One of the shareholders of The Canadian Cookies and Cakes Company is considering selling her one-third ownership and therefore wants to determine her equity in the cookie shop, using the correct accounting principles. The following transactions have occurred since the shop started operations at the beginning of this year:
1. The company borrowed $30,000 from the bank to help get the business started, and repaid $10,000 of this before year end. Shareholders also contributed $30,000 to get the business started.
2. Ingredients costing $42,000 were purchased on account, and 80% of these ingredients were used in goods that were baked and sold during the year. Before the end of the year, payments of $37,000 were made for these ingredients.
3. Baking ovens were rented for $12,000 cash, paid at the rate of $1,000 per month. At the end of the year, the company purchased its own ovens for $46,000 cash.
4. Employees earned wages of $30,000 during the year; the company withheld income taxes of $3,000 from their paycheques, which it will forward to the Canada Revenue Agency early next year. In other words, although the employees' wages were $30,000, the company deducted income taxes and paid only the remaining $27,000 net amount to the employees; it will pay the $3,000 of income taxes directly to the CRA. (Note that these income taxes relate to the employees' earnings, not the company's earnings. Consequently, they are recorded as part of the company's wages expense, not as income taxes expense.)
5. Interest on the bank loan for the year totalled $1,600, but has not yet been paid.
6. Various other expenses totalled $15,000 for the year, but only $13,500 of this amount was paid before the end of the year.
7. After $98,000 was collected from the sale of goods (which was the full sales amount), the cash balance at the end of the year was $12,500, and net income of $5,800 was reported.
Required:
a. Show calculations to prove that the ending cash balance was $12,500 and the net income for the year was $5,800.
b. Prepare a statement of financial position for the bakery as of the end of the year.
c. If the shareholder sells her one-third ownership interest in the bakery, what does the foregoing tell you regarding how much she should expect to get for her shares?