On January 3, 2001, Ken Harmot agreed to buy the Ace Cleaning Service from Janice Steward. They agreed that the purchase price would be five times the 2000 net income of the company. To determine the price, Janice prepared the following condensed income statement for 2000.

Revenues $ 48,000 Expenses (36,000)

Net Income $ 12,000 Janice said to Ken:“‘Based on this net income, the purchase price of the company should be $60,000 ($12,000 x 5). Of course, you may look at whatever accounting records you would like.” Ken examined the accounting records and found them to be correct, except for several balance sheet accounts. These accounts and their December 31, 2000 balances are as follows: two asset accounts—Prepaid Rent,

$2,400; and Equipment, $3,600; and one liability account—Unearned Cleaning Service Revenues, $0.

Ken gathered the following company information related to these accounts. The company was started on January 2, 1998. At that time, the company rented space in a building for its operations and purchased $4,800 of equipment. At that time, the equipment had an estimated life of 8 years, after which it would be worthless. On July 1, 2000, the company paid one year of rent in advance at $200 per month. On September |, 2000, customers paid $600 in advance for cleaning services to be performed by the company for the next 12 months. Ken asks for your help. He says: “I don’t know how these items affect net income, if at all. | want to pay a fair price for the company.”

Required: (1) Discuss how the 2000 net income of the Ace Cleaning Service was affected, if at all, by each of the items.

(2) Prepare a corrected condensed 2000 income statement.

(3) Compute a fair purchase price for the company.  lop74