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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.

In the O'Henry assignment you must create an income statement and a statement of owners equity (do not create a balance sheet).

First, you need to create an income statement for the buyer. You need this for 2 reasons; (1) to determine the monthly net income you would pay (times 20) for the business, and (2) the net income figure needs to be "closed out" and "turned into" retained earnings which are part of the calculation for ending capital (a.k.a., owners equity). Look at the text, page 147, to determine what accounts go on the income statement (revenue and expenses only, please). Then take the net income figure multiplied by 20 to determine the amount the buyer is willing to pay for O''Henry''s business. REMEMBER, the buyer needs a manager, so the cost of the manager needs to be included in the income statement as well as the monthly revenue and expense figures discussed in the narrative of the assignment.

Next you need to determine how much O''Henry wants for the business. The least O''Henry will take is his ending capital. Capital (or owners equity) is calculated as follows: beginning capital (owners equity) plus retained earnings less any withdrawals or dividends = ending capital (or owners equity). For a good example see page 147 of the text. REMEMBER that the net income figure you use to calculate how much O''Henry wants for the business should not include the cost of the manager, since O'Henry does not need the manager.

In any business transaction you can negotiate the price. Finally, make sure you remember to discuss how much should you offer O''Henry and give your reason.

Length 3 paragraphs

Solution Preview

The most you would pay for this is 20 times the monthly net income. The monthly net income expected is \$6,350. The maximum amount that can be paid is 6,350 X 20 = \$127,000.

The least Benjamin will accept is the ending capital which is \$144,750.

The worth of any business is the difference between its assets and the liabilities. What is left ...

Solution Summary

The solution explains how to prepare an income statement and determine the value of the business.

\$2.19

1. Concrete Construction, Inc. (CCI), uses its cement-mixing equipment as collateral for a loan from First State Bank. The bank files a financing statement with the secretary of state in the state in which CCI was chartered. CCI is hired to do some work in another state and moves its equipment there to do the work. To continue the effectiveness of its
original filing, First State Bank must

a. file a continuation statement after the expiration of the original filing.
b. file a continuation statement before the expiration of the original filing.
c. file a new financing statement in the state in which CCI is working.
d. repossess CCI's equipment.

2. Ed repays his debt, incurred to buy consumer goods, to First City Bank and immediately files a written request for a termination statement. First City

a. must comply within one month of receipt of the letter.
b. must comply within twenty days of receipt of the letter.
c. must refund \$500 to Ed.
d. need not comply.

3. Mike owes \$12,000 to Nora, \$6,000 to Owen, and \$6,000 to Pat. The three creditors enter into an agreement with Mike to discharge the debts on payment of a sum of \$12,000 to them, to be divided proportionately. This is

a. a composition agreement.
b. a guaranty agreement.
c. a judicial lien.
d. a suretyship agreement.

4. Adam's home is in a state that has a \$15,000 homestead exemption. Adam defaults on a \$30,000 debt that he owes to Beth. Adam's home is sold at auction for \$40,000. Adam will receive

a. \$15,000.
b. \$25,000.
c. \$30,000.
d. nothing.

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10. Pete and Rob hold the first organizational meeting of Coastal Resorts Corporation (CRC). Probably the most important function of this meeting is
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17. Mega Corporation wants to gain control of MiniCo, Inc. The companies negotiate for several months, without coming to terms. Mega decides to pursue a takeover attempt. MiniCo decides to resist. MiniCo amends its bylaws to require that 80 percent of the shareholders approve a merger. This is a

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18. Acme Enterprises, Inc., a corporation traded on a national stock exchange, wants to offer bonds for sale to the public. All-Rite Insurance Company, a state-regulated insurance company, wants to offer annuity contracts for sale to the public. Before any sale, registration must be made with the SEC for

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20. Mike, a director of National Foods Corporation, learns that the company has developed a new fat-free food. Mike buys 1,000 shares of National stock. One week later, the new product is announced, the price of the stock increases, and Mike sells his shares for a profit. Under SEC Rule l0b-5, Mike would not be liable if he had waited

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21. Interstate Trucking, LLC, is a limited liability company. Jack, an Interstate driver, is in an accident in New Jersey with Owen, a citizen of New York. Owen files a suit against Interstate in a federal district court. For purposes of federal court jurisdiction, the citizenship of Interstate is the same as the citizenship of

