Benjamin O'Henry has owned and operated O'Henry's Data Services since its beginning ten years ago. From all appearances, the business has prospered. In the past few years, you have become friends with O'Henry and his wife. Recently, O'Henry mentioned that he has lost his zest for the business and would consider selling it for the right price. You are interested in buying this business, and you obtain its most recent monthly unadjusted trial balance which follows:
O'Henry's Data Services Unadjusted Trial Balance November 30, 20XX
Cash……………………………… $9,700
Accounts receivable……………………… 7,900
Prepaid expenses………… 2,600
Furniture, fixtures, & equipment 151,300
Accumulated depreciation $15,600
Accounts payable………… 3,800
Salary payable………………
Unearned service revenue 6,700
Benjamin O'Henry, capital 137,400
Benjamin O'Henry, withdrawals 2,000
Service revenue………… 14,300
Rent expense……………
Salary expense………… 3,400
Utilities expense……… 900
Depreciation expense
Supplies expense……
Total…………………………………………. $177,800 $177,800
Revenues and expenses vary little from month to month, and November is a typical month. Your investigation reveals that the unadjusted trial balance does not include the effects of monthly revenues of $2,100 and monthly expenses totaling $2,750. If you were to buy O'Henry's Data Services, you would hire a manager who would require a monthly salary of $3,000.
The most you would pay for the business is 20 times the monthly net income you could expect to earn from it. Compute this possible price. The least O'Henry will take for the business is his ending capital. Compute this amount. Under these conditions, how much should you offer O'Henry? Give your reason.
Thanks in advance for all your help : ).
To compute the possible price you could pay for O'Henry's Data Services, you need to calculate the monthly net income first. Here are the steps:
1. Start with the unadjusted trial balance provided and add the missing monthly revenues and expenses.
- Add the monthly revenues of $2,100 to the Service Revenue account.
- Add the monthly expenses totaling $2,750 to their respective expense accounts (Rent Expense, Salary Expense, Utilities Expense, and Supplies Expense).
The updated trial balance would look as follows:
O'Henry's Data Services Trial Balance (after adding monthly revenues and expenses) November 30, 20XX
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Cash $9,700
Accounts receivable $7,900
Prepaid expenses $2,600
Furniture, fixtures, & equipment $151,300
Accumulated depreciation -$15,600
Accounts payable $3,800
Salary payable (unknown)
Unearned service revenue $6,700
Benjamin O'Henry, capital $137,400
Benjamin O'Henry, withdrawals $2,000
Service revenue $16,400 ($14,300 + $2,100)
Rent expense (unknown)
Salary expense $3,400
Utilities expense $900
Depreciation expense (unknown)
Supplies expense (unknown)
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2. Calculate the monthly net income by subtracting the monthly expenses (excluding the manager's salary) from the service revenue.
- Net Income = Service Revenue - (Rent Expense + Salary Expense + Utilities Expense + Depreciation Expense + Supplies Expense)
- Net Income = $16,400 - ($0 + $3,400 + $900 + Depreciation Expense + Supplies Expense)
Since the unadjusted trial balance doesn't specify the amounts for Rent Expense, Depreciation Expense, and Supplies Expense, we'll assume them to be zero for simplicity. So,
Net Income = $16,400 - ($3,400 + $900) = $12,100
3. Compute the possible price:
- The most you would pay for the business is 20 times the monthly net income.
Possible Price = 20 x Net Income
Possible Price = 20 x $12,100 = $242,000
If the least O'Henry will take for the business is his ending capital, then the amount would be $137,400.
To decide how much you should offer O'Henry, consider the possible price of $242,000 and the least amount O'Henry will accept, which is $137,400. The offer should be somewhere between these two figures. You could negotiate a price closer to the possible price, taking into account factors like the business's future potential, market conditions, and any additional costs or risks associated with running the business.