Cece Saw, a carpenter who has saved some money, has decided to build and operate, with his wife, a ten-unit highway budget motel. Cece invests

$50,000 of his own money in the company ($10,000 by way of common stock and $40,000 as a long-term loan). He also obtained a long-term mortgage on the land and building for $240,000 at an 8 percent interest rate. Interest is estimated to be $1,600 per month for the first few months of the new business, and principal payments are expected to be $1,000 per month.

Land was purchased for $50,000 cash and $200,000 of cash was used to construct a building (estimated life of the building is 30 years, no residual value). Furniture and equipment was purchased for $24,000

(estimated life of the furniture and equipment is 10 years, no residual value). Linen was also purchased with cash for $6,000, and the owner decided to write off the linen (depreciated, no residual value) over a five-year period. Cece’s company also committed advertising costs of

$2,400 for brochures and other items; this cost will be expensed during the first year of business. The first year’s insurance premium of

$3,600 was prepaid before the business started.

For the first three months of business, occupancy is forecast to be 60 percent, 65 percent, and 70 percent, respectively, and, in order to build up volume, a low average room rate of $65 is to be offered. When calculating sales revenue, use a 30-day month. All sales revenue will be on a cash basis.

Since the motel is relatively small, Cece and his wife will run it themselves but expect to hire some casual help at a cash cost of $400 per month. Cece and his wife will each be paid $2,500 a month by the company for their services. However, for each of the first six months, they will each only take $750 cash out of the business for living expenses, until they are sure the company has sufficient cash resources to pay them the balance.

Laundry and supplies are estimated to be 10 percent of monthly revenue. This will be paid in cash. Utility costs are forecast to be $300,

$325, and $350 for the first three months of operations, respectively;

however, each month utility costs will not be paid until the following month. Office expenses are expected to be $100 per month in cash.

For each of the first three months of the motel’s operation, prepare an income statement and a cash budget. Also, prepare the balance sheet for the end of month three.