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?

Robertson Real Estate Recapitalization

Founded 25 years ago by CEO Steve Robertson, Robertson Real Estate (RRE) purchases commercial real estate (land and buildings), rents both to tenants. The company has shown consistent annual profits over the past 18 years, and shareholders have been pleased with the company's management. Before he started RRE, Steve was also the founder and CEO of a now bankrupt Ostrich farm. This previous bankruptcy has made him extremely reluctant to undertake any type of debt financing, and he has financed the real estate company 100% with equity. Robertson Real Estate stock currently trades at $37.80 per share and has 8 million shares of common stock outstanding.

The company has been reviewing an opportunity to purchase a large segment of land in the southeastern United States for $85 million and plans to lease this property to one or more farming operations. The land purchase is expected to increase RRE's annual pretax earnings by $14.125 million in perpetuity. Raylynne Givins, the company's new CFO, determined the company's current cost of capital is 10.2%. She feels the company would be more valuable if it added some debt to its capital structure, so she is evaluating whether the company should issue debt to fully finance the project.

Based on conversations with several investment banks, Raylynne believes RRE can issue bonds at par value with a 6% coupon rate. Her analysis suggests a capital structure using 70% equity / 30% debt would be optimal. If the company's debt structure exceeds 30%, RRE's bond rating would be lower and require a significantly higher coupon due to the increased exposure to financial distress and the associated higher financing costs. RRE has a combined state and federal corporate tax rate of 23%.

Questions:

1. If RRE seeks to maximize total market value, should the company issue debt or equity to finance the land purchase? Explain.
2. Suppose RRE decides to issue equity to finance the purchase.
   1. What is the net present value (NPV) of the project?
   2. Construct RRE's market value balance sheet after it announces the firm will finance the purchase using equity.
      1. What would be the new price per share of the firm's stock?
      2. How many shares will RRE need to issue to finance the purchase?
   3. Construct RRE's market value balance sheet after the equity issue but before the purchase has been made.
      1. How many shares of common stock does RRE have outstanding?
      2. What is the price per share of the firm's stock?
3. Suppose RRE decides to issue debt to finance the purchase.
   1. What will be the market value of RRE if the purchase if financed with debt?
   2. Construct RRE's market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firm's stock?
4. Which method of financing maximizes the per-share stock price of RRE's equity?

Thirty-three small communities in Connecticut (population near 10,000 each) gave an average of x = 138.5 reported cases of larceny per year. Assume that σ is known to be 43.9 cases per year.

(a) Find a 90% confidence interval for the population mean annual number of reported larceny cases in such communities. What is the margin of error? (Round your answers to one decimal place.)

(b) Find a 95% confidence interval for the population mean annual number of reported larceny cases in such communities. What is the margin of error? (Round your answers to one decimal place.)

(c) Find a 99% confidence interval for the population mean annual number of reported larceny cases in such communities. What is the margin of error? (Round your answers to one decimal place.)

(d) Compare the margins of error for parts (a) through (c). As the confidence levels increase, do the margins of error increase?

As the confidence level increases, the margin of error decreases.As the confidence level increases, the margin of error remains the same.     As the confidence level increases, the margin of error increases.

(e) Compare the lengths of the confidence intervals for parts (a) through (c). As the confidence levels increase, do the confidence intervals increase in length?

As the confidence level increases, the confidence interval decreases in length.As the confidence level increases, the confidence interval increases in length.     As the confidence level increases, the confidence interval remains the same length.

How much does a sleeping bag cost? Let's say you want a sleeping bag that should keep you warm in temperatures from 20°F to 45°F. A random sample of prices ($) for sleeping bags in this temperature range is given below. Assume that the population of x values has an approximately normal distribution.

(a) Use a calculator with mean and sample standard deviation keys to find the sample mean price x and sample standard deviation s. (Round your answers to two decimal places.)

