(a) Over a number of years, Honest Albert has built up a small but successful regulatory compliance consultancy and now wants to retire and sell off the business. You are interested in buying Albert’s business as you believe it will continue to be profitable. The value of all the physical assets included in the sale (test equipment, office equipment, computers, etc.) totals $95,000. However, Albert is asking for $135,000. Explain why Albert is able to sell his business for more than the declared value of the net assets on his balance sheet.
(b) To raise the money to purchase and take over Albert’s business, you have taken $42,000 from your own savings and borrowed $100,000 from the bank at a fixed, interest-only rate of 6.0% per year. You have put the surplus cash into a bank account set up especially for the business. When you took over, all the bills were paid and nobody owed the business any money. Construct a basic Balance Sheet representing the commencement of your new business. Show the totals for fixed assets (tangible and intangible), current assets, liabilities (current and long-term) and owner’s equity.