Mr. Peter created a working model of a new and improved commercial paint

spray, which he had patented. The patent had a legal life of 16 years remaining.

Peter was eager to exploit his patent commercially, but he had no funds of his

own. Several of his friends, who had used protypes of Peter's paint spray,

offered to invest in a new corporation with a capitalization of $200,000 capital

stock to further develop, manufacture and market the spray and its related

equipment. Before making their investment, the investors asked Peter to

prepare a profit plan projecting the company's revenues and expenses for the

initial year of operation along with the yearend Statement of Financial Position.

Peter agreed to prepare the requested information incorporating the following

projected transactions.

1. In return for signing the patent to the new company, which was to be

called Dispensers of Tacloban, Inc., Peter would receive 60 percent of

the company's capital stock. For their part, the investors would

contribute $80,000 cash for a 40 percent interest in the company.

2. Incorporation costs, $22,500.

3. Equipment to be used in assembling the paint spray dispensers,

$85,000.

4. Out- of -pocket labor and development costs to re-design the paint

spray dispensers to facilitate more efficient assembling, $25,000.

5. Component parts purchases, $212,100.

6. Short term loan from local bank, $30,000 (Loan to be repaid before

the end of the year with $500 interest.)

7. Manufacturing payroll - $145,000.

8. Other manufacturing cost (excluding component part cost) - $62,000

9. Selling, General and Administrative Expenses - $63,000

10. Ending component parts inventory cost, $15,100.

11. Sales - $598,500 (all received in cash)

12. All incorporation and product re-design cost expensed as incurred.

13. Depreciation, - $8,500 (Peter estimated the useful life of the

equipment was 10 years, with no salvage value)

14. Patent cost charged to income over the 6 years period. (Peter

anticipated technology development incorporating digital flow

controls would significantly reduce the current products sales in about

six years time.)

15. No inventory of unsold or partially completed dispensers at year end.

16. Cash dividends, $5,000

17. Income tax expense, $22,500 (due to be paid during the next year.)

18. All amounts due to employees, suppliers and others, except for income

taxes, paid in cash. (Peter made this assumption because he wanted

to present a "conservative" Statement of Financial Position to the

investors.

Required:

1. How might Peter and the investors use the Profit Plan in managing the

business?

2. Make profit plan in the form of Statement of Financial

Performance for the first year of operations?

3. Present Statement of Financial Position at the end of the first year of

operation.

4. Peter made a number of accounting decisions. Do you agree with these

decisions? Explain.