Gerta Franklin's trip to buy a pair of cowboy boots had been frustrating the 30-mile drive had yielded no boots. 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 probably had a similar experience. Gerta began to think that she had discovered a fantastic business opportunity. Gerta Franklin and her husband, George, had recently been married and were living in the heart of Central Florida's farm and horse country. George was temporarily between jobs and was curently 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 running her own business. The timing was perfect. After three months of careful planning, on November 16, 2006, Gerta and George opened Double G Western Wear for business. Their store specialized in all forms of western equestrian clothing and shoes and was located just off a main business thorouchfare. Althoush open for only 45 days, the store managed to earn a small profit during 2006. A summary of Double G's 2006 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 $5,000 a month. One month's rent plus a $3,000 security deposit was required up front. The lease term began October 1, 2006, and all rent payments were due on the first of each month.

Remodeling and improvements were made to the leased space. These included shelving materials ($10,000), four ceiling fans ($800), and contract labor ($3,000).

A cash register was purchased for $2,000.

Other operating expenses totaled $28,000.

Inventory was acquired from two western-wear distributors. It included boots, hats, belts, scarves, vests, and knickknacks. The total purchase price was $30,000.

On November 1, $12,000 was borrowed from a local bank. Terms were 10% 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 40% 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 property and equipment were five years, starting in the month placed in service
Exhibits 1 and 2 present the balance sheet and income statement for Double G Western

Wear as of the end of 2006

The Christmas season had helped Double G earn the 2006 profit, but sales returns early in 2007 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 Duble G's 2007 financial statements under what they believed were very conservative assumptions. They assumed 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 $35,000 of inventory on hand. Operating expenses other than owners' salaries, rent, depreciation, and interest would be approximately $19,000 a month. Finally, they would need a new truck, which, after trade-in, would cost $20,000.

Required:

Forecasted balance sheet as of December 31, 2007 and a forecasted income statement for the year 2007.
 
 

Assets Cash Inventory Total assets Prepaid assets Deposits Property and equipment (net) Liabilities Interest payable Taxes payable Accrued expenses Loan Total liabilities Equity Common stock Retained earnings Total equity -3- Exhibit 1 DOUBLE G WESTERN WEAR Balance Sheet: 12-31-06 6,280 16,400 5,000 3,000 20,107 100 553 5,000 12,000 30,000 3,134 50,787 17,653 33,134 UVA-C-2288