Accounting Decision Case

• Decision Cases

Case 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. Your investigation reveals that the trial balance does not include monthly 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 $.1',000.

WORLD.COM ADVERTISING Trial Balance

J3UItlC)' .u, 2012

Account Title

Cash Accounts receiva ble Prepaid exreoses

" Building Accumulated depreciation

. Accounts payable Salary payable

Unearned service revenue Lee Nicholas, Capital Lee Nicholas, Wuhdrawals

Service revenue

Balance Debit Credit- _.

. $ 9.700 14,100 2,60(1

121,300 ; 68,600 13,000

56,700 110,400

9,000

Rene expense Salary expense Utilities expense Depreciation expense Supplies expense

"----O~l~~~~.=_

3,400 900

$261,000 $261,000

RequIrements 1. Assume that the most you would pay for the business is 20 rimes the monthly net income

you GOuld expect to earn from it. Compute this possible price. 2. Nicholas states that the least he will take for the busine ss is an amount equal to the busi-

ness's owner's equity balance on January 31. Compute this amount. 3: Under these conditions, how much should you offer Nicholas? Give your reason.

(Challenge)

Case 2. One year a!i0. Tyler Stasney founded Swift Classified Ads. Stasney remembers that you took an accounting course while in college and comes to you for advice. He wishes ro know how much net income his business earned during the past year in order to decide whether to keep the company going. His accounting records consist of the T-accounrs from his ledger, which were prepared by an accountant who moved to another dry. The ledger at December 31 follows. The accounts have not been adjusted.

Stasney indicates that at year-end, customers owe him $1,600 for accrued service rev- enue. These revenues have not been recorded. During [he year, Stasney collected $4,000 ser- vice revenue in advance from customers, but he earned only $900 of that amount. Rent expense for the year was $2,400, and he used up $1,700 of the supplies. Stasney determines

The Adjusting Process , er

Assignment 2: Decision Case-World. com

Review Decision Case 1 (World. com) on page 186 in chapter 3. Analyze the data presented in the case scenario and address the following questions in your initial post:

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 that 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.