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De La Salle University (MBA-GSB)

Music Mart Case


Submitted by:
Grp. 5

Darwin Clemente
Raymond Martinez
Jojo Sebastian

Submitted to;
Prof. Virgilio Avila
Background and POV
Synthesis
The case concerns Music Mart, Inc., a CD and tape store which
was founded by John Smith . The store was initially started
through the personal funding of John Smith worth $ 25,000 that
was initially deposited in a bank, consequently taking $ 25,000
worth of stock certificates in return.
Several transactions followed, as reflected in the store’s last
balance sheet dated January 4.

Point of View

This case shall be tackled from the point of view of the user of
the accounting report or information, more specifically from the
point of view of the manager.
Problem and Objectives
Problem Statement
The case is concerned as to how the succeeding
transactions/events as provided for in the case will have an
effect on Music Mart’s balance sheet?
Objectives
The study of this case shall have the following objectives:
1. To accurately record the succeeding transactions/events on
the store’s account based on generally accepted accounting
principles.
 2. To be able to appreciate how each transaction/event
affects the store’s balance sheet.
 3. To be able to have an assessment, based on the updated
balance sheet, of the store’s financial position.
Areas of Consideration
Based on the facts provided for in the case, the group arrived at
the following assumptions:

 1. Based on the case, it is assumed that all these


transactions occurred during the month of January.
 2. It is also assumed that there were no other transactions
other than those provided for in the case.

 3. The case is somewhat conflicting in the sense that Music


Mart, was formed as a corporation, whereas it is clear that John
Smith is the sole owner of the store when it was incorporated.
Opening of Music Mart

 Initial Transactions Entered into by John Smith/Music Mart, Inc.:


 1. On Jan. 1, John smith starts an incorporated CD and tapes store


called Music Mart, Inc.. He does this by depositing $ 25, 000 of his own
funds in a bank account that he has opened in the name of the
business entity and taking $ 25,000 of stock certificates in return. He is
the sole owner of the corporation.
 2. On Jan. 2, Music Mart borrows $ 12,500 from a bank; the loan is
evidenced by a legal document called a note.
 3. On Jan. 3, the business buys inventory (merchandise it intends to
sell) in the amount of $ 5,000, paying in cash.
 On Jan. 4, for $ 750 cash the store sells merchandise that costs $ 500
Music Mart
Balance Sheet
As of Jan. 4

Assets Liabilities and Owner’s Equity


Cash
$33,250.00 Notes Payable $12,500.00
Inventory Paid-In Capital 25,000.00
4,500.00 Retained Earnings 250.00

Total
Total $37,750.00
$37,750.00
Music Mart
Balance Sheet
As of Jan. 4
Transaction 1

Assets Liabilities & Owner's


Cash Equity
$33,250.00 Current Liabilities:
Inventory Notes Payable
$12,500.00
9,500.00
Accounts Payable
Total
5,000.00
$42,750.00 Long-term Liabilities:
Paid-in Capital
25,000.00
Retained Earnings
The store purchased and received merchandise for 250.00
inventory for 5,000, agreeing to pay within 30 days. Total Liabilities &
Owner's Equity
$42,750.00
Music Mart
Balance Sheet
Transaction 2

Assets Liabilities & Owner‘s


Equity
Current Assets
Current Liabilities:
Cash Notes Payable
$35,550.00 $12,500.00
Inventory Accounts Payable
8,000.00 5,000.00
Long-term Liabilities:
Paid-in Capital
Total Assets: 25,000.00
$43,550.00 Retained Earnings
1,050.00
Merchandise costing $ 1,500 was sold Total Liabilities & Owner's Equity
for $ 2,300, which was received in $43,550.00
cash.
Music Mart
Balance Sheet
Transaction 3
Liabilities & Owner's Equity
Assets Current Liabilities:
Current Assets: Notes Payable
Cash $12,500.00
Accounts Payable
$35,550.00
5,000.00
Inventory 6,300.00
Long-term Liabilities:
Accounts Paid-in Capital
Receivable 25,000.00
2,620.00 Retained Earnings
Total Assets: 1,970.00
$44,470.00 Total Liabilities & Owner's Equity
Merchandise costing $ 1,700 was sold for $ $44,470.00
2,620, the customers agreeing to pay $ 2,620
within 30 days.
Music Mart
Balance Sheet
Transaction 4
Assets Liabilities & Owner's Equity
Current Assets: Current Liabilities:
Cash
Notes Payable
$34,326.00
Inventory
$ 12,500.00
6,300.00 Accounts Payable
Accounts Receivable 5000.00
2,620.00 Long-term Liabilities:
Prepaid Insurance Paid-in Capital
1,224.00 25,000.00
Total Assets: Retained Earnings
$44,470.00
1,970.00
Total Liabilities & Owner's Equity
The store purchased a three-year $ 44,470.00
fire insurance policy for $ 1,224,
paying cash.
Music Mart
Balance Sheet
Transaction 5
Assets Liabilities & Owner's Equity
Current Assets: Current Liabilities:
Cash
Notes Payable
$28,326.00
Inventory
$12,500.00
6,300.00 Accounts Payable
Accounts Receivable 5,000.00
2,620.00 Long-term Liabilities:
Long Term Assets: Paid-in Capital
25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00
1,970.00
Land 24,000.00
Total Assets 62,470.00
Mortgage Payable 18,000.00

