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.
Hynes was eager to exploit his patent commercially, but he had no funds of his own. Several of Hynes’
friends, who had used prototypes of Hynes’ 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 prepare a profit
plan projecting the company’s revenues 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 information incorporating the following projected transactions:
1. In return for signing his patent over the new company, which was to be called Dispensers of
California, Inc., Hynes would receive 60 percent of the company’s stock 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-of-packet 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 component part costs), $62,000.
9. Selling, general and administration costs, $63,000.
10. Ending component parts inventory cost, $15,100.
11. Sales, $5,98,500 (all received in cash)
12. All incorporation costs and product redesign costs expensed as incurred.
13. Depreciation $8,500. (Hynes estimated the useful life of the equipment was 10 years, with no
salvage value).
14. Patent cost charged income over a six-year period (Hynes anticipated technology developments
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 the 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:
a. How might Hynes and the investors use the profit-plan in managing the business?
b. How might the projected transactions impact the company’s balance sheet? (Think about the each
transaction in terms of its impact on both the basic accounting equation and specific accounts.)
c. Prepare a Profit plan in the form of an income statement for the first year of operations.
d. Hynes made a number of accounting decisions. Do you agree with these decisions?