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HOMEWORK ASSIGNMENT #2
BOB’S UPHOLSTERY SHOP
Your Uncle Bob has worked in an upholstery shop for ten years. Last year, Uncle Bob’s wages were $ 30,000. Lately, however, Bob has been unhappy with his employer. Convinced that he could run an upholstery shop that did better work at a lower cost, Bob decides to go into business for himself. Withdrawing $ 7,000 cash from his personal savings account, Bob opens BOB’S UPHOLSTERY SHOP. Primarily for liability purposes, Bob has decided to incorporate the business. 7,000 shares of stock, at $1 par value, are issued to Bob. His lawyers accept 500 shares of stock in exchange for the value of their legal advice during the start-up phase. These legal fees would be considered Organization Costs and are amortized over 5 years.To get the business going, Bob purchases several industrial sewing machines costing $ 4,000. Bob also needs other tools and equipment costing $ 3,000. Not wanting to completely deplete his cash balance, he applies for, and receives, a $ 2,500, 3-year loan from a local bank.
1. Prepare a Balance Sheet for BOB’S UPHOLSTERY SHOP dated January 1, 2008. (Hint: Prepare journal entries for each transaction noted above.
2. Is Bob’s financial condition better, worse, or the same as it was before he started the business?
Bob’s checkbook shows various increases and decreases over the twelve months ending December 31, 2008: Bob billed his customers $ 160,000. All, but $ 10,000 has been received in cash. Bob wrote checks for the following purchases: Upholstery Fabric $ 80,000
Supplies $ 20,000
Wages for part-time help $ 9,500
Rent $ 4,800
Insurance (2-year policy) $ 3,200
Utilities $ 2,500
Your Uncle Bob has just presented a rough draft of his Company’s financial statements to you, knowing that you are presently enjoying the rigors of an accounting course. You astutely ask him a couple of questions and receive the following responses:
1. Do you have any unpaid invoices on your desk? Bob replies: “Yes, a $ 300 utility bill and one for $ 10,000 for fabric I received a week ago.”
2. Did you make any loan payments this year? Bob answers: “I paid a total of $ 1,250, which included $ 250 for interest.”
3. Do you have an inventory of fabric on hand as of December 31, 2008? “Yes, $ 5,000 and I also have $ 550 of supplies on hand.”
4. How long do you expect to use your sewing machines and the other tools and equipment? “The sewing machines should last 5 years and the other stuff about 3 years.
HOMEWORK ASSIGNMENT #2
BOB’S UPHOLSTERY SHOP
3. Update your previously prepared Balance Sheet and prepare an Income Statement to reflect the data from Bob’s checkbook and his answers to your questions.
4. Is Bob’s financial condition better, worse, or the same as it was before he started the business?
5. How can Bob and his lawyers/shareholders get cash out of the business? How will this affect the
Uncle Bob is relatively pleased with the first year’s operations of his business but thinks there is room for improvement in operations and further growth.
1. What business changes would you recommend for Uncle Bob for the next year? In general, how would these affect the financial statements?
2. Prepare the second year’s Income Statement for BOB’S UPHOLSTERY SHOP next to the 2008 Income Statement. Incorporate the following changes over 2008:
• Fees earned increased 20% over the previous year.
• Bob has noticed that he has been left holding a “rubber” check after having already released his finished product to the customer. He has been unable to recover about 1% of his total sales from this situation and expects that percentage to unfortunately continue in the future as well.
• Bob began running advertising in the Huntington Herald Press during the year. Ads cost $ 250 per month.
• Bob adds himself to the payroll at $ 35,000.
• Part-time wages increase to $ 12,000 as business grows.
• Payroll tax expense is $ 4,500.
• Rent expense jumped to $ 5,000 and utilities increased 5%.
• Bob purchased a new tool, costing $ 1,000. It has a life of four years.
• Bob’s new tool allows him to work more efficiently. He used about 5% less fabric and supplies (due to less waste) than he did last year.
• Interest paid this year was $ 150.
• Bob’s Upholstery is in the 15% corporate tax bracket.
3. How would you compare the results of operations of the two years?