Question
In mid- 2015, Mr. and Mrs. Richard Bingham decided to go into the restaurant business. Mr. Bingham was dissatisfied with his job as short-order cook
In mid- 2015, Mr. and Mrs. Richard Bingham decided to go into the restaurant business. Mr. Bingham was dissatisfied with his job as short-order cook in a small family-owned restaurant where he earned $9.75 an hour. During July 2015, the Binghams found a business that seemed to be what they wanted. This was the Element Lunch, a lunch counter located in Fisher's Department Store downtown. The Element Lunch was operated under a lease with the department store; only the equipment was actually the property of the operator of the lunchroom. The equipmentwas old, but Mr. Bingham thought that it was in fairly goodcondition.
The couple opened negotiations with the current lunchroom operator and quickly reached an agreement to take over the lease and equipment on September 1, and to pay the operator a price of $10,300. Of this price, Mr. Bingham estimated that $4,600 represented the fair value of the equipment. The lease expired on August 31, 2016, and was renewable for three years if Fisher's consented. Under the terms of the lease, Fisher's furnished space, heat, light, and water, and the operators (i.e., the Binghams) paid Fisher's 15 percent of gross receipts asrent.
The Binghams paid the $10,300 from their personal savings account and also transferred $5,150 to a checking account that they opened in the name of Element Lunch.
Shortly after they started operations, the cooking range broke down. The Binghams thereupon sold the range for $400 (which was approximately its estimated value as a part of the $4,600) and purchased a new range for $4,000. It was installed immediately, and they paid $600 for its installation.
The coffee urn also broke down, but Mr. Bingham was able to repair it himself by working 16 hours one Sunday.
Early in 2016, the Binghams called in a firm that specialized in making out reports for small businesses and requested financial statements for Element Lunch for the period ended December 31, 2015. From their cash register and checkbook, they had the followingfigures:
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