Asset Project
Attached is the trial balance for McCurry Corporation. McCurry is a small business that custom designs unmanned aerial vehicles for specific customer needs. The business has a part-time bookkeeper with only basic training and experience in accounting. The bookkeeper is, however, knowledgeable enough to know when a transaction is "over his head." When this happens, he simply writes down the details of the transaction on a piece of paper and puts them in a box to hand to the company's outside accounting firm at the end of the year when financial statements are prepared.
This year, you have received the box. Your task is to record the entries required by the ten pieces of paper in the box (which are summarized below). For each of the ten items, you need to record all of the journal entries required for the year including any depreciation or amortization entries. After recording the transactions, you need to prepare an income statement, statement of retained earnings and balance sheet for the company.
In your conversations with the owner of McCurry, you discover that company can borrow money from its bank at 9% interest. You may want to consult your textbook for the legal life of any intangibles. McCurry uses the effective interest method to amortize any discounts or premiums on investments. The company uses straight-line amortization for intangibles and straight-line depreciation for plant assets. The company policy is to take a full year's depreciation or amortization in the year of acquisition for any intangible or plant asset.
You may assume all of the balances on the trial balance are correct as a starting point. You only need to add to the trial balance the results of the transactions you are recording. Assume all transactions and all amounts are material. If you don't know the exact date of a transaction, it is fine to record the transaction on the last day of the month in which it occurred.
When recording transactions related to investments, use the balance sheet accounts below to keep the categories of investments separate. You do not need to separate out the income statement accounts (such as interest revenue, dividend revenue, gains or losses).
- Equity Investments (using Equity Method)
- Equity Investments (at Fair Value)
- Fair Value Adjustment - Equity*Hint: also consider if the investment is
- Debt Investments (at Fair Value) current or long-term
- Fair Value Adjustments - Debt
- Debt Investments (at Amortized Cost)
You need to submit the following for this project.
1. Journal entries organized by item, not chronologically. Have all the entries for #1 together, then #2, etc. Do not organize by date. Have any required depreciation or amortization with appropriate item. Do not show all the depreciation & amortization at the end. Show all supporting calculations with the appropriate entry, including any amortization tables. The easier I can following your work, the more points you will get! Round all entries to the nearest whole dollar.
2. A updated trial balance resulting from your entries.
3. A 2016 year-end multiple-step Income Statement (without earnings per share data), Statement of Retained Earnings and classified Balance Sheet in good form. Round all amounts to the nearest whole dollar.
Here are the items in the box!
1. On January 1, 2016, McCurry had the following 2 equity investments:
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Number of Shares owned
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Cost per Share when purchased
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Market value per share on 12/31/2015
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DVT Corporation
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200
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$17
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$23
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AmTech Industries
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75
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$42
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$65
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McCurry owns 2% of the outstanding stock of AmTech and 23% of the outstanding stock of DVT Corporation. The remaining 77% of DVT stock is held primarily by heirs of the company's founder, who closely control the operations of the company and prevail in all shareholder matters. The following information is available about the performance of these 2 investments during 2016.
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Dividends paid
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2016 Net Income
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Market value per share on 12/31/2016
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DVT Corporation
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none
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$1,260,000
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$14
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AmTech Industries
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$1.25 per share
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$15,900,000
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$78
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The AmTech dividend was paid on 7/15/2016. McCurry anticipates they will sell the AmTech stock by the end of 2017 to cash in on the substantial gain. The DVT stock will be held on the hopes that the price will rebound over the long term.
2. On January 1, 2016, McCurry purchased $3,000 in bonds issued by Kane Company for $3,736.The contract rate on the bonds is 7% with interest payable on July 1 and January 1. The bonds mature on January 1, 2026 and they were priced to yield 4%. While management has no specific plans to sell the bonds, it is not likely that they would be held for the almost 10years until maturity. On December 31, 2016, these bonds were selling at 120.
3. On January 1, 2016, McCurry entered into a 4 year lease for a forklift. The forklift has an economic life of 6 years and a fair value of $70,000. The annual lease payment (first payment due 1/1/2016) is $16,000. McCurry can buy the forklift at the end of the 4 years for $8,000 even though the estimated residual value at that time is estimated to be $15,000. The implicit rate on the lease, which happened to be listed in the lease contract, is 8%.
