Question

Smith and Jones start a business to build custom bicycles. Smith invests personal funds of $80,000 and Jones invests $70,000. Grandma Smith loans the company $12,000 with the provision it is to be paid back in 12 equal monthly payments plus 1.5% monthly interest. Smith and Jones agreed that ownership would be proportional to their equity investments. In addition, they borrow $38,000 from the bank at interest of 1.5% per month payable monthly. (They do not have to pay back the principal for five years, so ignore it.) They buy $90,000 worth of parts. They use $60,000 of those parts in the first month. They pay factory workers a total of $10,000 for the first month. They pay rent of $3,000 for the month for a factory. They each (not Grandma) draw salaries of $4,000 per month. They sell the resulting bicycles for $120,000.

a) Prepare a balance sheet for day zero, that is, store is ready, people hired, parts on hand, money collected from bank, Grandma, Smith, and Jones.

b) Prepare an income statement for the first month.

c) Prepare a balance sheet for the last day of the first month.

d) What is the percent ownership by Smith, Jones, and Grandma on the first day of the month.

e) How much equity is owned by each on last day of the first month.

Answer 1

Answer :

Balance sheet as on First day of the Month

Assets	Amount
Current assets	-
Cash	200,000
Liabilities	Amount
Capital	-
Smith	80,000
Jones	70,000
Loan from Grand maa	12,000
Loan from Bank	58,000
Profit	-
	200,000

Income Statement

	Sales	120,000
Less	Parts	90,000
Less	Workers comp	10,000
Less	Rent	3,000
Less	Interest on Grandmaa Loan	180
Less I	Interest on Bank Loan	570
	Profit	16,250

Balance sheet as on Last day of the Month

	Assets		Amount
	Current Assets	-	-
	Cash	-	207,250
	Liabilities	-	Amount
	Capital	-	-
	Smith	80,000	-
Less	Drawings	4,000	76,000
	Joes	70,000	-
Less	Drawings	4,000	66,000
	Loan from Grandma		11,000
	Loan from Bank		38,000
	Profit		16,250
			207,250

(d). The percent of equity owned by Smith and Joes are 8:7. Gramdma is just a leader and hence cannot own any equity

(e). Equity owned on the last day of moth is 76000 and 66000 post salary to self and to this we need add the profit o f16,250 in the ratio of 8:7 which is 84,666 and 73,583 will be their net equity.

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