(b) Using the given data as representative of the population of prices of all summer sleeping bags, find a 90% confidence interval for the mean price μ of all summer sleeping bags. (Round your answers to two decimal places.)

Do you want to own your own candy store? Wow! With some interest in running your own business and a decent credit rating, you can probably get a bank loan on startup costs for franchises such as Candy Express, The Fudge Company, Karmel Corn, and Rocky Mountain Chocolate Factory. Startup costs (in thousands of dollars) for a random sample of candy stores are given below. Assume that the population of x values has an approximately normal distribution.

(a) Use a calculator with mean and sample standard deviation keys to find the sample mean startup cost x and sample standard deviation s. (Round your answers to one decimal place.)

(b) Find a 90% confidence interval for the population average startup costs μ for candy store franchises. (Round your answers to one decimal place.)

Stanley Burrell founder of a company named Hammer Time Inc. Hammer Time Inc produces specialty functional novelty hammers in the image of Stanley Burrell himself, aka MC Hammer. The three best-selling/most popular products sold by Hammer Time Inc. are Hammer Head Hammers, Hammer Pants Hammers, and Please Hammer Don't Hurt ‘Em Mini Hammers.

Hammer Time Inc. uses the actual total factory overhead costs from the prior year (corresponding month) to estimate the total factory overhead costs. They do this by taking last year’s actual costs (same month) and increasing them by 8%.

Actual Total Factory Overhead costs October '18 = $3,000,000

For the month of October '19 for the production in the 2 Legit Warehouse

Estimated Machine Hours = 128,000

Hammer Head Hammers = 50,300 machine hours

Hammer Pants Hammers = 41,200 machine hours

Mini Hammers = 27,300 machine hours

Actual Total Factory Overhead costs October '19 = $3,130,560

A. What is the predetermined overhead rate?

B. If the predetermined factory overhead rate was applied to the three products in March what would be the under/over applied factory overhead once the actual factory overhead cost was known?

C. Using the data from how much factory overhead would be applied to Hammer Pants Hammers?

Some firms, frequently family firms or founder firms, have dual-class shares ("A" shares and "B" shares) with differential voting rights. Sometimes one class gets more votes than the other class (e..g., "A" shares receive 1 vote per share and "B" shares receive 10 votes per share). Other times, one class can have the right to elect a majority of the directors (e.g., "A" shares elect 3 directors and "B" shares elect 7 directors). In these cases, the company is considered a "controlled" company and does not have to abide by independent director rules established by the SEC or the stock exchanges. In Atlanta, Rollins is a controlled (family controlled) company and elects to be treated as a controlled, company. That is, as a controlled company, Rollins exercises their right not to comply with director independence requirements. The New York Times (controlled by the Ochs-Sulzberger Family since 1893 -- ability to elect 7 of 10 directors) and Facebook (controlled by Mark Zuckerberg since the founding; 22% of the CF rights but 56% of voting rights after the IPO) are controlled companies. The New York Times and Facebook both claim controlled status but choose to meet director independence requirements. Corporate Governance groups (e.g., Institutional Investor Services) and shareholder activists almost routinely view these control arrangements negatively since the controlling shareholder has, within legal limits, unlimited power and few if any checks and balances. Thus, the controlling shareholders could choose policies to benefit themselves at the expense of minority shareholders. For instance, the Ochs-Sulzberger family might receive private satisfaction from influencing the news even if their approach did not maximize shareholder value. Others, argue that these arrangements can be beneficial for certain firms. For instance, control allows the Ochs-Sulzberger family to maintain independent journalistic control without shareholder pressure. If the Ochs-Sulzberger slant sells best to a certain constituency, this approach could maximize value for shareholders. Likewise, if Zuckerberg's creativity and innovation is vital to Facebook, his control would protect his creative guidance of the firm from unwanted takeovers or market pressures, and therefore benefit shareholders. A third viewpoint is that markets work pretty well so any positive or negative impact of the control arrangement is already impacted in the stock price when you purchase it. If The argument is correct, you will not incur costs as an investor.

