Journal Entries

See the attached file(s).

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.