Lee Nicholas has been the owner and operator of 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.

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 stockholders’ equity balance on January 31. Compute this amount.

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

Transcribed Image Text:

WORLD.COM ADVERTISING Trial Balance January 31, 2015 Balance Account Title Debit Credit Cash $ 9,700 Accounts Receivable 14,100 Prepaid Expenses 2,600 Building 221,300 Accumulated Depreciation-Building $ 68,600 Accounts Payable 13.000 Salaries Payable Unearned Revenue 56,700 Common Stock 30,400 Retaned Earnings 80,000 Dividends 9,000 Service Revenue 12,300 Rent Expense Co 3,400 Salaries Expense Utiities Expense 900 Deprediation Expense-Building Supplies Expense Total $ 261,000 $ 261,000