PINETREE MOTEL

Mr & Mrs Hyong Kim had purchased the Pinetree Motel in 2008 with their life savings,
supplemented by a loan from a close personal friend. The motel consisted of 20 units (ie, 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 problems 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 machines to supplement room rentals. The vending machines
posed no inventory or maintenance problems as the vending machine company provided servicing and
maintenance.

A frequent guest at Pinetree Motel was Marcus Carter, controller of a large company. Mr Carter
visited a company branch plant near the motel several times a year. As he stayed at the motel during
these trips, he became acquainted with the Kims.

In May 2013, Mrs Kim showed Mr Carter the current issue of a motel trade journal that
contained operating data for motels with 40 or fewer units for the calendar year 2012. Mrs Kim
commented: “These figures show a profit of 21%. Our profit last year was P134,003 on sales of
P244,461, or 55%. We think 2012 was our best year to date, but we can’t make figures jibe with those in
the magazine, and we wonder if we really are 34% ahead of the industry average. Can you help us?”

Mr Carter was interested and willing to help. He told Mrs Kim to get the available figures for
2012 so that he could look them over that evening. The principal records the Kims kept to reflect the
motel’s financial transactions were a record of receipts taken from the cash register and a checkbook
describing cash paid out. In addition, certain rough notations of other expenses incurred were available.

That evening, Mrs Kim showed Mr Carter the cash summary for the year 2012 as given in Exhibit
1. Mr Carter immediately noted that the difference between receipts and expenditures was P47,903
and asked Mrs Kim to explain why she had stated the profit to be P134,003. Mrs Kim replied, “Oh, that’s
easy. Our drawings aren’t expenses; after all, we are the owners. My husband and I have consistently
taken only about P85,000 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 statements so I don’t have to worry about them. That income tax stuff is so
complicated that I avoid it.”

Mr Carter worked with the trade journal’s figures (Exhibit 2) and the cash summary (Exhibit 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 to get together some additional information. Mr Carter suggested to
Mrs Kim that an important non-cash expense was depreciation. Mr Carter also wanted to know about
expenses that had been incurred in 2011 but not paid until 2012. He told Mrs Kim to check up on wages
and salaries, insurance, advertising, taxes, utilities and any other items paid in 2012 but applicable to
2011.

In addition, Mr Carter instructed Mrs Kim to try to find items of expense properly chargeable to
2012 but not paid by December 31, 2012. Mrs Kim told Mr Carter the same types of expenses were
involved, that is, salaries and wages, insurance, advertising, taxes and so forth. Also, Mr Carter inquired
about income from room rentals. He asked if any of the cash receipts during 2012 related to rentals
during 2011 and if there were any rentals during 2012 that had not been collected.
 During the two weeks Mr Carter was back at the home office, Mrs Kim checked the records and
compiled the additional information requested by Mr Carter. The evening Mr Carter returned to the
Pinetree Motel, Mrs Kim gave him a summary of the information she had gathered (Exhibit 3). With all
the additional information, Mr Carter constructed an operating statement that matched in form the one
appearing in the trade journal. He calculated both the peso amounts and percentage composition of
each expense for more useful comparison with the journal’s figures.

Exhibit 1: Cash Register and Checkbook Summary during 2012

Receipts
From rooms P236,758
From vending machines 7,703
Total P244,461
Checks Drawn
Owners’ Drawings P86,100
Salaries and wages 26,305
Paid to laundry 8,800
Replacement of glasses, bed linens and towels 1,660
Advertising 2,335
Payroll taxes 2,894
Fuel for 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 P196,558

Exhibit 2: 2012 Operating Data for Motels with 40 or Fewer Units

(expressed as % of total revenues)
Revenues:
Room rentals 98.7
Other revenue 1.3
Total revenues 100.0
Operating Expenses:
Payroll 22.5
Administrative and general 4.2
Direct operating expenses 5.9
Fees and commissions 3.3
Advertising and promotion 1.2
Repairs and maintenance 4.8
Utilities 7.5
Total 49.4
Fixed Expenses
Property taxes, fees 4.4
Insurance 2.5
Depreciation 12.5
Interest 7.7
Rent 2.8
Total 29.9
Profit (pre-tax) 20.7
 Exhibit 3: Additional Information about the Business

Chargeable in 2011 but paid in January 2012

Salaries and wages P795
Advertising 600
Payroll taxes 84
Fuel for heating 933
Telephone 105
Electricity 360
Property taxes 1,005
Insurance 2,025
Interest 687
Chargeable in 2012 but not paid as of Dec 31, 2012
Salaries and wages 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
Also, 2012 deprecation charges of P30,280
Also, 2012 cash receipts included a P1,660 payment
from a company that had rented several units during
December 2011for a convention in a nearby city.
There were no such uncollected rentals as of
December 31, 2012.