Not long after completing her residency in neurology, Mary Lou Black, M.D., became quite disenchanted with the practice of medicine. Shortly after she began her private practice, she was beset with more administrative and regulatory reporting requirements than she had ever thought possible. Moreover, the hospital at which she had admitting privileges began to insist that all its physicians participate in determining clinical treatment protocols for patients with the most common diagnoses, a practice that Dr. Black found completely distasteful.
During her residency and for the years that followed, she had specialized in the treatment of narcolepsy, a neurological disorder that resulted in individuals falling asleep during periods of high emotional activity or stress, and occasionally during periods of relative inactivity. Although drug treatments had been found that would allow narcoleptics to lead relatively normal lives, the one area where they frequently encountered difficulty was in driving. For obvious reasons, if a narcoleptic’s drugs should fail to work while the individual was driving, the results could be fatal. As a result, many narcoleptics were unable to drive.
During her work with narcoleptics, Dr. Black had begun experimenting with a device that could be used to keep them awake while driving. The device was quite simple: it was a small alarm, powered by a miniature battery, all of which could be inserted in an elongated plastic case that hooked over the driver’s ear, much like a hearing aid. When the driver’s head was erect, the device was silent, but as soon as the driver’s head began to tip forward or backward, as it would if he or she were falling asleep, the alarm would sound a shrill tone directly into the ear.
Her increasing disenchantment with medical practice, coupled with the potential for her “Narcolarm,” as she called the device, led her to resign her position on the hospital staff and devote full attention to the invention. She obtained a patent for it, which had a legal life of 17 years. Since she was using her modest savings to live on, she decided to seek investors to provide the capital needed to produce, market, and sell the Narcolarm.
After much searching, and more rejections than she had thought possible, Dr. Black finally managed to convince a former patient who had benefited from a prototype of Narcolarm to provide the seed money. The patient also agreed that, since the Narcolarm was of value to the company, Dr. Black should be given a share of ownership in the company in exchange for the patent. After much discussion, the two agreed that Dr. Black would assign her patent to the company in exchange for $25,000 in equity. Before being willing to make his contribution, however, the former patient insisted that Dr. Black prepare a business plan, including some pro-forma financial statements.
Enlisting the help of a niece who had recently completed a course in accounting, Dr. Black first prepared a list of requirements and activities necessary to launch the new enterprise, which she called “Narcolarm, Inc.” These requirements and activities are shown in Exhibit 1. Her next task was to draw up a balance sheet that would reflect these items.
- Assuming the activities in Exhibit 1 actually take place prepare a balance sheet as of the completion of item 5. To do so, draw up a basic balance sheet format and make entries to the appropriate accounts for each event. Leave sufficient space below each asset, liability, and equity account to make several entries.
- What do you think of Dr. Black’s proposed venture?