This case can be assigned as a group activity. Additional instructions and material for this activity can be found on the Instructor Resource site and in WileyPLUS.

Kenmare Architects Ltd. (KAL) was incorporated and began operations on January 1, 2017. Sheila Kenmare, the company's only employee, consults with various clients and uses expensive equipment to complete her work. When the company was formed, Sheila bought 10,000 common shares but at the beginning of 2018, another 1,000 common shares were sold to Sheila's mother.

In addition to selling shares, KAL received financing from Sheila's Uncle Harry in the form of a loan that was taken out on January 1, 2017. Her uncle required the company to pay only the interest on the loan and no principal in 2017, which KAL did. However, he wanted both interest and a portion of the principal to be paid during 2018. These payments were made evenly throughout 2018. Harry was surprised when Sheila paid down more of the loan balance in 2018 than he asked her to.

The following shows the financial statements of the company for the past two years:

Instructions
(a) When the company was formed, how much did Sheila pay for her shares? How much did her mother pay for her shares?
(b) At the end of 2017, what portion of the loan did Uncle Harry want paid off in 2018? How much of the loan was actually paid off in 2018? What was the total amount of cash received by Harry in 2017 and 2018?
(c) Calculate the current ratio for each year. Has the company's liquidity improved or deteriorated?
(d) Calculate the debt to total assets ratio for each year. Did the company's solvency improve or deteriorate? What effect did the change in this ratio have on the income statement?
(e) Calculate the basic earnings per share of the company for each year. Why do you think that basic EPS changed in 2018?
(f) Assume that the price Sheila paid for her shares was the share price throughout 2017. Using that price, calculate the price-earnings ratio for that year. Assume that the price Sheila's mother paid for her shares was the share price throughout 2018. Using that price, calculate the price-earnings ratio for 2018. Why do you think the P-E ratio changed? Do you think that the share price change was justified?
(g) What was the major reason for the company to sell shares in 2018?

KENMARE ARCHITECTS LTD Income Statement Year Ended Decembe 2018 2017 $120,000 $100,0oo 74,000 59,000 Rent and other office expenses 20,000 20,ooo 12,000 12,000 2.703.600 11,300 5,400 3.31890 $ 7.910 S 3,510 Service revenue Salaries expense Depreciation expense Interest expense Income before income tax Income tax Net income KENMARE ARCHITECTS LTD Statement of Financial Position December 31 2018 2017 Cash Accounts receivable 9,000 $ 22,00o 37.0009.000 46.000 31,000 84,00084,00o 12,00o 60,000 72,000 $106,000 $103,000 $ 29,580 $14,490 Current portion of loan payable 4000 80o0 33,580 22,490 26,000 52,000 59.580 74.49o 35,000 25,000 11.420 3.510 46.420 28.510 $106,000 $103,000 Equipment Accumulated depreciation 24000 Accounts payable Loan payable Common shares Retained earnings