Lee Nicholas has been the owner and has operated World.com

Decision Case 3-1

Lee Nicholas has been the owner and has operated World.com Advertising since its beginning 10 years ago. The company has prospered. Recently, Nicholas mentioned that he would sell the business for the right price. Assume that you are interested in buying World.com Advertising. You obtain the most recent monthly trial balance, which follows. Revenues and expenses vary little from month to month, and January is a typical month. The trial balance shown is a preliminary or unadjusted trial balance. The controller informs you that the necessary accrual adjustments should include revenues of $3,800 and expenses of $1,100. Also, if you were to buy World.com Advertising, you would hire a manager so you could devote your time to other duties. Assume that this person would require a monthly salary of $5,000.

WORLD.COM ADVERTISING

Trial Balance

January 31, 2015

Debit              Credit

Cash                                                                $ 9,700

Prepaid expenses                                             14,100

Accounts receivable                                        2,600

Building                                                          221,300

Accumulated depreciation                                                                  $ 68,600

Accounts payable                                                                                13,000

Salary payable

Unearned service revenue                                                                   56,700

 Nicholas, capital                                                                                 110,400

Nicholas, drawing                                           9,000

Service revenue                                                                                   12,300

Rent expense

Salary expense                                                3,400

Utilities expense                                              900

Depreciation expense

Supplies expense

Total                                                                $261,000                     $261,000

Requirements

1. Assume that the most you would pay for the business is 20 times the monthly net income you could expect to earn from it. Compute this possible price.

2. Nicholas states the least he will take for the business is an amount equal to the business’s owner’s equity balance on January 31. Compute this amount.

3. Under these conditions, how much should you offer Nicholas? Give your reason.