Preparation of Projected Statements for a New Business Upon graduation from MegaState University, you and your roommate decide to start your respective careers in accounting and salmon fishing in Remote, Alaska. Your career as a CPA in Remote is going well, as is your roommate’s job as a commercial fisherman. After one year in Remote, he approaches you with a business opportunity.

As we are well aware, the DVD rental business has yet to reach Remote and the nearest rental facility is 250 miles away. We each put up our first year’s savings of $5,000 and file for articles of incorporation with the state of Alaska to do business as Remote DVD World. In return for our investment of $5,000, we will each receive equal shares of capital stock in the corporation. Then we go to the Corner National Bank and apply for a

$10,000 loan. We take the total cash of $20,000 we have now raised and buy 2,000 DVDs at $10 each from a mail-order supplier. We rent the movies for $3 per title and sell monthly memberships for $25, allowing a member to check out an unlimited number of movies during the month. Individual rentals would be a cash-and-carry business, but we would give customers until the 10th of the following month to pay for a monthly membership.

My most conservative estimate is that during the first month alone, we will rent 800 movies and sell 200 memberships. As I see it, we will have only two expenses. First, we will hire four high school students to run the store for 15 hours each per week and pay them $5 per hour. Second, the landlord of a vacant store in town will rent us space in the building for $1,000 per month.

Required 1. Prepare a projected income statement for the first month of operations.

2. Prepare a balance sheet as it would appear at the end of the first month of operations.

3. Assume that the bank is willing to make the $10,000 loan. Would you be willing to join your roommate in this business? Explain your response. Also indicate any information other than what he has provided that you would like to have before making a final decision.