Upon graduation from MegaState University, you and your roommate decide to start your respective careers in accounting and salmon fishing in Remote, Alaska. Your career as a CPA in Remote is going well, as is your roommate’s job as a commercial fisherman. After one year in Remote, he approaches you with a business opportunity.
As we are well aware, the winters are long up here and the locals need a way to stay fit. We each put up our first year’s savings of $5,000 and file for articles of incorporation with the state of Alaska to do business as Remote Fitness World. In return for our investment of $5,000, we will each receive equal shares of capital stock in the corporation. Then we go to Corner National Bank and apply for a $10,000 loan. We take the total cash of $20,000 we have now raised and buy $20,000 of exercise equipment from a distributor. We hire a qualified instructor to offer a one-hour group fitness class to be offered 15 times each week. We will pay the instructor $20 per hour for conducting the classes. We charge $10 for each class taken and sell monthly memberships for unlimited use of the facility for $50. Classes would be paid for on a cash basis, but we would give customers until the 10th of the following month to pay for a monthly membership. My most conservative estimate is that during the first month alone, the total number of classes signed up for will amount to 240 and we will sell 100 monthly memberships. As I see it, we will have only two expenses, the hourly wage for the instructor and rent for a vacant building of $1,000 per month, both payable during the month.
Required
1. Prepare a projected income statement for the first month of operations.
2. Prepare a balance sheet as it would appear at the end of the first month of operations.
3. Assume that the bank is willing to make the $10,000 loan. Would you be willing to join your roommate in this business? Explain your response. Also indicate any information other than what he has provided that you would like to have before making a final decision.