American Physical and Social Programs for Children, Inc: Case C10-8
Harvey Acker and Jane Clemens, child psychologists, have started and are operating American Physical and Social Programs for Children, Inc., a sports-orientated school year and summer camp program for children. The program was started one year ago and has four operating locations. With assistance from their bookkeeper, Harvey and Jane have prepared a balance sheet as of June 30, 20X2, and an income statement for ht year then ended, on a modified cash basis (see below).
Harvey and Jane have decided to seek the advice of an accountant and revealed the following about their operation:
Harvey and Jane are the sole shareholders, and each paid $20,000 for no par of common stock of American. On July 31, 20X1, the corporation borrowed $100,000 at 12% from a local bank. Equal principal payments plus interest are due monthly on the bank loan over the next 5 years, beginning August 31, 20X1. The corporation executed an agreement, effective July 1, 20X1, through which it purchased the operating assets of Fun Time Programs, Inc. an organization that ram similar programs for many years. The agreement provided for payment of $30,000 for furniture and fixtures and $50,000 for sports equipment. These values were determined by an outside independent appraiser and agreed to by all parties. The agreement further provided for an additional payment of $80,000 due on July 1, 20X3, and that as consideration for such payment, Fun Time Programs, Inc. and/or its shareholders would not compete in a similar business for 5 years within a distance of 200 miles of any American operating location. American then negotiated new leases, purchased additional fixed assets, and expanded operations.
The organization costs to incorporate were $15, 120 and were paid primarily for legal services.
The school-year programs run form mid-September to mid-June for 10-week periods and most customers prepay for each 10-week period. As of June 30, 20X2, customers owed $28,800, of which a $4,000 allowance would be adequate to cover uncollected accounts.
The summer camp program runs from the last week of June through the last week of August. Each camper pays in advance. Camp deposits started coming in about the beginning of March, and as of June 30, 20X2, camp receipts collected in advance but not earned totaled $224,200. All operating facilities are leased. Summer camp programs are operated on local college campuses. The summer rents are 20% of the gross camp receipts and become due and payable to the lesser the month following that the facilitates are actually used. Camp revenues collected and earned the last several days of June 20X2 totaled $85,400.
Depreciation for financial reporting and income taxes are the same. The combined federal and state income tax rate id 30% and the company has made no estimated tax payments as of year-end.
Program supplies on hand as of June 30, 20X2, total $17,700.
The only significant unpaid liabilities as of June 30, 20X2 are salaries of $16,000, employee payroll taxes of $3,500 and utilities of $2,000.
Advertising costs paid during the year were incurred to gain market recognition, and normal advertising costs are expected to be approximately $30,000 per annum.
American is presently being sued for gross negligence due to injuries sustained by a child while participating in a gymnastics program. It is the opinion of American's legal counsel that the case can be settled out of court at a cost of anywhere from $10,000 to $50,000 to the company. Harvey and Jane are worries about the unfavorable publicity that the suit could bring and would like to settle the matter as quickly as possible.
Harvey and Jane believe that they made a fantastic deal with Fun Time Programs, Inc. It is their opinion that Fun Time Programs mismanaged their business affairs and then sold out them for virtually nothing. They have been able to use the same programs and expand on them, enabling the company to be profitable immediately. They anticipate that the business will be very profitable for many years, and that the major moneymaker is summer camps.
1. Discuss the company's selection of June 30 as its fiscal year-end and the apparent implications of such a decision.
2. In order to prepare financial statements, many accounting policy decisions must be made. List the areas in which accounting policy decisions must be made, your choice of each accounting policy, and your reasons for selecting such.
The choice of a June 30 year end may not be the best for a seasonal business such as this one is. Deposits taken prior to June 30 will have to be reported as taxable income even though they won't be earned until the following fiscal year. For financial reporting, they are a liability at year end but for tax reporting, they are income. September 30 might have made more sense.
There are numerous omissions in the balance sheet which the accountant will correct:
1. The covenant not to compete with Fun is not recorded or disclosed. It is an asset with a ...
American Physical and Social Programs for Children, Inc, case C10-8 is a comprehensive look at a new business after one year of operation. The solution lists nine areas of correction needed for improper accounting procedures, and explains the potential effects of the changes. Accounting principles are cited with each item for correction.