Required:
Please write a formal business letter to George F. Smith, Senior Accountant- Controllers Staff at the Kennedy Corporation. In your letter to Mr. Smith please inform him that the existing Balance Sheet presentation of "lumping similar accounts together", that Kennedy Corporation has been using for many years is not proper accounting under GAAP and that changes to the Balance Sheet presentation must be made immediately before the new financial statements are to be issued at 12/31/17.
Please explain to Mr. Smith that you analyzed the Trial Balance accounts and you discovered that the following items were improperly classified:
1. Short Term Investments of $400,000 was included with Other Investments. Your analysis indicates that this investment is highly liquid and matures in less than three months time.
2. Cash Restriction $1,500,000 - Kennedy Company checking account. The restriction was placed on Kennedy's checking account by Citibank in order to meet bank debt service obligations coming due this year. The restriction has not been disclosed and the amount is co-mingled in the cash account.
3. Investments $1,900,000
An analysis of the Investment account disclosed the following items included:
a) The Kennedy Company invested in $50,000 of short term bonds of XYZ Company; the company's intention is to hold the investment until maturity.
b) The Kennedy Company invested $70,000 in various short term securities; the company's intention is to trade the securities and generate profits on price fluctuations.
4. Accounts Receivable:
An analysis of the account disclosed the following items included:
a) Receivables from affiliated company's - $300,000
b) Loans to officers and employees - 150,000
c) Non- trade receivables - 100,000
The estimated allowance for doubtful accounts (based on an Aging Schedule) at 12/31/16 is $75,000. Kennedy Company has never shown the allowance account on its Balance Sheet.
5. Stockholders' Equity.
Kennedy Company's Balance Sheet showed the following:
Capital Stock - $28,000,000
An analysis of the Stockholders' Equity account indicates the following items: Common Stock: 10 million SHS. Authorized; $2 Par; 6 million SHS issued;
5 million SHS. outstanding - $10,000,000
Additional Paid in Capital - Common $5,000,000
Treasury Stock at Cost - $2,500,000
Preferred Stock: 5 million SHS authorized $5.00 Par;
2 million SHS issued and outstanding - $10,000,000.
Additional Paid in Capital - Preferred - $3,000,000
Retained Earnings - $3,200,000
Required:
Please write a business letter (minimum of two full pages, single spaced and using 12 pt. font) addressed to George F. Smith, Senior Accountant - Controllers Staff, Kennedy Corporation explaining in your own words the following:
For each of the five items listed above, please provide comments to Mr. Smith.
- Please advise Mr. Smith as to what is wrong with the current presentation of "lumping items together" on the Kennedy Corporation's Balance Sheet.
- Please advise Mr. Smith as to the proper presentation for each of the items described above, under Generally Accepted Accounting Principles (GAAP). It would be appropriate for you to illustrate the proper presentation for each item in your discussion.
- In your discussion, please be certain to describe HOW AND WHERE each of the items should be shown (under GAAP).
This is a business letter to a professional person and as such, it should be written in a professional tone. Kindly Check your spelling, punctuation and grammar.