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22. Don and Elaine are limited partners in Fine Stores, a limited partnership. In terms of the firm's books, Don and Elaine are entitled to

a. access in proportion to their participation in the management of the firm.
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23. Alpha Footwear, LP, is a limited partnership. Beth, a limited partner, participates in the firm's management. Crafted Soles Corporation (CSC), is one of the firm's creditors. Based on Beth's conduct, CSC believes that she is a general partner. In terms of her liability for the firm's obligations to CSC, Beth has, in relation to the general partners,

a. some, but less, liability.
b. more liability.
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24. Downwind Properties Corporation and Eastern Investments Company transfer their property to Financial Management, Inc., which manages the property and distributes the profits to Downwind and Eastern. This is

b. a joint stock company.
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25. Resource Development Company and Western Mining Corporation form a joint stock company. Like most joint stock companies, it is managed by

a. directors and officers.
b. general partners.
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d. trustees.

26. To enable Bob, a potential franchisee, to make an informed decision concerning the purchase of a Great Store franchise, regulations requiring Great Stores to disclose material facts were issued by

b. the National Conference of Commissioners on Uniform State Laws.
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27. Three farm-equipment distributors control 90 percent of the market for their products in a certain geographic area. The firms agree to sell their products for the same prices. This is

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c. price fixing.
d. none of the above.

28. USA Computer Corporation requires all distributors of its products to sell the products at specified minimum prices. This resale price maintenance agreement is

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b. a violation of the Clayton Act.
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d. not subject to antitrust law.

29. Macro Corporation conditions the sale of its operating software on the buyer's agreement to purchase another Macro product, an Internet browser. This is

a. an exclusive-dealing contract.
b. an interlocking directorate.
c. price discrimination.
d. a tying arrangement.

30. Sue buys a car from her neighbor, Tim, for \$5,000 and agrees to make monthly payments of \$500 until the price is paid. This transaction is subject to

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c. the Truth-in-Lending Act.
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31. Ace Payments Agency harasses Beth in an attempt to collect payment for a shipment of CDs that she returned to Central Music Company four months earlier. This is a violation of

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c. the Truth-in-Lending Act.
d. none of the above.

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b. a permit from the Army Corps of Engineers.
c. both a and b.
d. none of the above.

33. Alpha Telecommunications Corporation employs seven thousand workers in three states. A third of the employees are member of the National Telecommunications Workers Union. Under the Labor-Management Relations Act, the union can

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b. insist that Alpha hire more employees than necessary.
c. refuse to bargain with Alpha.
d. none of the above.

34. Beth, an employee of Midstates Manufacturing Corporation, is injured on the job and accepts workers' compensation. Beth can successfully sue Midstates

a. if the injury was caused by the employer's negligence.
b. if the injury was caused by the employer intentionally.
c. regardless of the employer's fault.
d. none of the above.

35. Mike works as an employee for International Services, Inc. To protect Mike and other employees from arbitrary discharge, courts have created exceptions to the employment-at-will doctrine based on

a. an implied contract theory only.
b. a public policy theory only.
c. implied contract and public policy theories.
d. none of the above.

36. Jane works for Butler Warehouse Company. Jane is the only woman on her work crew. The male crew often tell jokes and play minor pranks on each other. When Jane attempts a prank, the supervisor fires her, saying that "we don't tolerate horseplay at Butler." Assuming that Jane can establish the ground for a lawsuit against Butler, Butler can defend itself by showing that

a. Jane is the member of a protected class and she was qualified for the job.
b. the misconduct Jane engaged in was nearly identical to that engaged
in by an employee who is not a member of the protected class and who was not fired.
c. there was a legitimate, nondiscriminatory reason for the discharge.
d. both a and b.

37. Paul believes that American Equipment Corporation, his employer, subjected him to discrimination on the basis of his age. For the Age Discrimination in Employment Act of 1967 to apply

a. the age discrimination must have been intentional.
b. American must have at least thirty employees.
c. Paul must be forty years of age or older.
d. all of the above.

38. Dana, who has a disability, is an employee of Hersch & Company. After the installation of new entry doors, Dana finds it nearly impossible to get into and out of the Hersch building. For repeatedly failing to be on time, Hersch discharges Dana. Dana is replaced by Gert, who does not have a disability. Dana files a claim against Hersch under the Americans with Disabilities Act of 1990. To successfully defend against Dana's claim, Hersch will have to show that

a. Dana consistently failed to meet the essential requirements of her job.
b. Gert is qualified for Dana's position.
c. Hersch cannot reasonably accommodate Dana without undue hardship.
d. all of the above.