Do you think controlled firms provide good governance and protect shareholder interests? Why or why not. Or, maybe you think it doesn't matter one way or the other? Why or why not? Would you be willing to invest in a controlled company? Why or why not?

Gravity Payments

In April 2015, Dan Price, the 30-year-old chief executive officer (CEO), and founder of Gravity Payments, announced an increase in every employee’s wage to US$70,000. Every employee, including the lowest-paid clerk and newly hired staff, would receive a minimum annual salary of $70,000 over the next three years. The announcement stunned the employees and triggered a wave of high-fiving and clapping. With this decision, one young entrepreneur in Seattle, Washington, became an instant hero when he issued a direct and adventurous challenge to the long-standing problem of U.S. income inequality. However, at the same time, he was experiencing unexpected challenges from different people only a few months after his bold move.

Income inequality has been racing in the wrong direction. I want to fight for the idea that if someone is intelligent, hard-working and does a good job, then they are entitled to live a middle-class lifestyle.

• Dan Price, CEO

COMPANY OVERVIEW

Gravity Payments was a private credit card processing and financial services company. It was founded in February 2004 by brothers, Dan and Lucas Price.

Gravity Payments provided a variety of processing and financial services, including credit card processing, POS (point of Sales) systems, mobile payments, working capital financing, and gift and loyalty cards. The company’s customers were mostly small and medium-sized businesses. By 2009, the company became the largest credit card processor in the state of Washington, serving more than 15 percent of small businesses in the Seattle area. The company’s success was mainly due to its low-cost strategy and word of mouth publicity. The company charged less than half of the industry-average processing rate.

Gravity Payments had had a philanthropic mandate since its beginning, and launched the “Gravity Gives” program in March, 2008. Through this program, 2 percent of the company’s revenue had been donated to charities, including World Vision, the Fred Hutchinson Cancer Research Center and Northwest Harvest. Price believed strongly in fighting poverty on both a global and locale scale.

THE DECISION

It was the right thing to do. I want everybody that I’m partnered with at Gravity to really live the fullest, best life they can… I think that’s the [income level] where you can start to check off those life’s goal boxes – saving for college, buying a home, some of the basics, starting a family. I want everyone to have those basic opportunities.

• Dan Price, CEO

Announcement of the $70,000 Minimum Salary

In April 2015, Price set a new minimum salary of $70,000 for all of his 120 employees at Gravity Payments. The idea struck him when one of his friends shared her worries about trying to pay her bills and student loans on an annual income of $40,000. Some of Price’s own employees earned that amount or less.

Price decided upon the amount of $70,000 based upon a 2010 study conducted at Princeton University by economist, Angus Deaton and psychologist, Daniel Kahneman, a Nobel Laureate. According to the study, those who made less that $75,000 were likely to experience emotional pain and job dissatisfaction. However, even if people made more than $75,000, they did not feel any greater level of happiness. Simply put, the study suggested that emotional well-being increased with economic compensation, but only up to the amount of about $75,000. The study concluded that “low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. We conclude that high income buys life satisfaction but not happiness, and that low income is associated with both with low life evaluation and low emotional well-being.”

Before Price initiated the salary increase, the average salary at Gravity Payments was about $48,000, with the lowest salary at around $34,000. Due to Price’s decision, about 30 employees had their paycheques nearly double overnight, and others also received raises to reach the $70,000 level. Ryan Pirkle, the spokesman for Gravity Payments, mentioned that this new minimum wage policy would increase the salary of about 70 employees. The ground-breaking move was met with applause and shouts of joy by many employees. Kevin, a customer operations associate, said in an interview with the media, “I was there at the meeting… honestly, I could not believe what I heard, and I think that’s what a lot of people felt. I kind of felt that we needed to get that repeated.” Phillip Akhavan, a staff member in the merchant relations team, who earned an annual salary of $43,000, also said, “My jaw just dropped… This is going to make a difference to everyone around me.” Jaime June, in the marking department, said, “Dan is just an incredible man in general. He has a really amazing moral compass.”

