Question

Decision Case Jean Ketchum has been the principal stockholder and has operated Creative Marketing Strategies, Inc., since its inception 12 years ago. The company has been profitable, and recently Jean mentioned that she would sell the business for the right price. Assume that you are interested in purchasing Creative Marketing Strategies. In preparation, you obtain the most recent monthly trial balance, which follows. Revenues and expenses vary little from month to month, and March is a typical month. Upon review, you find that the trial balance does not include monthly revenues of $6,700 and expenses of $1,400. Also, if you were to buy Creative Marketing Strategies, you would hire a manager so you could devote your time to other duties. Assume that this person would require a monthly salary of $4,500.

Answer 1

Answer: R1) Possible price R2) Amount of stockholders' equity on March 31 R3) Under these conditions, Jean to be offerred $208,000 $156,100 $156,100 EXPLANATION: As Jean's minimum expected price for the business is amount of stockholders' equity, paying $156,600 is the better deal to the purchaser of the firm. $80,500 [Ref: Income Statement] Workings: Creative Marketing Strategies, Inc. Income Statement For the Month Ended March 31, 2016 Revenues: Service Revenue $21,800 ($15,100 + $6,700] Expenses: Salary expense $8,900 [$4,400 + $4,500) Utilities expense $1,100 Other expense $1,400 [Special expense] Total Expenses $11,400 Net Income $10,400 [$21800 - $11400] Number of times the net income Possible price for the business acquisition $208,000 ($10400 x 20 Times] Creative Marketing Strategies, Inc. Statement of Retained Earnings For the Month Ended March 31, 2016 Retained Earnings - Beginning balance Add: Net Income $10,400 Less: Dividends $9,800 Net increase in retained earnings Retained Earnings - Ending balance Add: Common Stock Amount of Stockholders' Equity on March 31 $600 $81,100 $75,000 $156,100 20