CASE STUDY - 2

PINE Click to edit Master subtitle style TREE MOTEL

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SUMMARY OF THE CASE

Pine Tree Motel was purchased in the year 1998 by Mr and Mrs . Kim with their lifetime savings and a loan from a personal close friend. The Motel consisted of 20 units (Rentable rooms) The presumed that they were

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Case continued..

Mr. Marcus Carter visited the Motel several times and was acquainted with the Kims. Mrs. Kims approached Mr. Marcus for help as she found that their Motels profit was unusually high (55%) as compared to the other (< or = 40 unit Motels) which was only 21%. She wanted to know if it was real that they were 34% ahead of the rest. 8/16/12

Cash Register and Checkbook Summary During 2005 (Exhibit 1)

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Mr. Carters Observation

He immediately noticed that difference between Receipts and Expenditure was $47,903. But Mrs. Kim claimed the profit to be $134003. Mrs. Kim said she said she doesnt include her drawings ( Of $85000 per annum) as they were the owners. He told the Kims he needed more 8/16/12 information.

Trade Journal Figures (Exhibit 2)

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Suggestions of Mr. Cartar for more Information

He suggested that an important non cash expense was depreciation. He wanted to look at the previous years (2004) expenses. Outstanding expenses (Not paid by Dec 31, 2005) Not collected Rentals and Increase in room rents
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Additional Information about the Business (Exhibit 3)

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Questions
Prepare 2005 operating statement for pine tree motel such as the one shown in exhibit 2 showing dollar amounts and percentages of total revenues.
q

As Mr. Carter ,what comments would you make to the Kims regarding the motels progress to date.
q

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Business Entity Concept:

The business is treated as a distinct (and separate) entity from the individuals who own it and accordingly accountants record transactions.

Accrual Concept:
Expenses incurred for a particular accounting period should be reckoned in the same period, irrespective of the fact whether these expenses have been paid in cash or not in that year. The same holds 8/16/12 true for revenues, i.e., revenues earned in a

Income statement for the year ended December 31, 2005

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The industry average is 20.7,whereas the average of pine tree motel is 42.47.the reason of this could be the survey data are dominated by motels having twice as many rooms as Pinetree Motel .

No final conclusion on the success of their operation can be made as information regarding capital is missing. 8/16/12

Thank you
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