This is an assignment that discusses the income statement calculation for Smith and Jones. The paper also discusses the amount the equity for every day in the first month.
The income statement calculation for Smith and Jones
Worth 20 points, so think, don’t just fling numbers around
Smith and Jones start a business to build custom bicycles. Smith invests personal funds of $80,000 and Jones invests $70,000. Grandma Smith loans the company $12,000 with the provision it is to pay back in 12 equal monthly payments plus 1.5% monthly interest. Smith and Jones agree that ownership would be proportional to their equity investments. In addition, they borrow $38,000 from the bank at interest of 1.5% per month payable monthly. (They do not have to pay back the principal for five years, so ignore it.) They buy $90,000 worth of parts. Use $60,000 of those parts in the first month. Additionally, they pay factory workers a total of $10,000 for the first month. Also, they pay rent of $3,000 for the month for a factory. They each (not Grandma) draw salaries of $4,000 per month. They sell the resulting bicycles for $120,000.
a. Prepare a balance sheet for day zero, that is, store is ready, people hired, parts on hand, money collected from bank, Grandma, Smith, and Jones.
b. Prepare an income statement for the first month.
c. Prepare a balance sheet for the last day of the first month.
d. What is the percent ownership by Smith, Jones, and Grandma on the first day of the month.
e. How much equity is owned by each on last day of the first month.
Hints: The interest calculations can be done in your head. I am not looking at some kind of sophisticated loan amortization calculations. That means grandma gets 1/12 of her money back each month and also gets her interest calculated on the initial amount.