Sam Smithers and his brother, Arthur, were avid outdoors enthusiasts and were also quite entrepreneurial. Thus, they agreed to go into business together selling fishing and recreational boats on a small lake near Waterton Park in Alberta, Canada. Since the nearest competition was across the border in West Glacier, Montana, they were confident that their business, Waterton Park Boating Company (WPBC), would be successful.

In early 2019 they located a site for their business -- a parcel of waterfront land containing a dock and an old, dilapidated building. At this point, they decided to form a corporation and hired an attorney to draft the articles of incorporation for WPBC. The brothers split the attorney’s $2,400 bill evenly.

On June 1, 2019, Sam purchased 2,100 shares for $84,000 and Arthur paid $28,000 for 700 shares. Because they each took credit for their half of the attorney’s invoice, WPBC only received $109,600. The brothers agreed that any future purchase, or sale, of shares would be done at the book value at the time of the purchase, or sale. They also agreed that they would earn a salary of $3,000 per month (paid monthly) for each month that they were fully engaged in conducting WPBC’s business. They knew that this was a lot less than they could earn in their former jobs, but were happy to take less as they started their own business and could eventually make a lot more on their own.

On July 1, 2019, Sam purchased the site that they had previously identified with the help of a $30,000 bank loan and $50,000 of the company’s money. That same day, Sam resigned from his full-time job so that he could devote his full attention to WPBC (and earn his $3,000 monthly salary).

The first thing that Sam did was arrange to have the old, dilapidated building torn down as there was no value to it. Cardston Wrecking Company tore down the building in July for $24,000 and agreed to defer payment until May 1, 2020.

Meanwhile, Sam contacted RFB, Inc., a large manufacturer of recreational and fishing boats. In exchange for WPBC’s promise to sell only its boats, RFB agreed to provide all of the financing for WPBC’s new building on the site. The loan carried an annual interest rate of 6% (simple interest) with the first installment due on June 30, 2020. Interest was charged from the date of each advance by RFB. On August 1, 2019, RFB provided WPBC with a $50,000 check to get construction of the new building started. The balance of the loan would be provided upon completion of the building.

Construction of the building began immediately under the supervision of a consulting architect, and the contractor promised completion by December 31, 2019 at a price of $160,000. As construction progressed, WPBC made payments to the contractor of $50,000 on August 1, $60,000 on October 31, and $50,000 at completion on December 31, 2019. RFB provided the financing for the October 31 and December 31 payments, as well as the initial $50,000 loan on August 1.

During the construction period, Sam tried to obtain some orders for boats which would be delivered to the customers directly from RFB’s warehouse in Lethbridge, Alberta. Between October 1 and December 31, 2019, Sam sold seventeen boats at an average cost to WPBC of $10,000 per boat. All of this was paid to RFB by December 31, 2019.

These seventeen sales resulted in $204,000 of revenue, of which $24,000 was still outstanding as of December 31, 2019. Previously, the brothers agreed that Sam would receive a $50 commission per boat for his efforts in selling the boats, and WPBC paid Sam his commissions in December.

The building was completed at the end of December. There were extra costs of $5,000 (for changes that WPBC had authorized) and the consulting architect’s $8,000 bill arrived. These amounts were due in January 2020. The $30,000 bank loan, plus interest of $2,700 was repaid on December 31.

Where appropriate, fixed assets, if any, should be depreciated over a twenty-five year period and intangible assets, if any, should be amortized over a five-year period.

Arthur quit his job on December 31 and joined WPBC on a full-time basis. At this time Arthur requested a set of financial statements so that the brothers could see where they stood at the end of December.

a. Using a spreadsheet, prepare a transactions analysis for WPBC from its date of incorporation until December 31, 2019.

b. Prepare a balance sheet, income statement and statement of cash flows (direct method) for the period ending December 31, 2019.

c. Prepare a reconciliation of the cash provided by operations from the statement of cash flows to WPBC’s net income for the period.

d. Based on your financial statements, what is the value of each brother’s equity in WPBC as of December 31, 2019?

Answer rating: 100% (QA)

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