The new salary would change employees’ lives. Maria Harley, vice-president of operations said, “I’ve heard things from, ‘I can finally afford to move out of my parent’s home,’ [to] ‘I can finally afford to have a baby,’ we have some people that are parents and really want a good education for their children and feel like they can finally afford that.”

Huge publicity from all major national media had generated clear public-relations benefits for the company. After Gravity Payments became a front-page media story, it received more than 5,000 resumes in just one day. Before the announcement, Gravity Payments added 200 clients per month on average. In June 2015, the number grew to 350.

The Downside of the $70,000 Minimum Salary Plan

There’s no perfect way to do this and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs. I came up with the best solution I could… I know the decision to pay everyone a living wage is controversial.

• Dan Price, CEO

The implementation of this wage increase was not easy. In order to pay for the increases in employees’ salaries, Price cut his own remuneration from $1 million to $70,000. Also, about 75 to 80 percent of the company’s $2.2 million profits had to be uses.

Many questions were raised. Was this a social experiment? Was it a public relations stunt? Or was Price just a nice guy? In addition, not everyone was pleased with his move. Other local business owners and some entrepreneurial CEOs in the same, close-knit, entrepreneurial network complained that his decision made them look stingy. Steve Duffield, CEO of DACO Corp., who had met Price through the Entrepreneurs’ Organization in the Seattle area, said, “I worry how that’s going to impact other businesses. We can’t afford to do that. For most businesses, employees are the biggest expense and they need to manage those costs in order to survive.”

Some customers were against the “socialist” gesture and stopped their business with Gravity Payments. Others customers withdrew their business due to an anticipation of a fee increase, in spite of the repeated assurances from the company that this would not happen.

Complaints even came from Price’s own employees. While 30 or so employees would see their pay nearly double overnight, and about 70 employees also go raises, the remaining 50 were already paid more than $70,000. In fact, according to the New York Times, the company’s two best employees left the company because of Price’s decision. For example, Maisey McMaster, who joined Gravity Payments five years earlier and had worked long hours that left little time for her family, was one of them. She said, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.” McMaster talked to Price after contemplating a fairer proposal. From her view, a fairer proposal was offering small raises with the opportunity to gain a future increase with more experience. “He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”

Grant Moral, a web developer whose salary increased from $41,000 to $50,000 (due to the first stage of pay increase), also expressed concerns, even though he would receive a substantial pay increase from this plan. He opted to leave the company. “I had a lot of mixed emotions. Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.” He added, “I was kind of uncomfortable and didn’t like having my wage advertised so publicly and so blatantly. It changed perspectives and expectations of you, whether it’s the amount you tip on a cup of coffee that day or family and friends now calling you for a loan.” From McMaster and Moran’s points of view, it was not fair to double the paycheque of someone with the lowest skills, while the longest-serving and highest-skilled employees received a small or no salary increase.

Furthermore, even employees who were exhilarated by the raises had new concerns and indicated they were facing a lot of pressure. “Am I doing my job well enough to deserve this? I didn’t earn it,” said Stephanie Brooks, 23, who joined the company as an administrative assistant two months before the decision.

Question:

1. What are the potential problems of a minimum salary as a compensation plan for the organization? How can you minimize these problems and motivate employees?

Gravity Payments

In April 2015, Dan Price, the 30-year-old chief executive officer (CEO), and founder of Gravity Payments, announced an increase in every employee’s wage to US$70,000. Every employee, including the lowest-paid clerk and newly hired staff, would receive a minimum annual salary of $70,000 over the next three years. The announcement stunned the employees and triggered a wave of high-fiving and clapping. With this decision, one young entrepreneur in Seattle, Washington, became an instant hero when he issued a direct and adventurous challenge to the long-standing problem of U.S. income inequality. However, at the same time, he was experiencing unexpected challenges from different people only a few months after his bold move.

