Your Newest Clients are Ken and Barbara Mattel. Ken owns his own Internet consulting firm, MattelNet, which
Question:
Your Newest Clients are Ken and Barbara Mattel.
Ken owns his own Internet consulting firm, MattelNet, which right now consists of himself, and has been operating for about two years. Ken was born on October 3, 1962.
Barbara is a patent attorney for a large medical products company, where she has worked for the past 9 years. Barbara was born on June 1, 1963.
Ken and Barb have two children, Jason and Jennifer, who were born on July 4, 1994, and September 15, 1998, respectively. Neither child has any special needs.
Ken’s income from his business, which is organized as a sole proprietorship, is estimated to be $65,000 - $70,000 after expenses this year. He feels that when he can affords to hire an additional employee or two, this has the potential to provide $150,000 or more in income 3-5 years from now.
Barb’s salary is $90,000 per year, and bonuses should add about 15% in an average year or 25% in a
good year. Her salary increase is about 5% per year, if she stays in the legal department. She also was
awarded 2,000 non-qualified stock options (10-year term) about a year ago at a share price of $40 per
share. Her employer’s stock is now trading at $45. She will likely be awarded similar amounts of
options each year in the future.
The Mattels just bought their dream house six months ago for $600,000, and have a $420,000
mortgage, with principal and interest of $3,100 per month, and taxes and insurance of $1,100 per
month. They also own a small cabin in Wisconsin, worth about $190,000 with a balance of $50,000 on
a contract for deed, which will be paid off over 9 years at 10%.
In short, the Mattels spend everything they earn, and last April paid about $6,000 in income taxes
because they were under-withheld. In 2006 they will be in a 30% Federal Tax bracket and a 7.85%
Minnesota bracket. They have historically filed a joint return.
Insurance Coverage
Both Ken and Barb are in good overall health. Barb’s employer provides non-contributory group life
insurance equal to 2 year’s salary, & optional amounts up to two year’s salary at group rates. Barb
does not participate in the optional life insurance and has no personal life insurance.
Ken has a $20,000 paid-up life insurance policy with a cash value of $7,000 that his parent’s bought
for him many years ago. He also bought a $100,000 ten-year term life insurance policy when Jason
was born.
Barb has a group long-term disability plan at work that pays 60% of the first $10,000 of monthly salary
if she is disabled for more than 6 months, with payments continuing through disability up to age 65.
Ken has no disability insurance.
The entire family is covered under a comprehensive medical plan through Barb’s employer.
Mattel 2
Retirement Plans
Barb’s company does not have a pension plan. Retirement is provided entirely through a 401(k) plan.
Under the 401(k) plan provisions, each employee can elect to contribute up to the IRS maximum. The
company matches each contribution 100¢ on the dollar on the first 6% of the employee’s contribution,
and nothing on any excess. The plan provides a choice of 6 different mutual funds for the employee’s
contributions. Barb currently contributes 3% of pay to this plan.
Ken and Barb both come from modest means and do not expect to inherit any substantial sums,
although Ken is a beneficiary of his father’s insurance trust which will distribute approximately
$50,000 to him on his 50th birthday.
The Mattels both describe themselves as conservative, reasonably risk averse, and would like to make
a 10% return on their money.
Objectives (In no particular order)
1. Expand Ken’s Business
2. Improve their cabin
3. Increase their investment portfolio
4. Send kids to college, preferably private schools
5. Minimize Taxes
6. Retirement – preferably when Ken is 60 – at the same standard of living
7. Make some charitable bequests.
Mattel 3
Assignment
Develop recommendations for a financial plan to meet Mattel’s objectives. This should include actions to be taken now and in the future. Be specific as to dollar requirements for retirement and college funding. Indicate the type of financial products that you recommend that they use in their plan.
Indicate what aspects of their financial affairs you’ve reviewed. Prepare a budget, net worth statement, cash flow, and any other charts, graphs and other tools you feel are necessary to assist Mattels in understanding and implementing your plan.
If it is necessary to assume other facts about their present and future situation (e.g. no more children.
Ken’s business prospects, etc.), please list them. Winning Powerball is not a satisfactory assumption.
Non-Real Estate Assets
Checking Accounts $3,000
Money Market Accounts 4,000
Certificate of Deposits 15,000
Government Savings Bonds 2,000
Mutual Funds (taxable bond fund) 4,000
Common Stocks, 4 stocks including Barb’s employer (50%) 20,000
401(k) Plan – Barb 22,000
401(k) Plan – Ken (former employer) 4,000
IRA –Ken 1,000
Autos and Personal Property 110,000
Their other Non-Real Estate Debts
Credit Card Debt $7,000 (18% interest, paying $400 per month)
Loan on Ken’s office equipment $7,000 (18 months remaining @10%)
Barb’s Student Loans are $28,000 (8% due in 5 years)
Automobile Loans $14,000 (3 years remaining, $415 monthly payment)
Miscellaneous Facts
2005 Charitable Gifts $3,000
2005 Ordinary Income from Investments $1,700
Cabin Property Taxes $1,500
Licenses $600
Accounting Principles Volume 2
ISBN: 978-1119502555
8th Canadian Edition
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak