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.

Hints: The interest calculations can be done in your head. I am not looking at some kind of sophisticated loan amortization calculations. That means grandma gets 1/12 of her money back each month and also gets her interest calculated on the initial amount.

Answer 1

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 Grandma		12,000
	Loan from Bank		38,000
	Profit		-
			200,000

	Income Statement
	Sales	120,000
Less	Parts	90,000
Less	workers comp	10,000
Less	Rent	3,000
Less	Interest on Grandma Loan	180
Less	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
	Jones	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 Jones are 8:7. Grandma is just a lender and hence cannot own any equity

e. Equity owned on the last day of the month is 76000 & 66000 post salary to self and to this we need add the profit of 16,250 in the ratio of 8:7 which is 84,666 & 73,583 will be their net equity