When doing O’Henry’s Data Services balance sheet adjustment, the following entries are made:
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| Accounts receivable | 2,100 | |
| Service revenue | 2,100 | |
| Accounts payable | 2,750 | |
| Other expenses | 2,750 |
After making adjustment entries, net income of O’Henry’s Data Services can be calculated:
NI = Service revenue – Salary expense – Utilities expense – Other expenses = ($14,300 + $2,100) – $3,400 – $900 – $2,750 = $9,350
Net income for the buyer is smaller than Net income of the owner by the salary of the manager:
NIb = $9,350 – $3,000 = $6,350 – this is the net income, buyer will receive per month.
The highest price of a business for the buyer equals 20 monthly net incomes, so it equals:
BP = $6,350 × 20 = $127,000
The least price for the business for O’Henry equals ending capital of O’Henry’s Data Services:
EC = Beginning capital + Net income – Withdrawals = $137,400 + $9,350 – $2,000 = $144,750
Under this condition the price offered to O’Henry will be between $127,000 and $144,750. If there are other alternatives to get invested $127,000 back in 20 months, the price will equal $127,000. If there are no investment options, which can give an ability to get invested $144,750 back in 20 months, the offer price would be $144,750.
References
Horngren, C. T., Sundem, G. L., Elliott J. A. (1993). Introduction to financial accounting. Prentice Hall.
Eisen, P. J. (2007). Accounting. Barron’s Educational Series.
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