Marion Boats, Inc.

Fred Cunningham was a fire truck salesman for may years, while Bill, his brother, worked as a book salesman for a major publishing house. Although they had done fairly well financially, they wanted to be their own bosses, so they decided to go into business together.

They agreed that selling small fishing and recreational boats would be a good line for them to go into as both had been interested in fishing and boating for many years. Also, the small town Marion, Mississippi, where they lived, did not have any boat dealerships. The nearest dealer was some 95 miles away.

After some searching, they chose a suitable site for their proposed operation. It was situated at a popular local dock. A dilapidated building which had been condemned by the local authorities stood on the site.

At this point in time, the brothers decided to incorporate the business. The services of a lawyer were obtained to draw up the legal papers and to handle all aspects of the execution of the incorporation. The fee for this service was $800, and each of the brothers paid half of it.

On October 1, 2005, Fred purchased 1,800 shares of the companys stock for $72,000, and Bill purchased 500 shares for $20,000. The payment for legal services was considered part of these companys shares could be made only at the prevailing book per share at the time of the sell his shares back to the company, this transaction would also be conducted at the prevailing book value of the shares. The brothers also agreed that they should each receive salaries of $24,000 per year at all times during which they were engaged in the companys business on a full-time basis. Both knew this amount was less than they could earn in other jobs, but they realized a small salary was needed at this time to ensure that the dealership could pay its bill on time.

On November 1, 2005 with the aid of a $40,000 bank loan and $32,000 of the companys money, Fred purchased the property which had been selected. The same day, he left his job to devote his full attention to the new enterprise.

First, Fred arranged to have the old building demolished. A cursory examination revealed there was nothing of any significance that could be salvaged, except for some building stone. Mr. Mahoney, the wrecker, agreed to clear the site for $7,000, provided he could have the stone. Otherwise, he would want $9,000. Fred was convinced he could get a better price for the stone, so he instructed Mr. Mahoney to clear the site and store the stone in a corner of it. This work was started immediately and completed before Christmas. Mr. Mahoney agreed to defer collection of payment until May 31, 2006.

In the meantime, Fred got in touch with a large boat manufacturer, Sport Boats, Inc., who had previously indicated interest in the projected dealership. Fred asked Sport Boats for financial help to construct the buildings needed to carry on business. Sport Boats agreed to provide all the financing needed for the building through a loan repayable in 10 equal annual installments, provided Marion Boats sold only Sport Boats models. The loan carried an interest rate of 10% per year, payable from April 1, 2006. The first repayment, including interest, would fall due on March 31, 2007.

On December 31, 2005, Sport Boats sent a check for $40,000 to get Marion Boats started. Fred deposited the check in the businesss bank account. The remainder of the loan would be forthcoming when the building was completed.

Next, Fred arranged through a consulting architect for several construction companies to bid for the job. The lowest bidder was the Birkett and Snell Company. They agreed to construct the specified building for $124,000. On the advice of his architect, however, Fred decided to accept the Holmes Brothers Construction Company bid of $140,000; the architect believed Birkett and Snell was less reliable than Holmes in meeting promised completion dates.

The construction was started immediately, Holmes promising completion by the end of March 2006. Progress payments on certificates from the architects were to be made at the end of January, the end of February, and the date of completion in amounts of $40,000, $40,000, and $60,000.

During early 2006, Fred tried to obtain some orders for boats which he planned to deliver directly to customers from Sport Boats warehouse in Cleveland. Fred has some success with the model he had recently bought himself. Between January 1 and March 30, Fred sold 17 of this model at an average cash cost to Marion of $9,000. Nothing was paid to Sport Boats for these boats during the period. These 17 sales realized $183,600, whereof $58,000 represented trade-in allowances, $112,000 in cash, and the rest was outstanding at March 30. Fred sold all the trade-in boats for $54,800 cash before March 31. Previously, Bill and Fred agreed that the latter should receive $40 for every new boat sale as compensation for using his private boat as a display model.

At the end of March, the building was completed. However, there was an additional charge of $2,4000 for materials, which Marion had to pay according to the provisions of the building contract. At the same time, the architects bill for $2,600 arrived.

Fred sent the progress payments to the builder as previously arranged, making the January payment with $40,000 of the companys money and the February payment with the Sport Boats loan. On March 31, the last $60,000 progress payment and the $2,400 materials surcharge were paid. The $40,000 bank loan plus interest of $2,000 was repaid by check on March 30.

On March 30, Bill quit his job with the publishing house and joined Marion on a full-time basis. At Bills request, it was agreed that financial statements would be prepared, to allow the two brothers to see where they stood at the end of March. Sport Boats asked that a portion of the amount under the building contract, and Fred accepted this arrangement on behalf of Marion. The two brothers agreed that they would invite Mr. William Hurley, an accountant who was a mutual friend of theirs, to prepare the accounts.

Questions

1. As Mr. Hurley, prepare journal entries to record the events that have taken place in the business up to March 31, 2006.

2. From these journal entries, prepare a balance sheet as of March 31, 2006, and an income statement for the operation period to that date.

3. Based on your financial statements, what is the value of each brothers equity in the company?

4. Using the cash account data, prepare a statement showing the receipts and disbursement of cash during the period from the formation of the business until March 31, 2006.

5. Prepare statements of cash flows using the direct and indirect methods from the formation of the business until March 31, 2006.