Question

C3-80. (Learning Objectives 3, 4: Adjust the accounts, construct the financial statements; evaluate a business based on financial statements) Teresa Gardner has owned and operated Gardner Advertising, Inc., since it began ten years ago. Recently, Gardner mentioned that she would consider selling the company for the right price. Assume that you are interested in buying this business. You obtain its most recent monthly trial balance, which follows. Revenues and expenses vary little from month to month, and June is a typical month. Your investigation reveals that the trial balance does not include the effects of monthly revenues of $4,000 and expenses totaling $1,100. If you were to buy Gardner Advertising, you would hire a manager so you could devote your time to other duties. Assume that your manager would require a monthly salary of $5,000. $ 12.000 6,900 3,200 158,000 125,000 $ 81,500 13.800 Gardner Advertising, Inc. Trial Balance June 30, 2018 2 Cash 3 Accounts receivable 4 Prepaid expenses 5 Land 6 Plant assets 7 Accumulated depreciation plant assets 8 Accounts payable 9 Salary payable 10 Unearned advertising revenue 11 Common stock 12 Retained earnings 13 Dividends 14 Advertising revenue 15 Rent expense 16 Salary expense 17 Utilities expense 18 Depreciation expense-plant assets 19 Supplies expense 20 Total 21 58.700 50,000 93,000 9,000 22,000 4,000 900 $319,000 $319,000 Requirements 1. Assume that the most you would pay for the business is 16 times the amount of monthly net income you could expect to earn from it. Calculate this possible price. 2. Gardner states that the least she will take for the business is two times its stockholders equity on June 30. Calculate this amount. 3. Under these conditions, how much should you offer Gardner? Give your reason. (Challenge)

Answer 1

(Answer 1)  

Caluculation of the possible price to be offered:  
(Amount in $ )
Advertising revenue for the month 22,000
Add: Skipped revenue as come to know on investigation 4,000
Less: Salary Expenses -4,000
Less: Utilities Expenses -900
Less: Skipped expenses as come to know on investigation -1,100
Less: Manager's salary as expecting to be incurred -5,000
Monthly Net Income   15,000
  
Possible Price shall be 16 times of Monthly Net Income 2,40,000
(15,000 * 16 )  
  
(Answer 2)  
Gardener demands 2 times of Shareholder's equity.   
  
Calulation of Shareholders Equity:  
   (Amount in $ )
Common Stock   50,000
Retained Earning    93,000
Add: June Month Net Income (As calculated in Ans.1 but ignore expenses related to Manager's Salary as this is irrelevant for Gardener's)   20,000
( 15000+5000 )  
  
Less: Divends paid    -9,000
Shareholders Equity   1,54,000
  
Gardener demands (1,54,000 * 2)   3,08,000
  
(Answer 3)  
Considering the above facts and circumstances, we should come to a price as average price.   
( Possible Price + Gardener demand)/2   2,74,000