39. Ira is declared mentally incompetent. Jay, Ira's son, is named his guardian. At Jay's insistence, Ira transfers his assets to Jay "for safekeeping." A court might conclude that this gift is not effective on the ground that there was no

a. acceptance.
b. delivery.
c. donative intent.
d. donor's acknowledgment.

40. Sara, a famous pianist, is told that she will have to undergo brain surgery that could result in partial paralysis of her right arm and leg. Before she enters the hospital, Sara gives her concert piano to a good friend who is also a pianist and has the piano transported to the friend's home. The surgery is successful, and Sara suffers no postsurgical paralysis of any kind. Sara can

b. not revoke her gift because it was a gift causa mortis.
d. not revoke her gift because it was a gift inter vivos.

41. Jerome agrees to let Kenny store his boat behind Jerome's garage for \$20 a month while Kenny is in Europe. One day, a few weeks after Kenny's departure, Jerome notices that the canvas tarp covering the boat is so cracked and worn that rainwater is collecting in the boat. Jerome replaces the tarp at a cost of \$35. Given these facts a. Jerome does not have a right to collect \$35 from Kenny because this was

a gratuitous bailment.
b. Jerome probably has a right to be compensated for the \$35 on Kenny's return.
c. Kenny does not have to pay Jerome \$35 because he did not authorize Jerome to purchase a new tarp.
d. Kenny does not have to pay Jerome \$35 because no bailment existed, just a friendly arrangement.

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b. a future interest.
c. a leasehold estate.
d. a life estate.

43. Irma owns land in Iowa. Her ownership rights include the right to sell or give away the property without restriction, and the right to commit waste, if she chooses. Irma deeds her land to Jake. The deed states, "To Jake, for life, then to Kim." Irma has given Kim

a. a fee simple absolute.
b. a fee simple defeasible.
c. a life estate.
d. a remainder.

44. Ben, a football fan, transfers land, by deed, to Alpha University. The deed states, "To Alpha University, as long as the football team wins every game, then to Kappa College." Alpha's interest in the land is

a. a fee simple defeasible.
b. an executory interest.
c. a remainder.
d. a reversionary interest.

45. Earl applies for, and obtains, a life insurance policy from Federated Insurance Corporation that contains an incontestability clause. This clause provides that Federated cannot contest statements made in the application

a. after the policy has been effect for a specified period of time.
b. as soon as the policy is issued.
c. under any circumstances.
d. none of the above.

46. In her will, Jill makes a gift of stock to Kent. At the time of Jill's death, she owes \$10,000 to Local Mortgage Company. The residuum of her estate consists of assets that

a. exist before taxes, expenses, and the debt to Local Mortgage are paid.
b. pay estate taxes, expenses, and debts.
c. remain after the debt to Local Mortgage is paid and the gift to Kent is made.
d. remain after taxes, expenses, and the debt to Local Mortgage is paid, but before the gift is made to Kent

47. Sophia executes a will in 1990 naming her nephew Porter as the sole beneficiary. In 1999, she executes another will, changing the beneficiary to her niece Allison, but she does not state in the 1999 will that she is revoking the earlier will. On Sophia's death

a. Porter will be the sole heir, as the 1990 will was first in time and was never effectively revoked.
b. Allison will be the sole heir because a second will automatically revokes an earlier will even if a declaration of revocation is missing from the second will.
c. Allison will be the sole heir because even when a declaration of revocation is missing from a second (later) will, if the second will is inconsistent with an earlier will, the second will controls.
d. neither Porter nor Allison will inherit because when a second will is inconsistent with an earlier will and the earlier will is not specifically revoked in the second will, the testator's property escheats to the state.

48. Egypt hires a British advertising agency to promote tourism from Europe but fails to pay for the agency's services. If the agency attempts to sue Egypt in a U.S. court, Egypt will likely be exempt from the court's jurisdiction under
a. the act of state doctrine.
b. the Convention on Contracts for the International Sale of Goods.
c. the doctrine of sovereign immunity.
d. the principle of comity.

49. New World Products, Inc., a U.S. firm, contracts with Fong, Ltd., a Hong Kong firm, allowing the foreign firm to use and profit from its patented products. This is
a. importing.
b. exporting.
c. exclusive distributing.
d. technology licensing.

50. The United States taxes each barrel of imported oil at a flat rate. This is

a. an antidumping duty.
b. a dumping duty.
c. a quota.
d. a tariff.

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