The store purchased two lots of land of equal Total Liabilities & Owner's Equity
size for a total of $ 24,000. it paid $ 6,000 in cash
$62,470.00
and gave a 10-year mortgage for $ 18,000.
Music Mart
Balance Sheet
Transaction 6

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$31,326.00 $12,500.00
Inventory Accounts Payable
6,300.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 1,970.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$53,470.00 $53,470.00

The store sold one of the two lots of land for $ 12,000. It received $ 3,000 cash, and in
addition, the buyer assumed $ 9,000 of the mortgage; that is, Music Mart is no longer
responsible for this half.
Music Mart
Balance Sheet
Transaction 7 No Effect

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$31,326.00 $12,500.00
Inventory Accounts Payable
6,300.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 1,970.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$53,470.00 $53,470.00
Smith received a bona fide offer of $ 33,000 for the business;
although his equity was then only $ 26,970, he rejected the offer. It
was evident that the store had already acquired goodwill of $ 6,030.
Music Mart
Balance Sheet
Transaction 8

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$30,326.00 $12,500.00
Inventory Accounts Payable
6,300.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 970.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$52,470.00 $52,470.00

Smith withdrew $ 1,000 cash from the store’s bank account for his personal use.
Music Mart
Balance Sheet
Transaction 9

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$30,326.00 $12,500.00
Inventory Accounts Payable
5,550.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 220.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$51,720.00 $51,720.00

Smith took merchandise costing $ 750 from the store’s inventory for his personal
use.
Music Mart
Balance Sheet
Transaction 10 No Effect

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$30,326.00 $12,500.00
Inventory Accounts Payable
5,550.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 220.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$51,720.00 $51,720.00
Smith learned that the individuals who purchased the land subsequently sold it for
$ 14, 000. The lot still owned by Music mart, Inc., was identical in value with this other
plot.
Music Mart
Balance Sheet
Transaction 11

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$24,326.00 $6,500.00
Inventory Accounts Payable
5,550.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 220.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$45,720.00 $45,720.00

The store paid off $ 6,000 of its note payable (disregard interest).
Music Mart
Balance Sheet
Transaction 12 No Effect

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$24,326.00 $ 6,500.00
Inventory Accounts Payable
5,550.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 220.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$45,720.00 $45,720.00

Smith sold one-third of the stock he owned in Music mart, Inc. for $ 11,000 cash.
Music Mart
Balance Sheet
Transaction 13

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$25,636.00 $ 6,500.00
Inventory Accounts Payable
4,700.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 680.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$46,180.00 $46,180.00

Merchandise costing $ 850 was sold for $ 1,310, which was received in cash.
Music Mart
Balance Sheet
As of the end of January

Assets Liabilities & Owner's Equity


Current Assets: Current Liabilities:
Cash Notes Payable
$25,636.00 $ 6,500.00
Inventory Accounts Payable
4,700.00 5,000.00
Accounts Receivable Long-term Liabilities:
2,620.00 Paid-in Capital
Long Term Assets: 25,000.00
Prepaid Expense (Insurance) Retained Earnings
1,224.00 680.00
Land Mortgage Payable
12,000.00 9,000.00
Total Assets: Total Liabilities & Owner's Equity
$46,180.00 $46,180.00
Conclusion and Recommendation

Based on the store’s latest balance sheet, its operations was able to realize a $ 680
worth of retained earnings despite the earlier withdrawal made by John
Smith and the subsequent use of the store’s merchandise for his personal use.
 Specific recommendations are provided in the following discussions:
 That John Smith, ideally, should maintain a separate personal accounting
record in order to effect the separation of entity. Though the case has a gray
area in the sense that it is a corporation while maintaining that John Smith is the
sole incorporator, the owner/incorporator should make his personal transactions
separate and distinct from the business in order to effectively monitor the
business’ performance.
 Prepaid expenses like the three-year insurance policy purchased by Music Mart
are recorded based on the amount of the un-expired cost. In this case, the full
amount is reflected in the balance sheet.
 Dividends due for shareholders are to be taken from the business’ earnings. In
the Music Mart case, the withdrawal made by John Smith was treated in the
same manner.
Conclusion and Recommendation
 Non-monetary assets should be recorded at cost in compliance with
the accepted accounting concepts. Thus, in this case, transaction 10 ,
where Smith learned that the portion of lot he sold was sold by the
buyer at a higher amount did not have any effect in the store’s balance
sheet. Otherwise, organizations will have a very difficult time assessing
an asset’s market value only to update its accounting records. With
this, it would be of utmost importance for decision makers to note that
the book value of certain assets does not necessarily correspond to the
asset’s fair market value.
 In summary, a balance sheet can be considered as one of the most
important accounting reports for it provides a clear picture on the dual
effect of a particular transaction on the business’ financial position.
However, accounting reports or accounting in general is not concerned
with measuring a particular entity’s actual value or worth mainly
because only those which can be expressed in monetary terms are
reflected in every accounting report.
References
 References:
 Book:
 Accounting: Text and Cases by Robert N. Anthony, David F. Hawkins,
and Kenneth A Merchant, Mc Graw-Hill International Editions,
Accounting Series, 11th. Edition.

 Internet:

 Dickinson Law Review

 http://www.sovereign-
freedom.com/asset_protection/modern_corporation_sole_3.htm

 Retrieved, September 20, 2005