Marion Boats, Inc. ( The following contains the only given information) Fred Cun
ID: 2511090 • Letter: M
Question
Marion Boats, Inc. (The following contains the only given information)
Fred Cunningham was a fire truck salesman for may years, while Bill, his brother, worked as a book salesman for a major publishing house. Although they had done fairly well financially, they wanted to “be their own bosses,” so they decided to go into business together.
They agreed that selling small fishing and recreational boats would be a good line for them to go into as both had been interested in fishing and boating for many years. Also, the small town Marion, Mississippi, where they lived, did not have any boat dealerships. The nearest dealer was some 95 miles away.
After some searching, they chose a suitable site for their proposed operation. It was situated at a popular local dock. A dilapidated building which had been condemned by the local authorities stood on the site.
At this point in time, the brothers decided to incorporate the business. The services of a lawyer were obtained to draw up the legal papers and to handle all aspects of the execution of the incorporation. The fee for this service was $800, and each of the brothers paid half of it.
On October 1, 2005, Fred purchased 1,800 shares of the company’s stock for $72,000, and Bill purchased 500 shares for $20,000. The payment for legal services was considered part of these company’s shares could be made only at the prevailing book per share at the time of the sell his shares back to the company, this transaction would also be conducted at the prevailing book value of the shares. The brothers also agreed that they should each receive salaries of $24,000 per year at all times during which they were engaged in the company’s business on a full-time basis. Both knew this amount was less than they could earn in other jobs, but they realized a small salary was needed at this time to ensure that the dealership could pay its bill on time.
On November 1, 2005 with the aid of a $40,000 bank loan and $32,000 of the company’s money, Fred purchased the property which had been selected. The same day, he left his job to devote his full attention to the new enterprise.
First, Fred arranged to have the old building demolished. A cursory examination revealed there was nothing of any significance that could be salvaged, except for some building stone. Mr. Mahoney, the wrecker, agreed to clear the site for $7,000, provided he could have the stone. Otherwise, he would want $9,000. Fred was convinced he could get a better price for the stone, so he instructed Mr. Mahoney to clear the site and store the stone in a corner of it. This work was started immediately and completed before Christmas. Mr. Mahoney agreed to defer collection of payment until May 31, 2006.
In the meantime, Fred got in touch with a large boat manufacturer, Sport Boats, Inc., who had previously indicated interest in the projected dealership. Fred asked Sport Boats for financial help to construct the buildings needed to carry on business. Sport Boats agreed to provide all the financing needed for the building through a loan repayable in 10 equal annual installments, provided Marion Boats sold only Sport Boats models. The loan carried an interest rate of 10% per year, payable from April 1, 2006. The first repayment, including interest, would fall due on March 31, 2007.
On December 31, 2005, Sport Boats sent a check for $40,000 to get Marion Boats started. Fred deposited the check in the business’s bank account. The remainder of the loan would be forthcoming when the building was completed.
Next, Fred arranged through a consulting architect for several construction companies to bid for the job. The lowest bidder was the Birkett and Snell Company. They agreed to construct the specified building for $124,000. On the advice of his architect, however, Fred decided to accept the Holmes Brothers Construction Company bid of $140,000; the architect believed Birkett and Snell was less reliable than Holmes in meeting promised completion dates.
The construction was started immediately, Holmes promising completion by the end of March 2006. Progress payments on certificates from the architects were to be made at the end of January, the end of February, and the date of completion in amounts of $40,000, $40,000, and $60,000.
During early 2006, Fred tried to obtain some orders for boats which he planned to deliver directly to customers from Sport Boat’s warehouse in Cleveland. Fred has some success with the model he had recently bought himself. Between January 1 and March 30, Fred sold 17 of this model at an average cash cost to Marion of $9,000. Nothing was paid to Sport Boats for these boats during the period. These 17 sales realized $183,600, whereof $58,000 represented trade-in allowances, $112,000 in cash, and the rest was outstanding at March 30. Fred sold all the trade-in boats for $54,800 cash before March 31. Previously, Bill and Fred agreed that the latter should receive $40 for every new boat sale as compensation for using his private boat as a display model.
