# Cece Saw, a carpenter who has saved some money, has decided to build and operate, with his wife,…

• September 24, 2021 /

Cece Saw, a carpenter who has saved some money, has decided to build and operate, with his wife, a 10-unit highway budget motel. Cece invests \$50,000 of his own money in the company (\$10,000 by way of common stock and \$40,000 as a long-term loan). He also obtained a long-term mortgage on the land and building for \$240,000 at an 8% interest rate. Interest is estimated to be \$1,600 per month for the first few months of the new business, and principal payments are expected to be \$1,000 per month. Land was purchased for \$50,000 cash and \$200,000 cash was used to construct a building (estimated life of the building is 30 years, no residual value). Furniture and equipment was purchased for \$24,000 (estimated life of the furniture and equipment is 10 years, no residual value). Linen was also purchased with cash for \$6,000, and the owner decided to write off the linen (depreciated, no residual value) over a 5-year period before the business opened. Cece’s company also committed advertising costs of \$2,400 for brochures and other items; this cost will be expensed during the first year of business. The first year’s insurance premium of \$3,600 was prepaid before the business started. For the first three months of business, rooms occupancy is forcasted to be 60%, 65%, and 70%, respectively. To increase room sales volume, a low average room rate of \$65 is to be offered. When calculating sales revenue, use a 30-day month. All sales revenue will be on a cash basis. Since the motel is relatively small, Cece and his wife will run it themselves but expect to hire some part-time help at a cash cost of \$400 per month. Cece and his wife will each be paid \$2,500 a month by the company for their services. However, for each of the first six months, they will each only take \$750 cash out of the business for living expenses, until they are sure the company has sufficient cash resources to pay them the balance. Cece hired casual labor for \$853 which will not be paid when the job is completed and will pay the landscaper on April 1. Laundry and supplies are estimated to be 10% of monthly sales revenue. This will be paid in cash. Utility costs are forecast to be \$300, \$325, and \$350 for the first three months of operations, respectively; however, each month utility costs will not be paid until the following month. Office expenses are expected to be \$100 per month in cash. For each of the first three months of the motel’s operation, prepare an income statement and a cash budget. Also, prepare the balance sheet for the end of Month 3.

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