Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, thecompany is entirely equity financed, with 8 million shares of common stock outstanding. The stock currently trades at $37.80 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $85 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $14.125 million in perpetuity. Jennifer Weyand, the company’s new CFO, has been put in charge of the project. Jennifer has determined that the company’s current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. Based on her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 23 percent corporate tax rate (state and federal).

QUESTIONS

1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2. Construct Stephenson’s market value balance sheet before it announces the purchase.

3. Suppose Stephenson decides to issue equity to finance the purchase.

a. What is the net present value of the project?

b. Construct Stephenson’s market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm’s stock? How many shares will Stephenson need to issue to finance the purchase?

c. Construct Stephenson’s market value balance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firm’s stock?

d. Construct Stephenson’s market value balance sheet after the purchase has been made.

4. Suppose Stephenson decides to issue debt to finance the purchase.

a. What will the market value of the Stephenson company be if the purchase is financed with debt?

On 1 July 2018, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $2,057,000. At this date, the equity of Son Ltd consisted of:

Share capital – 500 000 shares: $ 1,000,000

Retained earnings: 500,000

Son Ltd also reported a dividend payable of $100,000 and a recorded goodwill of $50, 000 at the acquisition date. The dividend payable was subsequently paid in September 2018.

At the acquisition date, all the identifiable assets and liabilities of Son Ltd were recorded at amounts equal to fair value except for the following:

Of the inventory on hand in Son Ltd at 1 July 2018, 60 percent was sold in August 2018 and the remainder was sold in June 2019. It was estimated that the plant has a further 5-year life with zero residual value.

Son Ltd was involved in a court case that could potentially result in the company paying damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this liability to be $50,000, even though Son Ltd had not recorded any provision for damages (liability). On 29 June 2020 Son Ltd reassessed the liability in relation to the court case as the chance of winning the case had improved. The fair value on 29 June 2020 was considered to be $30,000.

The company applies the partial goodwill method. The income tax rate is 30%.

During the period 1 July 2018 to 30 June 2020, the following intragroup transactions have occurred between Parent Ltd and Son Ltd:

(T1) On 1 January 2019, Parent Ltd acquired furniture for $100,000 from Son Ltd. The furniture had originally cost Son Ltd $150,000 and had a carrying amount at the time of sale of $80,000. The sale was made on credit. At 30 June 2019, $60,000 was outstanding. At 30 June 2020, $20,000 was still not paid and outstanding. Both entities apply depreciation on a straight-line basis. At 1 January 2019, the furniture had a further five years of useful life, with zero residual value.

(T2) On 1 March 2019, Son Ltd sold inventory costing $12,000 to Parent Ltd for $16,000. On 1 October 2019, Parent Ltd sold half of these inventory items back to Son Ltd for $6,000. Of the remaining inventory kept by Parent Ltd, half was sold in March 2020 to Dingo Ltd at a profit of $400.

The adjusting consolidation entries at 30 June 2019 for the last intragroup transaction (T2) is provided below.

Explain why the above entries are made for the intragroup transaction (T2) as at 30 June 2019, noting the adjustments to each account separately.

Sunland Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2019, the company expends $329,000 on a research project, but by the end of 2019 it is impossible to determine whether any benefit will be derived from it.

Part 1

The project is completed in 2020, and a successful patent is obtained. The R&D costs to complete the project are $119,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2020 total $18,500. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Question 2

A.   List two (2) policies a company may adopt to lessen the risk of uncollectible accounts and improve its cash flows.

B. Joseph Corporation a mobile phone wholesaler sells mobile phones to PhoneTech Ltd, a mobile phone retailer on August 1, 2020 for $500 each, the value of the sale is $50,000, with credit terms of 3/10, n/30. Assume the company uses the net method to record accounts receivables.

Required:

a. Prepare the journal entry to record the sale.

b. On August 8, 2020, collection on $15,000 of the sales was received from PhoneTech. Record the necessary journal entry for the cash received.

c. The remaining $35,000 of the sales was collected on August 28, 2020 from Phone Tech. Record the necessary journal entry for the transaction on this date.

Dennis Kozlowski: Living Large

Dennis Kozlowski came from modest circumstances. He began his career at Tyco International in 1975 as an auditor, and worked his way up the corporate ladder to become CEO in 1992. Kozlowski gained notoriety as CEO for the rapid growth and success of the company, as well as his extravagant lifestyle. He left the company in 2002 amid controversy surrounding his compensation and personal spending. In 2005, Kozlowski was convicted of crimes in relation to alleged unauthorized bonuses of $81 million, in addition to other large purchases and investments.

As CEO, Kozlowski was lauded for his risk-taking and the immense growth of the company. He launched a series of strategic mergers and acquisitions, rapidly building up the size of Tyco. During his first six years as CEO, he secured 88 deals worth over $15 billion. Strong growth was bolstered by a booming economy, and Tyco’s stock price soared as the company consistently beat Wall Street’s expectations. However, when the economy slowed, the company began to struggle.

