Haystack Bookstore∗
For several years, Arthur King dreamed of owning his own business. One afternoon, he noticed a newspaper ad for the sale of a bookstore in Cannon Beach, Oregon:

The ad provided a telephone number, so King called Mary Becker and arranged a meeting for the following week. When he arrived in Cannon Beach, King discovered a small store on a busy street in the heart of town. The building that housed the shop was an attractive older structure that had been remodeled and was in good repair. Inside, the fixtures were clean and well maintained, and the shelves were stocked with best-sellers, travel guides, cookbooks, "how-to" books, and the usual bookstore merchandise. Mary Becker had owned and operated the Haystack Bookstore for over 20 years. She showed King her accounting records disclosing the cost of inventories and the earnings of the bookstore for the past 5 years. She also indicated that Cannon Beach was growing more popular as a summer resort and as a year-round residence. King wanted to purchase the business but explained that he could only afford to pay $45,000 in cash. Becker was eager to sell, so she put King in touch with an individual who was willing to lend him the remaining $80,000. The loan would be secured by the land and building, bear a 10% interest rate, and require eight annual payments of $10,000 plus accrued interest. After some discussion, King agreed to these terms and signed a purchase agreement with Becker and a loan agreement with the lender. No cash was exchanged at this stage.

Organizing the new business

King immediately began organizing his business. He was able to contribute $60,000 in cash to the business after depleting his personal savings and cashing in an insurance policy he owned. On
∗

This is a revision of a case by the same name that originally appeared in Financial Accounting: A Casebook by G.