Income inequality has been racing in the wrong direction. I want to fight for the idea that if someone is intelligent, hard-working and does a good job, then they are entitled to live a middle-class lifestyle.

• Dan Price, CEO

COMPANY OVERVIEW

Gravity Payments was a private credit card processing and financial services company. It was founded in February 2004 by brothers, Dan and Lucas Price.

Gravity Payments provided a variety of processing and financial services, including credit card processing, POS (point of Sales) systems, mobile payments, working capital financing, and gift and loyalty cards. The company’s customers were mostly small and medium-sized businesses. By 2009, the company became the largest credit card processor in the state of Washington, serving more than 15 percent of small businesses in the Seattle area. The company’s success was mainly due to its low-cost strategy and word of mouth publicity. The company charged less than half of the industry-average processing rate.

Gravity Payments had had a philanthropic mandate since its beginning, and launched the “Gravity Gives” program in March, 2008. Through this program, 2 percent of the company’s revenue had been donated to charities, including World Vision, the Fred Hutchinson Cancer Research Center and Northwest Harvest. Price believed strongly in fighting poverty on both a global and locale scale.

THE DECISION

It was the right thing to do. I want everybody that I’m partnered with at Gravity to really live the fullest, best life they can… I think that’s the [income level] where you can start to check off those life’s goal boxes – saving for college, buying a home, some of the basics, starting a family. I want everyone to have those basic opportunities.

• Dan Price, CEO

Announcement of the $70,000 Minimum Salary

In April 2015, Price set a new minimum salary of $70,000 for all of his 120 employees at Gravity Payments. The idea struck him when one of his friends shared her worries about trying to pay her bills and student loans on an annual income of $40,000. Some of Price’s own employees earned that amount or less.

Price decided upon the amount of $70,000 based upon a 2010 study conducted at Princeton University by economist, Angus Deaton and psychologist, Daniel Kahneman, a Nobel Laureate. According to the study, those who made less that $75,000 were likely to experience emotional pain and job dissatisfaction. However, even if people made more than $75,000, they did not feel any greater level of happiness. Simply put, the study suggested that emotional well-being increased with economic compensation, but only up to the amount of about $75,000. The study concluded that “low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone. We conclude that high income buys life satisfaction but not happiness, and that low income is associated with both with low life evaluation and low emotional well-being.”

Before Price initiated the salary increase, the average salary at Gravity Payments was about $48,000, with the lowest salary at around $34,000. Due to Price’s decision, about 30 employees had their paycheques nearly double overnight, and others also received raises to reach the $70,000 level. Ryan Pirkle, the spokesman for Gravity Payments, mentioned that this new minimum wage policy would increase the salary of about 70 employees. The ground-breaking move was met with applause and shouts of joy by many employees. Kevin, a customer operations associate, said in an interview with the media, “I was there at the meeting… honestly, I could not believe what I heard, and I think that’s what a lot of people felt. I kind of felt that we needed to get that repeated.” Phillip Akhavan, a staff member in the merchant relations team, who earned an annual salary of $43,000, also said, “My jaw just dropped… This is going to make a difference to everyone around me.” Jaime June, in the marking department, said, “Dan is just an incredible man in general. He has a really amazing moral compass.”

The new salary would change employees’ lives. Maria Harley, vice-president of operations said, “I’ve heard things from, ‘I can finally afford to move out of my parent’s home,’ [to] ‘I can finally afford to have a baby,’ we have some people that are parents and really want a good education for their children and feel like they can finally afford that.”

Huge publicity from all major national media had generated clear public-relations benefits for the company. After Gravity Payments became a front-page media story, it received more than 5,000 resumes in just one day. Before the announcement, Gravity Payments added 200 clients per month on average. In June 2015, the number grew to 350.