Allegedly, Tyco paid for Kozlowski’s $30 million New York apartment, as well as personal gifts and parties, including $1 million of a $2 million birthday party for his wife. After Kozlowski paid a $20 million finding fee to a board member without proper approval, and paintings invoiced for Tyco offices ended up in Kozlowski’s apartment (among other irregularities), Kozlowski was criminally charged with looting more than $600 million of assets from Tyco and its shareholders.

While many questioned his lifestyle, others questioned the trial and conviction. Commenting on the case, civil rights lawyer Dan Ackman wrote, “It’s fair to say that Kozlowski…abused many corporate prerogatives… Still, the larceny charges at the heart of the case did not depend on whether the defendants took the money—they did—but whether they were authorized to take it.” Kozlowski asserted his innocence of the charges, stating, “There was no criminal intent here. Nothing was hidden. There were no shredded documents. All the information the prosecutors got was directly off the books and records of the company.”

Please read the article and provide the answers for following questions.

1. Do you think Dennis Kozlowski was an effective leader for Tyco International? Were his actions ethically permissible? Why or why not?

2. As CEO of a major company, how might entitlement bias have affected Kozlowski’s behavior?

3. What rationalizations do you think Kozlowski might have used to justify his behavior in his own mind?

4. If you were in Kozlowski’s position, how do you think your actions would affect the behavior of your employees? Why?

5. Can you think of any other examples of leaders who have abused the power of their position? What similarities and differences do you see between them and Kozlowski?

Spritz Company owns 15% of the stock of Turner Corporation. The investment was purchased for $200,000. At the beginning of 2020, it had a fair value of $230,000. At the end of 2020, its fair value is $250,000. Turner reported net income of $100,000 for 2020, and declared and paid cash dividends of $60,000. Spritz sells products to Turner at a markup of 20% on cost. Turner’s ending inventory for 2020 included a balance of $10,800 for products purchased from Spritz.

Required

Prepare the journal entries Spritz makes in 2020 to record the above facts, assuming that Spritz treats its investment as having significant influence and uses the equity method.

As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,000 shares for $360,000 at the beginning of the reporting year of both companies. During the year, Midlin earned net income of $135,000 and distributed cash dividends of $0.25 per share. At year-end, the fair value of the shares is $375,000.

1. Assume no significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate. 2. Assume significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate.

Accounting Cycle Review 11-01 a,b, c1-c3

Morgan Company’s balance sheet at December 31, 2019, is presented below.

During January 2020, the following transactions occurred. (Morgan Company uses the perpetual inventory system.)

Adjustment data:

1. Prepare an adjusted trial balance at January 31, 2020. (Round answers to 0 decimal places, e.g. 5,275.)
2. Prepare an income statement. (Round answers to 0 decimal places, e.g. 5,275.)

3. Prepare an owner’s equity statement for the month ending January 31, 2020. (Round answers to 0 decimal places, e.g. 5,275.)
4. Prepare a classified balance sheet as of January 31, 2020. (List current assets in order of liquidity. Round answers to 0 decimal places, e.g. 5,275.)

Jamee is a resident taxpayer. For the year ended 30 June 2020 he received:

Gross salary of $82,000 from which PAYG of $20,100 had been withheld.

Net interest of $745 after TFN withholding tax of $715 had been withheld.

In September 2019 Jamee received $1,100 as his share in the winnings from a punters club with his work colleagues.

In January 2020 he received a holiday valued at $3,400 from his employer for achieving the highest sales in the previous year.

In June 2020, Jamee’s employer announced that he would be giving Jamee a pay rise effective from 1 April 2020. He is therefore to receive backpay of $2,000 of which $1,000 will be paid on 27June 2020 and the remaining $1,000 will be paid on 4 July 2020.

Dividend of $12,000 deposited to his bank account in May 2020 in respect of a 70% franked Australian dividend (company tax rate 30%).

Interest on a term deposit with a Swedish bank of $3,600 (10% withholding tax had been deducted). Advise Jamee how each payment would be treated, provide relevant section, case law and other supporting evidence. Calculate Jamee’s assessable income for the current year ended 30 June 2020.

URGENT!!!
Jamee is a resident tax payer. For the year ended 30 June 2020 he recived:

- Gross salary of $82,000 from which PAYG of 20,100 had been withheld.

- Net interest of $745 afterTFN with holding tax of $715 had been withheld.

- In September 2019, Jamee received $1,100 as his share in winnings from a punters club with his work colleagues.

- In Jan 2020,he received a holiday valued at $3,400 from his employer for achieving the highest sale in the previous year.

- In June 2020, Jamee’s employer announced that he would be giving Jamee a pay rise effective from 1 April 2020. He is therefore to receive backpay of $2000 of which $1000 will be paid on 27 June 2020 and the remaining of $1000 will be paid on 4 july 2020.

-Dividend of $12,000 deposited to his bank account in May 2020 in respect of 70% franked Australian dividend. ( company tax rate 30%).

- Interest on term deposit with a Swedish bank  of $3,600 (10% withholding tax had been deducted).

a. Advise Jamee how each payment would be treated, provide relevant section, case law and other supporting evidence.

b. Calculate Jamee’s assemble income for the current year ended 30 June, 2020.