Retained Earnings and Owner’s Equity Statement Preparation

ABC Company History

ACC/545 Version 6

University of Phoenix Material

ABC Company History

The ABC Company is a mid-sized company that manufactures goods in the United States and has begun to expand the operation overseas. The company maintains a healthy balance sheet and has reported positive net income since inception.

Currently, the organization utilizes the average cost inventory method and is exploring a change in accounting principle to maximize net income and attract new stockholders. Also, the company utilizes the straight-line method of depreciating fixed assets, which are primarily machinery/equipment and several large production facilities.

The organization is a publically–traded company that sells its stock on the open market. Demand for the stock has caused an increase in the price per share, and if the trend continues, the organization is considering splitting the stock to encourage investment. The company is having success selling preferred stock on the open market as well.

ABC Company offers its employees a generous pension plan, but it is currently investigating pension plan changes that will benefit both the employees and the stockholders. Also, the company offers a 401k and an employee stock purchase plan to encourage employees to be owners of their company.

Finally, the company finances some of the major investments it has made, including warehouses and land. To accomplish company goals, it has issued bonds in which the company is now considering restructuring.

	2013	2012
Cash	$ 35,000	$ 32,000
Accounts receivable	33,000	30,000
Allowance for doubtful accounts	(1,300)	(1,100)
Inventory	31,000	47,000
Property, plant, & equipment	100,000	95,000
Accumulated depreciation	(16,500)	(15,000)
Trade accounts payable	(25,000)	(15,500)
Income taxes payable	(21,000)	(29,100)
Deferred income taxes	(5,300)	(4,600)
8% callable bonds payable	(45,000)	(20,000)
Unamortized bond discount	4,500	5,000
Common stock	(50,000)	(40,000)
Additional paid-in capital	(9,100)	(7,500)
Retained earnings	(25,200)	(64,600)
Sales	(558,300)	(778,700)
Cost of goods sold	250,000	380,000
Selling expenses	141,500	172,000
General and administrative expenses	137,000	151,300
Interest expense	4,300	2,600
Income tax expense	20,400	61,200

Additional information:
Los Lobos purchased $5,000 in equipment during 2007.
Los Lobos allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.
Bad debt expense for 2007 was $5,000, and write-offs of uncollectible accounts totaled $4,800.
$12,000 of the debt is current portion.
Cash Sales	$72,600
Collections on Receivables	477,900
Purchases	(219,500)
Purchase of Equipment	(5,000)
Wages	(150,700)
Payments to Suppliers	(126,300)
Tax Payments	(27,800)
Borrowing	30,000
Repayment of Debt	(5,000)
Interest Payments	(3,800)
Sale of Stock	11,600
Dividends	(51,000)

On January 1, 2006, Jamona Corp. purchased 12% bonds, having a maturity value of $300,000, for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2006, and mature January 1, 2011, with interest receivable December 31 of each year. The company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale. The fair value of the bonds at December 31 of each year is as follows:

2006 – $320,500
2007 – $309,000
2008 – $308,000
2009 – $310,000
2010 – $300,000

The following information is available from Jamona’s inventory records:

	Units	Unit Cost
January 1, 2007 (beginning inventory)	600	$ 8.00
Purchases:
January 5, 2007	1,200	9.00
January 25, 2007	1,300	10.00
February 16, 2007	800	11.00
March 26, 2007	600	12.00

A physical inventory on March 31, 2007, shows 1,600 units on hand. Select any one of the inventory methods (LIFO, FIFO, Average Cost, or others).

On July 6, Jamona Corp. acquired the plant assets of Berry Company, which had discontinued operations. The appraised value of the property is:

Land	$ 400,000
Building	1,200,000
Machinery and equipment	800,000
Total	$2,400,000

Jamona Corp. gave 12,500 shares of its $100 per value common stock in exchange. The stock had a market value of $168 per share on the date of the purchase of the property.

Jamona Corp. expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building.

Repairs to building	$105,000
Construction of bases for machinery to be installed later	135,000
Driveways and parking lots	122,000
Remodeling of office space in building	161,000
Special assessment by city on land	18,000

On December 20, the company paid cash for machinery, $260,000, subject to a 2% cash discount, and freight on machinery of $10,500.

