CT$24$ Financial Analysis Case

Th is case can be assigned as a group activity. Additional instructions

and material for this activity can be found on the

Instructor Resource site and in WileyPLUS.

Kenmare Architects Ltd$.($KAL$)$ was incorporated and

began operations on January $1,2017.$ Sheila Kenmare,

the company$$s only employee, consults with various clients

and uses expensive equipment to complete her work.

When the company was formed, Sheila bought $10,000$

common shares but at the beginning of $2018,$ another

$1,000$ common shares were sold to Sheila$$s mother.

In addition to selling shares, KAL received fi nancing

from Sheila$$s Uncle Harry in the form of a loan that

was taken out on January $1,2017.$ Her uncle required the

company to pay only the interest on the loan and no principal

in $2017,$ which KAL did. However, he wanted both

interest and a portion of the principal to be paid during

$2018.$ Th ese payments were made evenly throughout $2018.$

Harry was surprised when Sheila paid down more of the

loan balance in $2018$ than he asked her to$.$

Th e following shows the fi nancial statements of the

company for the past two years:

KENMARE ARCHITECTS LTD$.$

Income Statement

Year Ended December $31$

$20182017$

Service revenue $$120,000$ $$100,000$

Salaries expense $74,00059,000$

Rent and other office expenses $20,00020,000$

Depreciation expense $12,00012,000$

Interest expense $2,7003,600$

Income before income tax $11,3005,400$

Income tax $3,3901,890$

Net income $ $7,910$ $ $3,510$

KENMARE ARCHITECTS LTD$.$

Statement of Financial Position

December $31$

$20182017$

Cash $ $9,000$ $ $22,000$

Accounts receivable $37,0009,000$

$46,00031,000$

Equipment $84,00084,000$

Accumulated depreciation $(24,000)(12,000)$

$60,00072,000$

$$106,000$ $$103,000$

Accounts payable $ $29,580$ $ $14,490$

Current portion of loan payable $4,0008,000$

$33,58022,490$

Loan payable $26,00052,000$

$59,58074,490$

Common shares $35,00025,000$

Retained earnings $11,4203,510$

$46,42028,510$

$$106,000$ $$103,000$