Question

In: Accounting

Smith and Jones start a business to build custom bicycles. Smith invests personal funds of $80,000...

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.

Solutions

Expert Solution

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


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