Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

CP16 Part I Debby Kauffman and her two colleagues, Jamie Hiatt and Ella Rincon, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 50+ age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Jamie believes there are more advantages to the corporate form than a partnership, but he hasn't yet convinced Debby and Ella. They have come to you, a small-business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.

Instructions


Part II After deciding to incorporate, each of the three investors receives 20,000 shares of $2 par common stock on June 12, 2013, in exchange for their co-owned building ($200,000 fair value) and $100,000 total cash they contributed to the business. The next decision that Debby, Jamie, and Ella need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understand the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business.

Instructions


(b) Prepare notes for a discussion with the three entrepreneurs in which you will compare the consequences of using equity versus debt financing. As part of your notes, show the differences in interest and tax expense assuming $1,400,000 is financed with common stock, and then alternatively with debt. Assume that when common stock is used, 140,000 shares will be issued. When debt is used, assume the interest rate on debt is 9%, the tax rate is 32%, and income before interest and taxes is $300,000. (You may want to use an electronic spreadsheet.)


Part III During the discussion about financing, Ella mentions that one of her clients, Timothy Hansen, has approached her about buying a significant interest in the new club. Having an interested investor sways the three to issue equity securities to provide the financing they need. On July 21, 2013, Mr. Hansen buys 90,000 shares at a price of $10 per share.
The club, LifePath Fitness, opens on January 12, 2014, and after a slow start begins to produce the revenue desired by the owners. The owners decide to pay themselves a stock dividend since cash has been less than abundant since they opened their doors. The 10% stock dividend is declared by the owners on July 27, 2014. The market price of the stock is $3 on the declaration date. The date of record is July 31, 2014 (there have been no changes in stock ownership since the initial issuance), and the issue date is August 15, 2014. By the middle of the fourth quarter of 2014, the cash flow of LifePath Fitness has improved to the point that the owners feel ready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2014. The record date is December 14, 2014, and the payment date is December 24, 2014.

Instructions


(c) (1) Record all of the transactions related to the common stock of LifePath Fitness during the years 2013 and 2014. (2) Indicate how many shares are issued and outstanding after the stock dividend is issued.


Part IV Since the club opened, a major concern has been the pool facilities. Although the existing pool is adequate, Debby, Jamie, and Ella all desire to make LifePath a cutting-edge facility. Until the end of 2014, financing concerns prevented this improvement. However, because there has been steady growth in clientele, revenue, and income since the fourth quarter of 2014, the owners have explored possible financing options. They are hesitant to issue stock and change the ownership mix because they have been able to work together as a team with great effectiveness. They have formulated a plan to issue secured term bonds to raise the needed $600,000 for the pool facilities. By the end of April 2015, everything was in place for the bond issue to go ahead. On June 1, 2015, the bonds were issued for $548,000. The bonds pay semiannual interest of 3% (6% annual) on December 1 and June 1 of each year. The bonds mature in 10 years, and amortization is computed using the straight-line method.

Instructions


(d) Record (1) the issuance of the secured bonds, (2) the interest payment made on December 1, 2015, (3) the adjusting entry required at December 31, 2015, and (4) the interest payment made on June 1, 2016.


Part V Mr. Hansen's purchase of the stock of LifePath Fitness was done through his business. The stock investment has always been accounted for using the cost method on his firm's books. However, early in 2016 he decided to take his company public. He is preparing an IPO (initial public offering), and he needs to have the firm's financial statements audited. One of the issues to be resolved is to restate the stock investment in LifePath Fitness using the equity method since Mr. Hansen's ownership percentage is greater than 20%.

Instructions


(e)
1. Give the entries that would have been made on Hansen's books if the equity method of accounting for investments had been used from the initial investment through 2015. Assume the following data for LifePath.

2013 2014 2015

Net income
$30,000
$70,000
$105,000
Total cash dividends $  2,100 $20,000 $  50,000

 


2. Compute the balance in the Stock Investment account (as it relates to LifePath Fitness) at the end of 2015.

 

 

 

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M941983

Have any Question? 


Related Questions in Accounting Basics

On october 1 little bobby corporations stockholders equity

On October 1, Little Bobby Corporation's stockholders' equity is as follows. Common stock, $5 par value                                       $400,000 Paid-in capital in excess of par- common stock             25,000 Ret ...

Assignment managerial accountingbackgroundperformance

Assignment: Managerial Accounting Background: Performance Drinks, LLC is owned by Dave N. Port. Performance Drinks produces a variety of sports centered drinks. They began operations in 1993 shortly after Mr. Port gradua ...

1 fair value determination of goodwill and calculating the

1) Fair value determination of goodwill and calculating the premium paid over market value in a merger: Using fair value accounting for goodwill, under FAS 141R, determine the amount of goodwill that "the acquiring compa ...

1 a title page replace this page with your title page

1. A title page (replace this page with your title page), proper grammar and a reference list. 2. A 2-3 page summary of the article - here's a suggested method for writing the summary: a. Read the article and make sure y ...

Intermediate accounting assignment1 the nail company paid

Intermediate Accounting Assignment 1) The Nail Company paid $1,200,000 to purchase 35% of the outstanding stock of the Toe Corporation. Toe Corporation reports $450,000 of net income and paid a cash dividend of $150,000. ...

To understand the accounting equation and its

To understand the accounting equation and its elements QUESTION Mr. "A" starts a new business. Before to start the business operation, he has purchased vehicle Rs. 1,500,000, office premises Rs. 3,000,000, stock of goods ...

Accounting discussion questionbulluse the internet to

Accounting Discussion Question • Use the Internet to research an annual report of a retail company. • Then, imagine you are an investor or creditor; suggest the ratios that you believe would provide an investor or credit ...

Assessment - written report - individual assessment purpose

Assessment - Written Report - individual assessment Purpose: This assessment is designed to reinforce the subject content and develop students' skills and application of knowledge of the subject content to business situa ...

Conduct a cost analysis of gas versus electric vehicle find

Conduct a cost analysis of gas versus electric vehicle. Find the break-even point assuming gasoline is $3.00/gallon with an average of 22 miles per gallon that costs $25,000. Compared to an electric vehicle for $35,000 t ...

Problem -a firm has the following probability distribution

Problem - A firm has the following probability distribution for annual losses due to vandalism. All amounts are before any tax consideration. The firm has a tax rate of 20%. Annual Losses Probability $ 0 .75 $ 4,000 .20 ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro