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Marion Boats, Inc. ruck salesman for many years, while Bill, his brother, worked a book salesman for a major publishing house. Although they had done fairly well financially. Fred Cunningham was a fire t they wanted to be their own bosses, so they decided to go into business together They agreed that selling small fishing and recreational boats would be a good line for them to Also, the small town Marion, Mississippi, where they lived, did not have any boat dealerships. The nearest dealer was go into as both had been interested in fishing and boating for many years. some 95 miles away After some searching, they chose a suitable site for their proposed operation. It was situated at a popular local dock. A dilapidated building which had been condemned by the local authorities stood on the site. At this point in time, the brothers decided to incorporate the business. The services of a o handle all aspects of the execution of the lawyer were obtained to draw up the legal papers and t incorporation. The fee for this service was $800, and each of the brothers paid half of it. purchased 500 shares for $20,000. companys shares On October 1, 2005, Fred purchased 1,800 shares of the companys stock for $72,000, and Bill The payment for legal services was considered part of these investments, so the actual cash received by the new company was $91,200. Further purchases of the could be made only at the prevailing book value per share at the time of the and only if both parties agreed to the transaction. If either brother wished at any time to ell his shares back to the company, this transaction would also be conducted at the prevailing book value of the shares. The brothers also agreed that they should each receive salaries of $24,000 per year at all times during which they were engaged in the companys business on a full-time basis ary purchase this amount was less than they could earn in other jobs, but they realized a small sal was needed at this time to ensure that the dealership could pay its bills on time On November 1, 2005, with the aid of a $40,000 bank loan and $32,000 of the companys money, Fred purchased the property which had been selected. The same day, he left his job to devote his full attention to the new enterprise First, Fred arranged to have the old building demolished. A cursory examination revealed there was nothing of any significance that could be salvaged, except for some building stone. Mr

Mahoney, the wrecker, agreed to clear the site for $7,000, provided he could have the stone. Otherwise, he would want $9,000. Fred was convinced he could get a better price for the stone, so he instructed Mr. Mahoney to clear the site and store the stone in a corner of it. This work was started immediately and completed before Christmas. Mr. Mahoney agreed to defer collection of payment until May 31, 2006 In the meantime, Fred got in touch with a large boat manufacturer, Sport Boats, Inc., who had interest in the projected dealership. Fred asked Sport Boats for financial help to previously indicated construct the buildings needed to carry on business. Sport Boats agreed to provide all the financing needed for the building through a loan repayable in 10 equal annual installments, provided Marion Boats sold only Sport Boats models. The loan carried an interest rate of 10% per year, payable from April 1, 2006. The first repayment, including interest, would fall due on March 31, 2007 On December 31, 2005, Sport Boats sent a check for $40,000 to get Marion Boats started. Fred deposited the check in the businesss bank account. The remainder of the loan would be forthcoming when the building was completed Next, Fred arranged through a consulting architect for several construction companies to bicd the job. The lowest bidder was the Birkett and Snell Company. They agreed to construct the specified building for $124,000. On the advice of his architect, however, Fred decided to accept the Holmes Brothers Construction Company bid of $140,000; the architect believed Birkett and Snell was less reliable than Holmes in meeting promised completion dates. The construction was started immediately, Holmes promising completion by the end of March 2006. Progress payments on certificates from the architects were to be made at the end o january, the end of February, and the date of completion in amounts of $40,000, $40,000, and $60,000. During early 2006, Fred tried to obtain some orders for boats which he planned to deliver directly to customers from Sport Boatss model he had recently bought himself. Between January 1 and March 30, Fred sold 17 of this mod at an average cash cost to Marion of $9,000. Nothing was paid to Sport Boats for these boats during the period. These 17 sales realized $183,600, whereof $58,000 represented trade-in allowances $112,000 in cash, and the rest was outstanding at March 30. Fred sold all the trade-in boats for $54,800 cash before March 31. Previously, Bill and Fred agreed that the latter should receive every new boat sale as compensation for using his private boat as a display model. eland. Fred had som success with the $40 for At the end of March, the building was completed. However, there was an additional charge of $2,400 for materials, which Marion had to pay according to the provisions of the building contract. At the same time, the architects bill for $2,600 arrived. yment with $40,000 of the companys money and the February payment with the Sport Boats loan. Fred sent the progress paym ents to the builder as previously arranged, making the January On March 31, the last $60,000 progress payment and the $2,400 materials surchargew $40,000 bank loan plus interest of $2,000 was repaid by check on March 30 basis. At Bills request, it was agreed that financial statements would be prepared, to allow the two On March 30, Bill quit his jo b with the publishing house and joined Marion on a full-time brothers to see of the dealership owed the manufacturers for boats be regarded as payment due to the dealership under the building contract, and Fred accepted this arrangement on behalf of Marion. The tw where they stood at the end of March. Sport Boats asked that a portion of the amount brothers agreed that they would invite Mr. William Hurley, an accountant who was a mutual friend of theirs, to prepare the accounts.

196-041 Marion Boats, Inc. Questions As Mr. Hurley, prepare journal entries to record the events that have taken place in the business up to March 31, 2006 1. eboot ac of March 31 2006 and an

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