Case 3-3
Dispensers of California, Inc.
Peter Hynes created a working model of a new and
improved commercial paint spray, which he had
patented, The patent had a legal life of 16 years
remaining.
paint spray, offered to invest in a new corporation
with a capitalization of $200,000 par value capital
stock to further develop, manufacture, and market
the spray and its related equipment. Before making
their investment, the investors asked Hynes to pre-
pare a profit plan projecting the company’s rev-
enues and expenses for the company’s initial year of
operation along with an end-of-first-year balance
sheet.
Hynes agreed to prepare the requested informa-
tion incorporating the following projected transac-
tions:
1. In return for signing his patent over to the new
company, which was to be called Dispensers of
California, Inc., Hynes would receive 60 per-
cent of the company’s capital stock. For their
part, the investors would contribute $80,000
cash for a 40 percent interest in the company.
2. Incorporation costs, $2,500.
3. Equipment to be used in assembling the paint
spray dispensers, $85,000.
4, Out-oftpocket labor and development costs to
redesign the paint spray dispenser to facilitate
more efficient assembling, $25,000.
5. Component part purchases, $212,100.
6. Short-term loan from local bank, $30,000.
(Loan to be repaid before the end of the year
with $500 interest.)
7. Manufacturing payroll, $145,000.
8. Other manufacturing costs (excluding compo-
nent part costs), $62,000.
9. Selling, general, and administration costs,
‘$63,000.
10. Ending component parts inventory cost,
$15,100
11. Sales, $598,500 (all received in cash.)
12. All incorporation and product redesign costs
expensed as incurred.
Hynes was eager to exploit his patent commer-
cially, but he had no funds of his own. Several of
Hynes’ friends, who had used prototypes of Hynes’
13. Depreciation, $8,300. (Hynes estimated the
useful life of the equipment was 10 years, with
no salvage value.)
14, Patent cost charged to income over a six-year
period (Hynes anticipated technology develop-
ments incorporating digital flow controls
would significantly reduce the current products
sales in about six years’ time.)
15, No inventory of unsold or partially completed
dispensers at year end.
16. Cash dividends, $5,000.
17. Income tax expense, $22,500 (due to be paid
during the next year).
18, All amounts due to employees, suppliers, and
others, except for income taxes, paid in cash.
(Hynes made this assumption because he
wanted to present a “conservative” balance
sheet to the investors.)
Questions
1. How might Hynes and the investors use the
profit-plan in managing the business?
2. How might the projected transactions impact the
company’s balance sheet? (Think about each
transaction in terms of its impact on both the
basic accounting equation and specific ac-
counts.)
Prepare a profit plan in the form of an income
statement for the first year of operations.
4, Prepare a balance sheet as of the end of the firs
year of operations.
5. Hynes made a number of accounting decisions.
Do you agree with these decisions?