The Downside of the $70,000 Minimum Salary Plan

There’s no perfect way to do this and no way to handle complex workplace issues that doesn’t have any downsides or trade-offs. I came up with the best solution I could… I know the decision to pay everyone a living wage is controversial.

• Dan Price, CEO

The implementation of this wage increase was not easy. In order to pay for the increases in employees’ salaries, Price cut his own remuneration from $1 million to $70,000. Also, about 75 to 80 percent of the company’s $2.2 million profits had to be uses.

Many questions were raised. Was this a social experiment? Was it a public relations stunt? Or was Price just a nice guy? In addition, not everyone was pleased with his move. Other local business owners and some entrepreneurial CEOs in the same, close-knit, entrepreneurial network complained that his decision made them look stingy. Steve Duffield, CEO of DACO Corp., who had met Price through the Entrepreneurs’ Organization in the Seattle area, said, “I worry how that’s going to impact other businesses. We can’t afford to do that. For most businesses, employees are the biggest expense and they need to manage those costs in order to survive.”

Some customers were against the “socialist” gesture and stopped their business with Gravity Payments. Others customers withdrew their business due to an anticipation of a fee increase, in spite of the repeated assurances from the company that this would not happen.

Complaints even came from Price’s own employees. While 30 or so employees would see their pay nearly double overnight, and about 70 employees also go raises, the remaining 50 were already paid more than $70,000. In fact, according to the New York Times, the company’s two best employees left the company because of Price’s decision. For example, Maisey McMaster, who joined Gravity Payments five years earlier and had worked long hours that left little time for her family, was one of them. She said, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.” McMaster talked to Price after contemplating a fairer proposal. From her view, a fairer proposal was offering small raises with the opportunity to gain a future increase with more experience. “He treated me as if I was being selfish and only thinking about myself,” she said. “That really hurt me. I was talking about not only me, but about everyone in my position.”

Grant Moral, a web developer whose salary increased from $41,000 to $50,000 (due to the first stage of pay increase), also expressed concerns, even though he would receive a substantial pay increase from this plan. He opted to leave the company. “I had a lot of mixed emotions. Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.” He added, “I was kind of uncomfortable and didn’t like having my wage advertised so publicly and so blatantly. It changed perspectives and expectations of you, whether it’s the amount you tip on a cup of coffee that day or family and friends now calling you for a loan.” From McMaster and Moran’s points of view, it was not fair to double the paycheque of someone with the lowest skills, while the longest-serving and highest-skilled employees received a small or no salary increase.

Furthermore, even employees who were exhilarated by the raises had new concerns and indicated they were facing a lot of pressure. “Am I doing my job well enough to deserve this? I didn’t earn it,” said Stephanie Brooks, 23, who joined the company as an administrative assistant two months before the decision.

Questions

1. Use equity theory to explain the reactions of Gravity employees. What steps are these employees taking, or might they take, to rectify any inequities?

On January 2, 2020, Seller sends Buyer a letter offering to sell an Andy Warhol painting (described in the letter) for $ 500,000. According to the letter, the seller must receive buyer’s acceptance no later than January 10, 2020. On January 6th, buyer (who wants the Warhol painting for his personal collection) decides to accept the offer and prepares a letter which states, "I accept your January 2, 2020 offer to sell the rare postage stamp (as described in the offer) for $500,000". Buyer leaves the office at noon for lunch. On the way, he stops at the post office to mail the letter.

Meanwhile, on the morning of January 6th, someone else offers Seller $ 600,000 for the painting. Before Seller accepts this offer, he needs to revoke the original offer that he had made to Buyer. Therefore, Seller calls Buyer’s office at 12:15 p.m. to revoke his offer. Seller speaks to Buyer’s secretary - the following exchange takes place:

Secretary: Buyer is out to lunch - he should be back at 1:00 p.m.

Seller: “Have him call me. I’m revoking my offer to sell the Andy Warhol painting”.

