the partnership accounts to record Bradshaw’s ad-mission to the firm.
b. Compute the yearly amounts of Bradshaw’s income from the partnership for the next four years. Compare these amounts with the salary that he will receive if he continues in his pre-sent employment and write a memo explaining the factors Bradshaw should consider in de-ciding whether to accept or decline the offer from Ames and Bolt.
c. Assuming that Bradshaw declines the offer, suggest some alternatives that he might propose if he decides to present a counteroffer to Ames and Bolt.
Iris, Jack, and Keith are partners and have the following balances in their capital accounts: Iris,
$30,000; Jack, $90,000; and Keith, $60,000. The partnership has $8,000 cash and has other as-sets, and owes its creditors $220,000. The three partners share income or loss as follows: 3:2:1.
Assume that the other (non-cash) assets are sold for $152,000 cash and the partnership is liq-uidated. Keith is personally solvent and will contribute any amount for which he is liable. Iris and Jack both have personal debts in excess of their personal assets.
Instructions
Show how the cash should be distributed.
1st year . . . . $ 62,000 3rd year . . . . $ 73,000 2nd year . . . . $ 66,000 4th year . . . . $ 80,000 1st year . . . . $ 192,000 3rd year . . . . $228,000 2nd year . . . . $ 204,000 4th year . . . . $240,000 Current assets . . . . $ 72,000 Current liabilities . . . . $ 36,000 Property & equipment . . . . 288,000 Long-term liabilities . . . . 174,000 Ames, Capital . . . . 75,000 Bolt, Capital . . . . 75,000 Total . . . . $ 360,000 Total . . . . $360,000
Go to
www.legalline.ca Step one Click on Areas of Law
Step two Click on Business Law A&D III-6
How Would Cash Be Distributed?
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