At the end of March, the building was completed. However, there was an additional charge of $2,4000 for materials, which Marion had to pay according to the provisions of the building contract. At the same time, the architect’s bill for $2,600 arrived.
Fred sent the progress payments to the builder as previously arranged, making the January payment with $40,000 of the company’s money and the February payment with the Sport Boats loan. On March 31, the last $60,000 progress payment and the $2,400 materials surcharge were paid. The $40,000 bank loan plus interest of $2,000 was repaid by check on March 30.
On March 30, Bill quit his job with the publishing house and joined Marion on a full-time basis. At Bill’s request, it was agreed that financial statements would be prepared, to allow the two brothers to see where they stood at the end of March. Sport Boats asked that a portion of the amount under the building contract, and Fred accepted this arrangement on behalf of Marion. The two brothers agreed that they would invite Mr. William Hurley, an accountant who was a mutual friend of theirs, to prepare the accounts.
Questions
1. As Mr. Hurley, prepare journal entries to record the events that have taken place in the business up to March 31, 2006.
2. From these journal entries, prepare a balance sheet as of March 31, 2006, and an income statement for the operation period to that date.
3. Based on your financial statements, what is the value of each brother’s equity in the company?
4. Using the cash account data, prepare a statement showing the receipts and disbursement of cash during the period from the formation of the business until March 31, 2006.
Marion Boats, Inc Fred Cunningham was a fire truck salesman for many years, while B, his brother, worked as a book salesman for a major publishing house. Although they had done fairly well financially, they wanted to e theirown bosses so they dacidad to go into business together They agreed that selling small fishing and recreational boats woald be a good line for them to go into as lboth had been interested in fishing and beating for many years Also, the small town Marion, Mississippi, where they lived, did not have ony boat dealerships. The nearest dealer was some 95 miles away After some searching, they chose a suitable site for their proposed operation It was situated at a popular local dock. A dlapidated buikling which had been condemned by the local authorities stood on the site. At this poin in te, the brothers docided to incorporate the business The services o a lawyer were obtained to draw up the kegal papers and to handle all aspects of the execution of the incorporatio. The fee for this service was $800, and each of the brothers paid half of it On October 1, 2005, Fred purchased 1,900 shares of the company's slock for $72,000, and Bill parchased 00 shares for SZ0000. he payment for legal services was considered pat of these imestments, so the actual cash received by the new company was 591.200. Further purchases of the company's shares could be made only at the prevailing book value per share at the time of the parchase and only it both parties agned to the transaction. I either brother wished at any time to sell his shares back to the company, this transaction would also be conducted at the prevailing book value of the shares. The brothers also agreed that they should each receive salaries of $24,000 per year at all times during which hy were engaged in the companys business onaul-time basis Both knew this amount was less than they could ean in other jobs, bat they realized a small salary was needed at this time to ensure that the dealership could pay its bills on tine On November 1, 200s, with the aid od a S40,000 bank loan and S32,000 of the company's money. Frod purchased the property which had been selected. The sanse day. he left his job to devote his full attention to the new enterprise. First, Fred arranged to heve the old building demoliehed. A cursory examination revealed there was nothing of any significance that could be salvaged, xept for some building stone. Mr. Mahoney, the wrecker, agreed to clear the site for $7000 provided he could