SuzanneMcDanielis an interior designer in Boise, Idaho and for several years has traveled toIndonesia to findspecialpiecesof furniture and other accessoriesfor herclients homes andbusinesses.After observing the significant interest inunique Indonesian products, Suzanne andher husband, Drew,decided to open a warehouse in Boise, Idahothat wouldspecialize in sellingIndonesian imports towholesale customers such asinterior designers andarchitects,as well asretail customers.Drew quit his job as a sales manager and they began their search for awarehouselocation inAugustof 2016.InSeptembertheyfound what they considered to be anideal spacein Southeast Boise, which isconveniently located near downtown and close to majorfreeways.

Pre-Opening Period

Drew and Suzanneinitiallyinvested $160,000 of personal fundsand existing inventory with avalueof $90,000 in their new business and decided to call it Impact Imports.On September21,2016, they signed a renewable 24-month lease for the location they desiredwith a lease termbeginning onNovember1.The lease agreementrequired an upfront paymentof $18,000, whichcoveredthe first six monthsof rent(coveringNovember2016throughApril2017) at the rate of$2,500 per month, plus an additional $3,000 damage deposit, which is non-refundable if the leaseis cancelled.Under the terms of the lease agreement, Drew and Suzanne were allowed to beginleasehold improvements on the warehouse on October 1.The grand opening was scheduled forNovember1stand the month ofOctoberwas used toprepare thewarehouseand to travel to Indonesia to hand selectnewpiecesto include in theirinventory.The prior tenantof the warehousehad been a martial arts center, so extensive paintand remodeling was necessary in order to createan eclectic, yet functional retail space.The costof remodeling the interior space totaled $70,000 and the cost of furnishings was an additional$28,000, including a point of salecomputer system.They expectthe useful life of the leaseholdimprovements, furnishings and equipment to be7years and theirsalvage value to be zero.In an effort to attract thewholesale(i.e. designers and architects)clientele,Drew and Suzannedecided to carryregionalhardwood andstone slabsalong withother architectural elements.Suzanne traveled toIndonesia during October and purchased several of these elemental piecesfor$36,000, which were scheduled to be delivered to the warehouse by October 31,2016. Drewand Suzanneplanned tocombine these newly acquired items with the existing inventory they hadinitially invested in Impact Imports.OnOctober25thDrew and Suzannereviewed the last minute preparations for opening day aswell as where their bank account stood.Suzannewas concerned that their cash balance haddwindled down to $8,000.Suzanne summarized herconcerns.In one month, we have gonethrough $152,000 and that doesnt countthe grand opening costs we will incur.We wont beinbusiness very long at this rate.On October 30th, they consulted with Eric Beem, a local certifiedpublic accountant, on setting up accounting records for Impact Imports and advice aboutobtaining additional funding.For example, should they seek other investors or should they try to

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get a loan?Eric explained that, while their bank balance was declining, they were not losingmoneyratherthey were investing in assets.Even so, they were right to be concerned with theamount of cash remaining.After Eric explained the options of seeking equity versus debtfinancing, Drew and Suzanne decided to seek a loan as protection against cash shortages.

The FirstTwoMonths of Operations

OnNovember 1,2016,Impact Importsobtained a loan for $80,000 fromIdahoBankingCompany, payableon October 31, 2017with semi-annual interest payments at an annual rate of6%.Drew and Suzannebelieved this amount ofaloan would be sufficient to keep them inbusiness until they were generating positive cash flows from theiroperations.Impact Imports sent local designers and architects invitations to their grand openingevent, whichwas held on November 5,2016.They alsoadvertisedthe event in thelocal newspaper and viaflyers posted atother area merchants.The grand opening event featuredwine and hors doeuvresas well as live music.The total cost of the advertising,foodand entertainmentfor the grandopening was $3,300, which was paid in cash.A summary of other events for the firsttwomonths of operations follows:

Retail sales for thetwo-monthperiod ending December 31,2016totaled $32,000.Allretailsales were for cash.The cost of the items sold to retail customers was$20,000.

Wholesale salestotaled $94,000 for thetwo-month period ending December 31,2016.Impact Imports extends credit to its wholesale customers, requiring that balances be paidwithin 30 days of purchase.Allwholesalesales weremade on credit and $77,000 of the totalamount had been received in cash as of December 31,2016.The cost ofthe items sold towholesale customers was$73,000.

DuringNovember2016, Drew traveled to Indonesia and purchased some additional pieces offurniture to replenish theirinventory before the holidays.Impact Importspaid $27,000 cashfor the furniture, which arrived at the warehouse during the second week of December.A one-year insurance policy to cover miscellaneous liabilities was purchased onNovember1,2016for $3,800.Wagesearned bypart-time employees during thetwo-month period ended December 31,2016totaled $8,800.Wages paid during the two-month period totaled $7,800.The remaining$1,000will be paid to employees on January 4, 2017, which is the end of the next payrollperiod.Invoices for miscellaneous expenses (includingEric Beemsconsulting fee) totaling $4,600werereceived and paid during November and December.On December 28,2016,ImpactImports receivedan invoice in the amount of $1,250fromIdaho Power. Impact Importsintends to pay the bill on its due date in January 2017.

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Otherinformation:

Straight-line depreciation will be used for all property, plant and equipment, includingleasehold improvements.No interest payments were made during the two-month period.The first interest paymentof$2,400on the loan will be due on April 30, 2017.

Required:

1.Prepare thefollowing financial statements:

a.Income statement for the period ended December 31,2016b.Balance sheet at December 31,2016

2.Briefly comment on Impact Imports performance during this period.Do you think Drew andSuzanne should continue their business?