Secretary leaves Buyer a phone message slip that reads “Seller called. He wants you to return the call”. Secretary then goes out to lunch. When Buyer returns from lunch, he sees the message and calls Seller - the following exchange takes place:

Buyer: Funny you should call. I just got back from the post office. I just mailed you a letter. I am accepting your offer for the Andy Warhol painting.

Seller: Actually, the offer is revoked. In fact, I told secretary “I’m revoking my offer to sell the Andy Warhol painting”.

The January 6th letter was delivered to Seller on January 8, 2020. Seller now refuses to transfer the painting. Buyer sues. RESULT?

Answer in this format :

1. Identification of the precise legal issue(s) presented by the facts :

2. Statement of the relevant legal principles/rules related to the issues

   identified :

The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2021, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2020, in exchange for various considerations totaling $330,000. At the acquisition date, the fair value of the noncontrolling interest was $220,000 and Keller’s book value was $430,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $120,000. This intangible asset is being amortized over 20 years. Gibson uses the partial equity method to account for its investment in Keller.

Gibson sold Keller land with a book value of $55,000 on January 2, 2020, for $110,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2020, it shipped inventory costing $110,500 to Gibson at a price of $170,000. During 2021, intra-entity shipments totaled $220,000, although the original cost to Keller was only $132,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $40,000 at the end of 2021.

(Note: Parentheses indicate a credit balance.)

1. Prepare a worksheet to consolidate the separate 2021 financial statements for Gibson and Keller.

2. How would the consolidation entries in requirement (a) have differed if Gibson had sold a building on January 2, 2020, with a $70,000 book value (cost of $160,000) to Keller for $120,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

During 2020, the following transactions were recorded by the Port Hudson Community Hospital, a private sector not-for-profit institution:

1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,950,000. Estimated contractual adjustments with third-party payors amounted to $550,000 and the Hospital estimated implicit price concessions would total $25,000.
2. Charity services, not included in transaction 1, would amount to $96,000, had billings been made at gross amounts.
3. Other revenues, received in cash, were parking lot, $35,000; cafeteria, $57,500; gift shop, $12,500.
4. Cash gifts restricted by the donor for programs amounted to $38,750 for the year. During the year, $77,000 was expended for technician salaries supporting the program identified by the donor (debit Operating Expense—Salaries and Benefits).
5. Mortgage bond payments amounted to $74,000 for principal and $46,000 for interest. Assume unrestricted resources are used.
6. During the year, the hospital received, in cash, unrestricted contributions of $63,000 and unrestricted income of $53,750 from endowment investments. (It is the hospital’s practice to treat unrestricted gifts as nonoperating income.)
7. New equipment, costing $182,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year.
8. An old piece of lab equipment that originally cost $200,000 and that had an undepreciated cost of $40,000 was sold for $22,000 cash.
9. At the end of 2020, pledges (restricted as to purpose) were received in the amount of $195,000. These are intended to be received and expended in 2021.
10. Cash contributions were received from donors restricted for plant acquisition, $218,750.
11. Bills were received for the following items: Utilities $158,500 and Insurance $92,000. These will be paid in January of 2021.
12. Depreciation of plant and equipment amounted to $225,000.
13. Cash payments on accounts payable amounted to $208,500. Another $834,500 was expended on wages and benefits.
14. Cash collections of patient accounts receivable amounted to $1,210,000. These were in settlement of patient accounts totaling $1,662,000. Contractual adjustments associated with these totaled $430,000 and price concessions totaled $22,000.
15. Closing entries were prepared.

Required:
a. Record the transactions in the general journal of the Port Hudson Community Hospital.
b. Prepare a Statement of Operations for the Port Hudson Community Hospital for the year ended December 31, 2020.
c. Prepare a Statement of Changes in Net Assets for the Port Hudson Community Hospital for the year ended December 31, 2020. Assume beginning net assets are $7,225,000