4. On January 1, 2016, McCurry also entered in to a 4 year lease of a small warehouse. The lease requires payments of $36,000 per year to be paid annually beginning on 1/1/2016. The warehouse probably has a useful life of 20 years or more, so McCurry could try to renegotiate a new lease at the end of the lease term if the space is still adequate, but they are under no obligation to do so and the lessor has made no promises regarding a new lease. McCurry wanted to lease the space because the purchase of a similar warehouse would probably cost $120,000. McCurry paid a $3,000 commission to the agent who found the warehouse and negotiated the initial lease.
5. On February 3, 2016, McCurry paid $2,000 to a marketing design firm to prepare a new logo to trademark for a new business segment. McCurry wants to enter the market of developing drones for serious hobbyists wanting to enter competitive flying. It is hard to predict the life of this business venture since it is such a new concept, but at this time McCurry plans on being in the business indefinitely. The legal fees and other costs paid in February to register the trademark totaled $3,000. In July of 2016, a competitor filed a law suit stating that McCurry's trademark design was too close to their own and would confuse customers. The suit asked for McCurry's trademark to disallowed. After McCurry spent $8,000 in legal fees, the competitor dropped the law suit in September.
6. On March 28, 2016, McCurry purchased 400 shares of James Incorporated common stock for $60 per share plus $150 in commissions. James has 2,500 shares of stock issued and outstanding. At the time, McCurry planned to sell the investment by the end of the year. On August 14, 2016, Mc Curry received 40 additional shares of James Inc. from a stock dividend when the market price of the stock was $62. On September 29, 2016, McCurry sold 100 shares of the James stock at $70 per share less commissions of $50. At the end of 2016, management now intends to hold on to the remaining shares of James for probably two or three more years. However, it could be sold sooner if there is a need for cash. James' income for 2016 was $720,000 and the stock's market price on 12/31/16 was $68 per share.
7. On July 1, 2016, the company purchased five $1,000 bonds issued by the City of Centerville School District. These bonds were purchased for $4,573. The contract rate on these bonds is 4% with interest payable on 1/1 and 7/1; these bonds mature 7/1/2021. The bonds were sold to yield 6%. It is the intention of management to hold these bonds until they mature. On December 31, 2016, these bonds had a fair value of 94.
8. On August 18, 2016, McCurry replaced the HVAC (Heating, Ventilation & Air Conditioning) system in its office building. The office building was purchased in 2011 and was being depreciated over a 30 year life. The new HVAC system cost $25,000. The new system will not extend the life of the building, but it is much more efficient than the old system. In addition, the installation included new venting that will make the building's temperature much more consistent from room to room and increase employee comfort. No depreciation has been recorded on the building or the new HVAC system for 2016.
9. On September 28, 2016, McCurry purchased 1,600 shares of Gem City Electronics. Gem City operates five retail stores in the greater Dayton area. These stores would have great potential in opening up McCurry's products to a new market. Gem City stock is readily marketable, but McCurry does not plan on selling the stock any time soon. At the time of the purchase, Gem City had issued and outstanding 6,400 shares of voting common stock. McCurry paid 25.25 per share for the stock. Total commissions on the purchase were $200. During 2016, Gem City's net income was $180,000 and the company paid dividends of $0.50 per share. Gem City's stock was selling for $27 per share at the end of 2016.
10. On November 5, 2016, McCurry purchased equipment by issuing a 2 year, non-interesting bear note for $30,000. The equipment has a useful life of 7 years with no salvage value. The list value of the equipment was $62,000.
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McCurry Corporation
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Preliminary Trial Balance
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December 31, 2016
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Debit
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Credit
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Cash
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$197,225
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Accounts Receivable
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168,000
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Allowance for Doubtful Accounts
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2,300
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Inventories
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192,000
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Prepaid Insurance
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9,000
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Equity Investments (using Equity Method)
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Equity Investments (at Fair Value)
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6,550
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Fair Value Adjustment-Equity
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2,925
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Debt Investment (at Fair Value)
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Fair Value Adjustment-Debt
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Debt Investment (at Amortized Cost)
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Land
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90,000
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Office Building
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420,000
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Accumulated Depreciation - Office Bldg
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70,000
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Equipment
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635,000
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Accumulated Depreciation - Equip
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60,000
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Accounts Payable
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75,000
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Interest Payable
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130,000
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Short-Term Notes Payable
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20,000
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Long-Term Bank Loans
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260,000
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Common Stock
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300,000
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Retained earnings
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179,000
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Sales Revenue
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1,590,000
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Sales Returns
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3,600
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Cost of Goods Sold
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460,000
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Selling Expenses
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140,000
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Administrative Expenses
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200,000
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Depreciation Expense
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20,000
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Interest Expense
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14,000
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Income Tax Expense
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128,000
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$2,636,300
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$2,636,300
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