Question

Case 3.1 Finns’ Fridges

Twin brothers, David, and Douglas Finn started a small business from their college dormitory room. Finns’ Fridges purchased several refrigerators to rent to other students for use in their rooms. At the end of their first year of operations, the brothers’ records showed the following information.

Current assets (cash and accounts receivable) $2,000

Interest payable 200

Other current liabilities 800

Property and equipment (net) 4,000

Long-term liabilities 3,200

Owners’ equity 1,800

Revenues 2,000

Interest expense 200

Depreciation expense 1,000

A. Construct a balance sheet and income statement for the business.

B. Based on the balance sheet you created, how much working capital do Finns’ Fridges have?

C. Suppose Finns’ Fridges is subject to corporate income tax at a rate of 30%. What will the company’s net income after tax be?

D. David and Douglas invested $500 each to capitalize Finns’ Fridges. To allow for future flexibility (such as selling shares to other investors), they placed a par value of $10 on each share; thus each brother owns 50 shares. What were the basic earnings per share (EPS) of Finns’ Fridges for its first year of operations?

E. David Finn notices that the local appliance store is now charging $210 for the same model of refrigerator his company bought for $200. Given that Finns’ Fridges purchased 25 of these refrigerators, what should the company’s balance sheet show as the value of property and equipment? Why?

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its first year of operations

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Answer 1