Kenmare Architects Ltd. (KAL) was incorporated and commenced operations on January 1, 2014. Sheila Kenmare, the company's only employee, consults with various clients and uses expensive equipment to complete her work.

When the company was formed, Sheila bought 10,000 common shares but at the beginning of 2015, another 1,000 common shares were sold to Sheila's mother.

In addition to selling shares, KAL received financing from Sheila's Uncle Harry in the form of a loan that was taken out on January 1, 2014. Her uncle required the company to pay only the interest on the loan and no principal in 2014, which KAL did. However, he wanted both interest and a portion of the principal to be paid during 2015. These payments were made evenly throughout 2015. Harry was surprised when Sheila paid down more of the loan balance in 2015 than he asked her to.

The following shows the financial statements of the company for the past two years:

Instructions
(a) When the company was formed, how much did Sheila pay for her shares? How much did her mother pay for her shares?
(b) At the end of 2014, what portion of the loan did Uncle Harry want paid off in 2015? How much of the loan was actually paid off in 2015? What was the total amount of cash received by Harry in 2014 and 2015?
(c) Calculate the current ratio for each year. Has the company's liquidity improved?
(d) Calculate the debt to total assets ratio for each year. Did the company's solvency improve? What effect did the change in this ratio have on the income statement?
(e) Calculate the earnings per share of the company for each year. Why do you think that the earnings per share changed in 2015?
(f) Assume that the price Sheila paid for her shares was the share price throughout 2014. Using that price, determine the value of the price-earnings ratio for that year. Assume that the price Sheila's mother paid for her shares was the share price throughout 2015. Using that price, determine the price-earnings ratio for 2015. Why do you think the value of this ratio changed? Do you think that the share price change was justified?
(g) What was the major reason for the company to sell shares in 2015?

Transcribed Image Text:

KENMARE ARCHITECTS LTD Income Statement Year Ended December 31 2015 Service revenue Salaries expense Rent and other office expenses Depreciation expense Interest expense Profit before income tax Income tax 120,000 74,000 20,000 12,000 2,700 11,300 3,390 $ 7,910 $100,000 59,000 12,000 3,600 $3,510 KENMARE ARCHITECTS LTD Statement of Financial Position December 31 2015 2014 $ 9,000 37,000 46,000 22,000 9,000 31,000 84,000 (12,000) 72,000 $103,000 Accounts receivable Equipment Accumulated depreciation (24,000) 60,000 $106,000 29,580 4,000 33,580 26,000 59,580 35,000 11,420 46,420 $106,000 S 14,490 8,000 22,490 52,000 74,490 25,000 3,510 28,510 $103,000 Accounts payable Current portion of loan payable Loan payable Common shares Retained earnings