balance sheet for the year ended $2006$

CASE DOUBLE G WESTERN WEAR Gerta Franklin 's trip to buy a pair Of cowboy boots had been 30-mile drive had yielded no bcxjts. The selection available in her size was sparse, but, more important she had been unable to find her desired red boots. Strange, she thought, how life took a turn that day. On the drive home, she realized that many others living in her hometown had had a similar experience. Gerta began to think that she had discovered a fantastic business opportunity. Gerta Franklin and her husband, George, had been married and were living in the heart Of Central Florida's fam and horse country. George was temporarily between jobs and was currently looking for work on one of the many small farms that dotted the countryside. Gerta worked as a bookkeeper for a successful land developer but had always dreamed of nmning her own bu.siness. The timing wws perfecL After three months of careful planning, on November 16, 2016, Gerta and George opened Double G Westem Wear for business. Their store specialized in all forms of western equestrian clothing and shoes and was located just off a main business thoroughfare. Although open for only 45 days, the store managed to earn a small profit during 2016. A summary Of Double G's 2016 financial information revealed the following: Gerta and George contributed $25 ,000 and a five-year-old truck valued at $5,000. Both agreed to take an annual salary of $36,000 ($3,000 a month each, starting at opening), reinvesting any annual profits back into the business. Leased Space downtown was secured at $5,0 a month. One month's rent plus a $3,0 security depcxsit was required up front. The lease term began October I , 2016, and all rent payments were due on the first Of each month. Remodeling and impmvements were made to the leased space. These included shelving materials ($10,000), four ceiling fans ($800), and contract labor ($3,0). A cash register was purcmsed for $2,000. Other operating exrrnses totaled $28,000. Inventory was acquired from two westem-wear distributors. It included boots, hats, belts, scarves, vests, and knick- knacks. The total purchase price was $30,000. On Novemtxr I , $ was borrowed from a local bank. Terms were per annum required, with interest-only payments due for the first three years. A $15,000 line of credit was also established. Terms allowed for the first $1,000 to be interest-free, with a rate of 12% per annum for any amounts over $1,000. Sales Of $82,000 were made through the end Of the year. NO credit was offered, although Of sales were made With credit cards. Credit-card processors charged a 2.5% fee. Inventory was replenished before year-end. During the year, inventory was priced to yield a 70% gross margin. Useful lives for all prolRrty and equipment were five years, starting in the month placed in service. Exhibits I 2 present thc balance sheet and income statement for Double G Western Wear as of the end of 2016. The Christmas season had Double G earn the 2016 profit, but sales returns early in 2017 had dampened the couple's enthusiasm. Contrary to the zero returns experienced in December, post-New Year's returns had totaled $5 , 100. In mid-January, Gerta realized she needed to plan for the year. She and George projected Double G's 2017 financial staternents under What they believed were very conservative assumptions. They sumed that sales would continue at their present rate of approximately $52,000 a month. Sales returns would run at 3%, gross margins would hold at 70%, and the store would end the year with $35 ,OOO of inventory on hand. Operating expensesother than owners' salaries, rent, &preciation, and interestwould be approximately $19,000 a month. Finally, they would need a new truck, which, after trade-in, would cost $20,000.