home / study / business / accounting / accounting questions and answers / accounting you decide to earn some money to finance your education by starting a business that ... Question: Accounting &nb... Accounting You decide to earn some money to finance your education by starting a business that designs Web pages. You will begin business on January 1, 2017, and run the business for the next 12 months. On your Excel spreadsheet, calculate the number of budgeted hours you will work for clients during the year by adding the last three digits of your student ID numbers of you and your partner, if working with a partner. Use only the last three digits of this sum. If working alone, just use the last three digits of your student ID number. If the number is less than 500, add 500 to the number. (If the last three digits of your ID number happen to be 000, use the first three digits of your ID number instead.) This number will be the expected number of billable hours to be worked in the coming budget year. You are going to prepare a budgeted income statement, cash budget, and budgeted balance sheet for the coming year based on the assumptions listed below. MY NUMBER IS 700 BUDGET ASSUMPTIONS FOR THE COMING YEAR: 1. Before the business begins, you will take $5,000 cash from your savings account to invest in the business. You will protect yourself by organizing as a corporation, with yourself as the only stockholder. 2. Before the business begins, it will buy a computer, printer, and software package that together cost $5,200. Your parents have agreed to lend the business $5,200 cash so that the business can pay for the equipment and software. The business plans to repay your parents on January 31, 2018. Your parents do not expect any interest but require you to sign a promissory note. The beginning balance sheet for your business is presented on the following page: Arachne, Inc Balance Sheet January 1, 2017 Assets Current Assets Cash $5,000 Long-term Assets Equipment Less Accumulated Depreciation 5,200 0 Total Assets Liabilities and Stockholders Equit Current Liabilities S0 Long-term Liabilities Note Payable Total Liabilities $5,200 Stockholders Equi Common Stock Retained Earnings $5,000 0 5,000 Total Liabilities Total Liabilities and Stockholders Equit 3. Starting January 1, 2017, the business will charge $40 per hour for design work and bill clients as each job is completed. You expect that by December 31, 2017, the end of the fiscal year, 70% of clients will have paid the business in cash. You expect that the rest will pay by January 31, 2018. 4. The business will hire an assistant to help with general office work. The assistant will earn $15 per hour and will work exactly the same hours that you work. The assistant will be paid for each month's work on the fifth day of the month following the month when the work is done. For the sake of simplicity, treat the assistant as an independent contractor rather than an employee. This means that you do not have to worry about withholding or matching payroll taxes. Assume that hours worked in December, 2017 are expected to total 10% (round to nearest whole hour) of the total hours for the year. 5. The business will purchase office supplies for cash of $1,800 in January, 2017 6. On March 1, the business will pay cash of $1,500 for a one-year liability insurance policy. 7. Since this is a new business, you think that it is important to advertise. The business will buy $500 of newspaper advertising each month. All payments for advertising costs will be made in the following month. (For example, January advertising expense will be paid for in February). 8. A dividend of $2,500 will be declared and paid before year end. Record SUMMARY budgeted transactions for the entire year based on the above assumptions in the T-Accounts below. Round all amounts to the nearest whole dollar. The T-Accounts will not be turned in, but should be completed to assist you in completing the budgeted financial statements. Record the expected adjusting entries in the T-Accounts for the following: A1) It is expected that the equipment and software will be used for four years, after which time they will be worthless. The business uses the straight-line method of depreciation. A2) It is expected that office supplies will be used up at the rate at the rate of $1.00 per hour worked, with the remaining amount still on hand at year-end. A3) Record the insurance that has been used up during the year. Instructions for Excel Worksheet: Part A: In the Excel spreadsheet, complete the Budgeted Income Statement (you may not need to fill in all lines provided) and questions 1. 5. Part B: Review chapter 9 and your notes from class. In the Excel spreadsheet, complete the Cash Budget (you may not need to fill in all lines provided). Part C: Review Chapter 9 and your notes from class. In the Excel spreadsheet, complete the Budgeted Balance Sheet in good form. Complete questions 1. and 2. in this section. Part D: Review Chapter 7 and 10 and your notes form class. Assume that you have now decided to charge clients $35 per hour instead of $40 per hour. Demand for your services will increase 10% over the hours you used in your original budget. All the other assumptions above remain the same. Answer questions 1. 7. in the Excel spreadsheet. Part E: Review Chapters 7 and 8 and your notes from class. Ignore the information used in Part D above and go back to the original assumptions on page 1. Now assume that Virtual Office Company could replace your assistant with their own office service. They will charge you $800 per month plus 12% of your revenue. Answer questions 1. 5. in the Excel spreadsheet. Part F: Review Chapter 10 and your notes from class. Ignore the information provided in Part D and E above and go back to the original assumptions on page 1. Your original budgeted income statement is your master budget. Assume now that actual hours worked were 500 and the actual price charged per hour was $43. Answer questions 1. and 2. in the Excel spreadsheet. Part G: Review Chapter 12 and your notes from class. In the Excel spreadsheet, answer questions 1. 3. 1. You are considering the purchase of a Web server that costs $16,000. Your parents have offered to provide another interest-free loan. You plan to use this server for five years and then sell it for the expected residual value of $4,000. This server will allow your clients to post their Web pages and is expected to generate annual incremental operating income equal to 20% of the operating income from Part A. (Round to the nearest dollar.) (The expected incremental operating income includes the depreciation expense on the new server only.) In the Excel spreadsheet, calculate the annual net cash inflow expected from the server. Show your work. 2. Assuming that every year for the next five years that you will use the server, you will earn the same net cash inflows that you calculated above. Using the tables from your textbook and a 12% required rate of return, calculate a) the present value of the future cash inflows. Next, b) calculate the net present value of the proposed investment. Label your calculations clearly. 3. Based on your calculation of net present value, should you buy the server?