Reference no: EM13851449

Suzanne McDaniel is an interior designer in Boise, Idaho and for several years has traveled to Indonesia to find special pieces of furniture and other accessories for her clients' homes and businesses. After observing the significant interest in unique Indonesian products, Suzanne and her husband, Drew, decided to open a warehouse in Boise, Idaho that would specialize in selling Indonesian imports to wholesale customers such as interior designers and architects, as well as retail customers. Drew quit his job as a sales manager and they began their search for a warehouse location in August of 2014. In September they found what they considered to be an ideal space in Southeast Boise, which is conveniently located near downtown and close to major freeways.

Pre-Opening Period

Drew and Suzanne initially invested $160,000 of personal funds and existing inventory with a value of $90,000 in their new business and decided to call it "Impact Imports". On September 21, 2014, they signed a renewable 24-month lease for the location they desired with a lease term beginning on November 1. The lease agreement required an upfront payment of $18,000, which covered the first six months of rent (covering November 2014 through April 2015) at the rate of
$2,500 per month, plus an additional $3,000 damage deposit, which is non-refundable if the lease is cancelled. Under the terms of the lease agreement, Drew and Suzanne were allowed to begin leasehold improvements on the warehouse on October 1.

The grand opening was scheduled for November 1st and the month of October was used to prepare the warehouse and to travel to Indonesia to hand select new pieces to include in their inventory. The prior tenant of the warehouse had been a martial arts center, so extensive paint and remodeling was necessary in order to create an eclectic, yet functional retail space. The cost of remodeling the interior space totaled $70,000 and the cost of furnishings was an additional
$28,000, including a point of sale computer system. They expect the useful life of the leasehold improvements, furnishings and equipment to be 7 years and their salvage value to be zero.

In an effort to attract the wholesale (i.e. designers and architects) clientele, Drew and Suzanne decided to carry regional hardwood and stone slabs along with other architectural elements.
Suzanne traveled to Indonesia during October and purchased several of these elemental pieces for $36,000, which were scheduled to be delivered to the warehouse by October 31, 2014. Drew and Suzanne planned to combine these newly acquired items with the existing inventory they had initially invested in Impact Imports.

On October 25th Drew and Suzanne reviewed the last minute preparations for opening day as well as where their bank account stood. Suzanne was concerned that their cash balance had dwindled down to $8,000. Suzanne summarized her concerns. "In one month, we have gone
through $152,000 and that doesn't count the grand opening costs we will incur. We won't be in business very long at this rate." On October 30th, they consulted with Eric Beem, a local certified public accountant, on setting up accounting records for Impact Imports and advice about obtaining additional funding. For example, should they seek other investors or should they try to

get a loan? Eric explained that, while their bank balance was declining, they were not losing money rather they were investing in assets. Even so, they were right to be concerned with the amount of cash remaining. After Eric explained the options of seeking equity versus debt financing, Drew and Suzanne decided to seek a loan as protection against cash shortages.

The First Two Months of Operations

On November 1, 2014, Impact Imports obtained a loan for $80,000 from Idaho Banking Company, payable on October 31, 2015 with semi-annual interest payments at an annual rate of 7%. Drew and Suzanne believed this amount of a loan would be sufficient to keep them in business until they were generating positive cash flows from their operations.

Impact Imports sent local designers and architects invitations to their grand opening event, which was held on November 5, 2014. They also advertised the event in the local newspaper and via flyers posted at other area merchants. The grand opening event featured wine and hors d'oeuvres as well as live music. The total cost of the advertising, food and entertainment for the grand opening was $2,900, which was paid in cash.

A summary of other events for the first two months of operations follows:

• Retail sales for the two-month period ending December 31, 2014 totaled $32,000. All retail sales were for cash. The cost of the items sold to retail customers was $19,000.

• Wholesale sales totaled $94,000 for the two-month period ending December 31, 2014. Impact Imports extends credit to its wholesale customers, requiring that balances be paid within 30 days of purchase. All wholesale sales were made on credit and $77,000 of the total amount had been received in cash as of December 31, 2014. The cost of the items sold to wholesale customers was $73,000.

• During November 2014, Drew traveled to Indonesia and purchased some additional pieces of furniture to replenish their inventory before the holidays. Impact Imports paid $27,000 cash for the furniture, which arrived at the warehouse during the second week of December.

• A one-year insurance policy to cover miscellaneous liabilities was purchased on November 1, 2014 for $4,200.

• Wages earned by part-time employees during the two-month period ended December 31, 2014 totaled $8,800. Wages paid during the two-month period totaled $7,800. The remaining
$1,000 will be paid to employees on January 4, 2015, which is the end of the next payroll period.

• Invoices for miscellaneous expenses (including Eric Beem's consulting fee) totaling $4,700 were received and paid during November and December. On December 28, 2014, Impact Imports received an invoice in the amount of $800 from Idaho Power. Impact Imports intends to pay the bill on its due date in January 2015.

Other information:

• Straight-line depreciation will be used for all property, plant and equipment, including leasehold improvements.

• No interest payments were made during the two-month period. The first interest payment of
$2,800 on the loan will be due on April 30, 2015.

Required:

1. Assume the events for the pre-opening period ended October 31, 2014 have been recorded correctly and are reflected in the beginning balances in the T-accounts worksheet provided. Record the events for the two months of operations ended December 31, 2014 in the T- accounts provided. Note that you will have to add some new accounts. Also note that it may be helpful to write out journal entries even though they are not required and will not be graded. You may ignore taxes.

2. Prepare the following financial statements:

a. Income statement for the period ended December 31, 2014

b. Balance sheet at December 31, 2014

3. Briefly comment on Impact Imports performance during this period. Do you think Drew and Suzanne should continue their business?