On January 1, 2007, Jamona Corp. signed a 5-year, noncancelable lease for a machine. The terms of the lease called for Jamona to make annual payments of $8,668 at the beginning of each year, starting January 1, 2007. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts to the lessor at the end of the lease term. Jamona uses the straight-line method of depreciation for all of its plant assets. Jamona’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

Restructuring Debt Data

Your company is in financial trouble and is in the process of reorganizing. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment.

Part A

ASSETS
CURRENT ASSETS
Cash and cash equivalents			$ 108,340
Trade accounts receivable, net of allowances			2,866,260
Other receivables			62,150
Operating supplies, at lower of average
cost or market			58,630
Prepaid expenses			446,050

Total Current Assets			3,541,430

PROPERTY, PLANT, AND EQUIPMENT (at cost)
Land			1,950,000
Buildings and improvements			2,327,410
Equipment			5,015,660
Other equipment and leasehold improvements			1,645,580
	total	10,938,650
Accumulated depreciation and amortization			(7,644,430)
	Net Property, Plant, and Equipment	3,294,220
OTHER ASSETS
Deposits and other assets			1,000,080

TOTAL ASSETS			$ 7,835,730

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable			$ 972,160
Accrued liabilities			2,071,270
Accrued claims costs			793,620
Federal and other income taxes			19,710
Deferred income taxes			500
Current maturities of long-term debt and
capital lease obligations			50,610
Short-term borrowings			249,250
Total Current Liabilities			4,157,120

LONG-TERM LIABILITIES
Capital lease obligation			54,580
Note outstanding			3,000,000
Mortgage outstanding			608,030
Other liabilities			95,860
Total long-term liabilities			3,758,470

Total Liabilities			7,915,590

SHAREHOLDERS’ EQUITY (DEFICIT)
Common stock, $.01 par value; authorized
500,000 shares; issued 231,000 shares			2,310
Additional paid-in capital			731,090
Accumulated other comprehensive loss			(113,500)
Retained earnings (deficit)			(639,180)
Treasury stock			(60,580)
Total Shareholders’ Equity (Deficit)			(79,860)

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			$ 7,835,730

Part B

As stipulated, your company is having financial difficulty and has asked the bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.

The company provides the following information related to its postemployment benefits for the year 2007:

Accumulated postretirement benefit obligation at January 1, 2007: $810,000
Actual and expected return on plan assets: $34,000
Unrecognized prior service cost amortization: $21,000
Discount rate: 10%
Service cost: $88,000

Lee Corporation Equity Scenario

Lee Corporation is an American company that began operations on January 1, 2004. It has just completed its fourth full year of operations on December 31, 2007. Ending Year Balances for the prior year that ended on December 2006 were as follows:

Retained Earnings: $225,000

Common Stock at par: $500,000

Additional Paid-in Capital: $1,000,000

Treasury Stock: $200,000

Income before taxes for 2007 totaled $240,000.

Effective Tax Rate was 40% for all years of operation including 2007.

The following information relates to 2007:

An error was discovered during 2007. Specifically, depreciation expense was understated in 2005, resulting in the need for a Prior Period Adjustment of $25,000 before taxes.

Lee Corporation changed its method of valuing inventory during 2007. The cumulative decrease in income from the change in inventory methods was $35,000 before taxes.

Lee Corporation declared cash dividends of $100,000 in late 2007 to be paid out in 2008.

Lee acquired a Canadian subsidiary whose sole asset is a piece of land. Lee acquired the subsidiary on 12/31/04 for the exact value of the land, CA $100,000. Lee owns 100% of the subsidiary. Go to www.x-rates.com and use the historic lookup feature to determine the exact exchange rates on 12/31/04, 12/31/05, and 12/31/06.

Requirements:

Prepare journal entries for items 1 to 3 above.

Calculate and journalize the foreign exchange adjustments for 2005, 2006, and 2007 for the Canadian subsidiary.

Prepare a Retained Earnings Statement for the year ended December 31, 2007.

4. Prepare a Statement of Changes in Stockholders’ Equity for the year ended December 31,

2007.