Cameron Masson has owned and operated Alberta Biotech, a management consulting firm, since its beginning 10 years ago. From all appearances the business has prospered. Masson lives in the fast lane-flashy car, home located in an expensive suburb, frequent trips abroad, and other signs of wealth. In the past few years, you have become friends with him through weekly rounds of golf at the country club. Recently, he mentioned that he has lost his zest for the business and would consider selling it for the right price. He claims that his clientele is firmly established and that the business “runs on its own.”According to Masson, the consulting procedures are fairly simple and anyone could perform the work.
Assume you are interested in buying this business. You obtain its most recent monthly trial balance, which is shown below. Assume that revenues and expenses vary little from month to month and that April is a typical month.
Your investigation reveals that the trial balance does not include the effects of April’s revenues of $3,300 and expenses totalling $6,300. If you were to buy Alberta Biotech, you would hire a manager so you could devote your time to other duties. Assume that this person would require a monthly salary of $6,000.
Required
1. Is this an unadjusted or an adjusted trial balance? How can you tell?
2. Assume that the most you would pay for the business is 40 times the monthly net income you could expect to earn from it. Compute this possible price.
3. Masson states that the lowest price he will accept for the business is $450,000 plus the balance in owner’s equity on April 30. Compute this amount.
4. Under these conditions, how much should you offer Masson? Give your reasons.
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