have the stone. Otherwise, be would want $9,000. Fred was convinced he could get a better prioe for the stone, so he instructed Mr. Mahonay to clear the site and store the stone in a corner of it. This work was started immediately and completed before Christmas. Mr. Mahoney agreed to defer collection of payment until May 31, 2006 In the meantime, Fred got in touch with a large boat manufacturer,Sport Boats, Inc., who had previously indicated interest in the projected dealership Fred asked Sport Boats for financial help to construct the buildings reeded lo carry on business Spoet Boats agreed to peovide all the financing needed for the building throagh a loan repayable in 10 equal anrual installments, provided Marion Boats sold only Sport Boats model. The loan carried an interest rate of 10% per year, payable from Apeil 1, 2006. The first repayment, including interest, would fall due onMarch 31, 2007 On December 31, 2005, Sport Boats sent a check for $40,000 to get Marion Boots started. Fred depositod the check in the busines'sbank account. The remainder of the loan would be forthcoming when the building was completed. Next, Fred arranged through a consulting aschitect for several construction companies to bid for the job The lowest bidder was the Birkett and Snell Company. They agroed to construct the specified building for $124.000. On the advice of his architect, however, Fred decided to accept the Holmes Brolhers Construction Company bid ol $140,000 the archilect believed Berkelt and Snell was less reliable than Holmes in meeting proised completion dates The construction was started immediately, Holmes promising completion by the end of March 2006· Progress payments on certificates from the architects were to be made at the end of January, the end of February, and the date of completion in amounts of S40000, $40,000, and $60,000. During carly 2006, Fred triad to obtain some orders for boats which he planned to deliver directly to customers from Sport Boats's warehouse in Cleveland. Fred had some success with the model he had recently bought himsel. Between Jaruary 1 and March 30, Fred sold 17 od this model at an average cash cost to Marion of 59,000. Nothing was paid to Sport Boats for these boats during the period. These 17 sales realized 5183,600, whereof 558,000 represented trade-in allowances 112,000 in cash, and the reat was outstanding at March 30. Fred sold all the trade-in boats for 54,800 cash before March 31. Previously,Bill and Fred agreed that the latter should receive S40 for every new boat sale as compensation for using his private boat as a display model At the end o March, the building was completed. However, there was an additional charge of $2,400 for materials, which Marion had to pay axoording to the provisions of the buikding contract At the sanme time, the architects bill for $2,600 arrived. Fred sent the progress payments to the builder as previously arranged, making the January payment with $40,000 o the company's money and the February payment with the Sport Boats loan. On March 31, the last S60,000 progness payment and the $2400 materials surcharge wene paid. The S40,000 bank loan plus interest of $2,000 was repaid by check on March 30. On March 30, Bill quit his job with the publishing house and joined Marion on a full-time basis At Bll's reuest, it was agreed that financial statements would be prepared, to allow the two brothers to see where they stood at the end of March. Sport Boats asked that a portion of the amount of the dealership owed the manufaclurers for boals be regarded as payment due to the dealership under the building contract, and Fred accepted this arrangement on behalf of Marion The two brothers agreed that they would invite Mr. William Hurley, an accountant who was a mutual friend of theirs, to prepare the accounts. Questions 1. As Mr. Hurley, prepare journal entries to record the events that have taken place 2. From these journal entries, prepare a balance sheet as of March 31, 2006, and an 3. Based on your financial statements, what is the value of each brothers equity in 4. Using the cash account data, prepare a statement showing the receipts and in the business up to March 31, 2006. income statement for the operating period to that date the company? disbursement of cash during the period from the formation of the business until March 31, 2006 Prepare statements of cash flows using the direct and indirect methods from the formation of the business until March 31, 2006 5.Explanation / Answer
