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    Could you let me know if I am on the right track with the answer for this extra credit assignment. We have to do the entries, complete a trial balance, income statement and balance sheet.

    Extra Credit Problem:

    Congratulations, you have just been offered the position of Controller for JP Inc, a diversified manufacturer of computer and electronic equipment.

    The Balance Sheet and supporting information are provided below.

    The company has a single outstanding debt issued on Dec 31, 1999.

    Face Value $60,000
    Coupon Rate 5.50%
    Market interest rate when issued 7.50%
    Term in years 12
    Interest is payable semi-annually on Jan 1 and July 1.

    The company issued 15,000,000 shares of Common Stock on Jan 1, 1997. The shares
    were sold for $7.75 per share.

    JP Inc
    Balance Sheet
    As of 31 Dec 2003
    Dollars in Thousands

    Assets
    Current Assets
    Cash $27,930
    Accounts Receivable $22,500
    Less Allowance for Doubtful accounts 614
    Net Accounts Receivable 21,886
    Prepaid Expenses 10,250
    Inventory 45,000
    Total Current Assets 105,066

    Long-term Assets
    Patents $10,500
    Property, Plant, and Equipment $105,000
    Less Accumulated Depreciation 15,500
    Net Property, Plant, and Equipment 89,500
    Total Long-Term Assets 100,000

    Total Assets $205,066

    Liabilities
    Current Liabilities
    Accounts Payable 2,284
    Salaries Payable 2,030
    Interest Payable 1,650
    Income Tax Payable 7,750
    Total Current Liabilities 13,714

    Long Term Liabilities
    Deferred Tax Liability 1,625
    Liability For Pension Expense, Not Funded 2,400
    Long-Term Debt $60,000
    Less Discount 7,122
    Net Debt 52,878
    Total Long-Term Liabilities 56,903

    Total Liabilities 70,617

    Shareholder Equity
    Common Stock at Par ($1 Par Value) 15,000
    Additional Paid-in-Capital 101,250
    Retained Earnings 18,199
    Total Shareholder equity 134,449

    Total Liabilities and Shareholder Equity $205,066

    Transactions in 2004
    All numbers below are actual numbers (i.e. not reported in thousands)

    1 On Jan 1, 2004, You are promoted to Vice President and Chief Financial Officer.
    You immediately recommend that we implement a stock option plan with the
    following particulars.

    Grant Date 1/1/2004
    Vesting Date 1/1/2006
    Number of Shares 1,000,000
    Current Market price of stock $15.75
    Exercise Price $16.75
    Fair Market Value of Option $4.00

    The company utilizes the Fair Value method for recognizing stock option expense.

    2 The company pays all Current Liabilities outstanding as of Dec 31, 2003.

    The company collects $17,000,000 of the outstanding A/R
    and writes off $500,000 of A/R

    3 You notice that the company has a significant amount of excess cash on the Balance
    Sheet. You comment to the CEO (interestingly enough, named Doug) that perhaps you
    could increase the company's bottom line by investing some of these funds in
    various securities.

    So you buy the following shares Classify as
    # of share Symbol $ per share
    100,000 HD 38 Available for Sale
    100,000 GE 34 Available for Sale
    100,000 Dis 24 Trading Securities

    4 On April 1, 2004, we sign a deal to build large ocean going ships for the Navy (Navy Contract)
    We will begin construction of these ships on:

    construction start date 7/1/2004
    construction completion 12/31/2005
    Contract Value $10,000,000
    Estimated Cost to Complete $5,000,000

    You talk with the Production Manager and he is confident that they can estimate
    the costs accurately and ofcourse you can count on the Navy to pay its bills.

    5 In anticipation of these project, I along with the Production Manager determine that
    we will need to acquire a floating dry dock.
    We are unable to access the capital markets necessary to purchase a dry dock, however
    you recommend that we enter into a lease. You locate an available dry dock and
    negotiate the following terms with the owner.

