Accounting

Purchase of Business : O 'Henry

Calculation of Purchase Price on the basis of Monthly Net Income

Amount

Income

Service Revenue 14 ,300

Expenses

Salary Expenses 3 ,400

Utilities Expenses 900

Depreciation per Month 1 ,260 Net Revenue 8 ,740 Net Revenue 8 ,740

Add : Omitted Monthly Revenue 2 ,100 Less

Omitted Expenses 2 ,750

Salary for Manager (to be hired ) 3 ,000 5 ,000

Net Business Income 5 ,840

times of the Net Income : 116 ,800 Depreciation is calculated at 10 percent on the cost of

furniture fixtures and equipments 151 ,300 and divided by 12 to arrive at the monthly depreciation of 1260

Calculation of Capital Employed

Assets

Cash 9 ,700

Receivables 7 ,900

Prepaid Expenses 2 ,600

Furniture , Fixtures and Equipment

Cost 151 ,300

Less : Depreciation 16 ,860 134 ,440 Liabilities

Capital 137 ,400

Less : Drawings 2 ,000

Sub Add : Profit 8 ,740 144 ,140

Unearned Service Revenue 6 ,700

Accounts Payable 3 ,800 Price Expected by O 'Henry on the basis of Ending Capital

Capital as on Date : 144 ,140

Less : Accounts Payable 3 ,800

Unrealized Earnings 6 ,700 10 ,500

Net Price for the Business 133 ,640

Thus as per the calculation the price payable on the basis of the net income comes to 116 ,800 and on the basis of the ending capital comes to 133 ,640 . The other way of calculating the price payable may be by taking in to account the cost of the assets that may be taken over . In this case the price would include the cost of furniture , fixtures equipment less depreciation and cash less the accounts payable . The receivables are not taken into account because it is not sure whether the entire amount is receivable . This amount comes to 140 ,340 134 ,440 9700 - 3800 . This is the actual cost of the assets that may be taken over from the business . Hence though on the basis of the income the price payable comes to 116 ,800 it is a fair price what O 'Henry demands and an amount of 133 ,640 can be paid to purchase the business . The difference between the price on the basis of the income and the O 'Henry 's demand comes to 16 ,840 133 ,640- 116 ,800 . Since , the business was run for 10 years there must be an amount of goodwill that needs to be calculated and included in the price calculated on the basis of income . Hence the payment of 133 ,640 as demanded by O 'Henry is a fair price and can be paid

Simon and Hobbs

The reasons for Simon 's action in doing some adjustments in the accounts can be explained as below

Sale of Fictitious Sale of Furniture 10 ,000

Since she is expecting a bank loan at the beginning of year 2001 , she wants to show a healthy financial position of the company by making some adjustment entries which will have the effect of improving the balance sheet . The fictitious sale of 10 ,000 will...