Oct 1,05Bank a/c…………………………………………..Dr92000
To Equity Share Capital 92000
(Being Equity share capital purchased by Fred (1800 shares for $72000) And Bill (500 shares for $20000))
Nov 1,05 Bank a/c……………………………………………Dr 40000
To Bank loan 40000
(being bank loan raised)
Nov 1,05 Property, Plant and Equipment……….Dr 72000
To bank a/c 72000
(being PPE bought)
Nov 1,05 Property, Plant and Equipment………..Dr 9000
To Accounts Payable 9000
(being site preparation cost charged by Mr. Mahoney capitalized)
Dec 31, 05 Bank a/c…………………………………………..Dr 40000
To, loan a/c 40000
(being loan provided by Marion Boats)
Dec 31,05 Property, Plant and Equipment………..Dr 140000
To Accounts Payable 140000
(being PPE account capitalized, and outstanding payments to be made to Holmes Brother Construction company)
Jan 31, 06 Accounts Payable……………………………….dr 40000
To bank 40000
(being Holmes Brother Construction company paid the 1st instalment)
Feb 28, 06 Accounts Payable……………………………….dr 40000
To bank 40000
(being Holmes Brother Construction company paid the 2nd instalment)
Mar 31, 06 Accounts Payable……………………………….dr 60000
To bank 60000
(being Holmes Brother Construction company paid the 3rd instalment)
Mar 31,06 Property, Plant and Equipment………..Dr 5000
To bank 5000
(being $2400 material surcharge and $2600 architect fees capitalized as part of PPE)
Mar 31,06 Finance Cost…………………………………….Dr 2000
To Interest payable 2000
(being interest expense on loan accrued)
Mar 31,06 bank loan a/c……………………………………..dr 40000
Interest payable……………………………….…dr 2000
To bank a/c 42000
(being bank loan and accrued interest repaid)
March Purchase a/c……………………………………..dr 153000
To bank a/c 153000
(being 17 boats purchased at a cash cost of $9000 each)
March Bank a/c………………………………………….dr 112000
Trade-in allowance…………………………dr 58000
Accounts Receivable………………………dr 13600
To Income from sales 183600
(being sales made and realised)
March Bank a/c………………………………………….dr 54800
Loss on trade-in stock a/c……………..dr 3200
To Income from sales 58000
(being trade-in stock sold and loss booked*)
March Fred Compensation a/c…………………dr 680
To bank 680
(being fred compensated at $40 each for 17 boats sold (17*40=680)*)
March Salary…………………………………………….dr 24000
To salary payable 24000
(being Fred and Bill’s salary payable from October’05 to march’06)
BANK A/C
Particulars
$
Particulars
$
To…
By…
Equity Share capital
92000
Property, plant & equipment
72000
Bank loan a/c
40000
Accounts payable
40000
Loan a/c
40000
Accounts payable
40000
Income from sales
112000
Accounts payable
60000
Trade-in allowance
54800
Property, plant & equipment
5000
Bank loan a/c
40000
Interest payable
2000
Boat Purchases (17*9000)
153000
Fred Compensation a/c
680
Balance c/d
2280
Total
412680
412680
Statement of Income and Expenses as at 31st March 2006
Particulars
$
INCOME
Income from Sales
241600
241600
EXPENSE
Purchases
153000
Finance Cost
2000
Salary and Wages
24000
Other Expenses (680+3200)*
3880
Trade-in allowance
58000
240880
Profit from operations (A-B)
720
Statement of Financial Position as on 31st March 2006
Particulars
$
Current Asset
Accounts receivable
13600
Non-Current Asset
Property, Plant and Equipment
226000
TOTAL
239600
Current Liabilities
Bank Overdraft
73880
Accounts Payable
9000
Salary payable
24000
Non-Current Liabilities
Loan a/c
40000
Owner Equity
Common Stock
92000
Retained Earnings
720
TOTAL
239600
Particulars
$
Particulars
$
To…
By…
Equity Share capital
92000
Property, plant & equipment
72000
Bank loan a/c
40000
Accounts payable
40000
Loan a/c
40000
Accounts payable
40000
Income from sales
112000
Accounts payable
60000
Trade-in allowance
54800
Property, plant & equipment
5000
Bank loan a/c
40000
Interest payable
2000
Boat Purchases (17*9000)
153000
Fred Compensation a/c
680
Balance c/d
2280
Total
412680
412680
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