    Economic Life of floating dry dock 25 yrs
    Lease term 25 yrs
    First lease payment due on Jul 1, 2004
    Interest Rate 7.50%
    Each semi-annual lease payment is $955,188
    Taxes and Insurance are included in the lease payment
    listed above. The taxes and insurance are $10,000 per semi-annual payment

    6 The Company has a Defined Benefit Pension Plan which it traditionally has underfunded,
    The particulars for the plan
    as of Jan 1, 2004
    Projected Benefit Obligation 4,400,000
    Plan Assets 2,000,000

    You review the records, meet with the actuaries and determine the following
    variables related to the Defined Benefit Pension Plan as of Dec 31, 2004

    Annual Service Cost for services in 2004 950,000
    Settlement Rate 8.25%
    Expected Rate of Return on Plan Assets 11.00%
    Actual Rate of Return on Plan Assets 11.00%
    Benefits paid to retirees -

    At the end of 2004, the company transfers 750,000 to the Pension trustee.
    Pension expense should be reported as Compensation Expense

    7 It is now December 31st and you look back at your records and note the following:

    Sales of Pleasure boats really took off this year. In fact, your manufacturing plant

    Cost of Boats Produced 55,000,000
    Sales Revenue of Boats 92,000,000
    Cost of Boats Sold 64,000,000

    As of Dec 31, you have collected 95.00% of pleasure boat sales revenue
    As of Dec 31, you have paid 92% of the cost of boats produced
    has been paid, the remaining
    amount represents salaries to
    production workers which has
    not been paid.
    The commercial boat business also did well:

    Cost of Boats Produced 45,000,000
    Sales Revenue of Boats 78,000,000
    Cost of Boats Sold 47,000,000

    As of Dec 31, you have collected 80.00% of commercial boat sales revenue
    The remaining amount is recorded
    as a Note Receivable signed Oct 1
    due March 31 earning
    9.00% simple annual interest
    As of Dec 31, you have paid 92% of the cost of boats produced
    has been paid, the remaining
    amount represents salaries to
    production workers which has
    not been paid.

    8 You receive the brokers statement on your investment portfolio and
    the stock prices are now:
    # of share Symbol $ per share
    100,000 HD 44
    100,000 GE 40
    100,000 Dis 20

    9 Ensure that you record all interest payments and amortizations.

    10 The Production Manager turns in the production status report

    Costs Incurred to Date $2,500,000
    Estimated Cost to Complete $3,000,000

    All of the costs incurred in construction have been paid (that is the credit is to Cash).

    We have billed the Navy $1,000,000 for work performed and
    have received $750,000 in payments.

    11 You review the ledgers and make the following determinations

    Depreciation Expense for Property, Plant and Equipment is $5,400,000
    The depreciation above includes Depreciation expense for the Dry Dock.
    Include the Capital Leased Asset as part of Property, Plant, and Equipment.
    Amortization Expense for the Patent is $1,500,000
    50.00% of the prepaid expenses were used up. These expenses
    should be charged to Administrative Expense

    You estimate that $300,000 of your accounts receivable will be uncollectible.

    You determine that Book Income exceeds Taxable Income by $15,000,000
    This difference is related to Long-term assets:
    Your tax rate is 35.00%

    My Answers So Far:

    1. 1/1/04 No Entry

    2. Notes Payable 13,714
    Cash 13,714

    Cash 17,000,000
    Accounts Receivable 17,000,000

    Bad Debt Expense 500,000
    Accounts Receivable 500,000

    3. Available-for-Sale Securties 7,200,000
    Cash 7,200,000

    Securities Fair Value Adjustment (Trading) 2,400,000
    Unrealized Holding Gain or Loss-Income 2,400,000

    4. 4/1/04

    5. 7/1/04 Taxes and Insurance Expense 10,000
    Lease Liability 955,188
    Cash 965,188

    6

    7. 12/31/04 Notes Payable (Pleasure Boats) 87,400,000
    Cash 87,400,000

    Accounts Payable 50,600,000
    Cash 50,600,000

    Notes Payable (Commercial Boats) 62,400,000
    Cash 62,400,000

    Accounts Payable 41,400,000
    Cash 41,400,000.

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    https://brainmass.com/business/leasing/explanation-journal-entries-42091

    Attachments

    Solution Preview

    See the attached file.

    Green Colour : Denotes correct/correction Red denotes: Incorrect
    1. 1/1/04 No Entry Correct

    2. Notes Payable 13,714 Correct
    Cash 13,714

    Cash 17,000,000
    Accounts Receivable 17,000,000

    Bad Debt Expense 500,000
    Accounts Receivable 500,000

    3. Available-for-Sale Securities 7,200,000 Correct
    ...

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