Case 3-4

Pinetree Motel Mr. and Mrs. Hyong kim had purchased the pinetree motel in 1988 with their life
savings supplemented by a loan from a close personal friend. The motel consisted of 20 units (i.e.,
rentable rooms) and was located near a vacation area that was popular during both the summer and
winter seasons. The kims had entered the motel business because Mrs kim had long wanted to run a
business of her own.

Both mr and mrs kim felt that they had been successful. Each year saw a growth in revenue from
room rentals, furthermore, their bank balance had increased. They noted that many of their
customers returned year after year. This was attributed to their location and their efforts to provide
consistently clean rooms and up to date furnishings.

The kims had no formal business training but felt their experience since acquiring the motel had
alerted them to the management problem involved. Both mr. and mrs kim devoted their full time to
operating the motel. In addition they hired part time help for daily room cleaning work. They had no
dining facilities but had installed vending machine to supplement room rentals the vending machine
posed no inventory or maintenance problem as the vending machine company provided servicing
and maintenance.

A frequent guest at pintree motel was marcus carter, controller of a large company. Mr carted
visited a company branch plant near the motel several times ayear. As he stayed in motel during
these tripos. He became acquainted with the kims.

In may 2002 Mrs kim showed mr carter the current issue of motel trade journal that contained
operating data for motels with 40 or fewer units for the calendars year 2001. Mrs kim commented:
These figures show a profit of 21 percent. Our profit last year was $ 134,003 on sales of $244,461, or
55 percent. We think 2001 was our best year to date. But we cant make our figures jibe with those
in the magazine. And we wonder if we really are 34 percent ahead of the industry average can you
help us?

Mr carter was interested and willing to help. He told mrs kim to get the availabkle figures for 2001
so that he could look them over that evening. The principal records the kims kept to reflect the
motels financial transactions were a record of receipts taken from the cash register and a checkbook
describing cash paid out. In addition, certain rough notation of other expenses incurred were
available.That evening Mrs kim showed mr carter the cash summary of the year 2001. As given
exhibit 1. Mr carter immediately noted that the difference between receipt and expenditures was
$47,903 and asked mrs kim to explain why she had stated the profit was $134,003 Mrs kim replied
Oh that’s easy. Our drawing aren’t expenses after all we are the owners. My husband and I have
consistently taken only about $85,000 a year out because we want the rest of the profits to
accumulate in the business as I said our bank balance has steadily risen furthermore I have a local
accountant make out the annual income tax statement so I don’t have the worry about them. That
income tax stuff is so complicated that I avoid it.
Exhibit 1 Cash Register and Checkbook

Summary during 2001

Receipt

From Rooms $ 236, 758.00

From Vending Machine 7, 703.00
Total $ 244,461.00

Checks Drawn

Owners Drawings $ 86,100

Wages and salaries 26, 305
Paid to laundry 8,800
Replacement of glasses, bed linens, and towels 1,660
Advertising 2335
Payroll taxes 2894
Fuel or heating 12,205
Repairs and maintenance 8,980
Cleaning and other supplies 6,820
Telephone 2,789
Electricity 5,611
Property taxes 9,870
Insurance 11,584
Interest 10,605
Total $ 196,558
Exhibit 2 2001 Operating Data for 40 or fewer units ( expressed as percentages
of total revenue)

Revenues:

Room rentals 98.7

Other revenue 1.3
Total revenues 100
Operating expenses
Payroll costs 22.5
Administrative and general 4.2
Direct operating expense 5.9
Fees and commissions 3.3
Advertising and promotion 1.2
Repairs and maintenance 4.8
Utilities 7.5
Total 49.4
Fixed expense:
Property taxes, fees 4.4
Insurance 2.5
Depreciation 12.5
Interest 7.7
Rent 2.8
Total 29.9
Profit (pretax) 20.7
Mr carter work with the trade journals figures (Exhibit 2) and the cash summary (echibit 1)

That evening and quickly found he needed more information. He told mrs kim that he was returning
to the home office the next morning but would be back in two weeks for another visit to the branch
plant Meanwhile he wanted mrs kim that an important non cash expense was depreciation. Mr
carter also wanted to know about expenses that had been incurred in 2000 but not paid until 2001.
He told mrs kim to check up on wage and salaries, insurance, advertising, taxes, utilities and any
other items paid in 2001 but applicable to 2000.

In addition mr carter instructed mrs kim to try to find items of expense properly chargeable to 2001
but not paid by December 31, 2001 Mrs kim said mr carter the same type of expenses were involved
that is wages and salaries, insurance, advertising, taxes and so forth. Also mr carter inquired about
income from room rentals. He asked if any of the cash receipts during 2001related to rentals during
2001 that had not been collected.

During the two weeks Mr carter was back at the home office, mrs kim check the records and
compiled the additional information requested by mr carter. The evening mr carter returned to the
Pinetree motel. Mrs kim gave him the summary of the information she had gathered (Exhibit 3) with
all the additional information. Mr carter constructed a 2001 operating statement that match in
inform the one appearing in the trade journal. He calculated both the dollar amounts and
percentage composition of each expense for more useful comparison with the journal figures.

Exhibit 3 Additional information about the business

Chargeable in 2000 but paid in January 2001

Wages and salary $ 795

Advertising 600
Payroll taxes 84
Fuel for heating 933
Telephone 105
Electricity 360
Property taxes 1,005
Insurance 2,025
Interest 687
Chargeable in 2001 but not paid by December 31, 2001:

Wages and salary 1,128

Advertising 996
Payroll taxes 126
Fuel for heating 840
Cleaning and other supplies 75
Telephone 153
Electricity 492
Property taxes 1,119
Interest 579
Question

1. prepare a 2001 operating statement for the pinetree motel such as the one shown in exhibit 2
showing dollar amount and percentages of total revenue.

2. as mr carter what comments would you make to the kims regarding the models progress date?