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I. 10.01 Problem

Examine the following list of items, and match each to the best corresponding description from the choices list. Each choice should be used only once.
1	Cost minus salvage value
2	Cost minus accumulated depreciation
3	Depreciation is a process of this, rather than valuation
4	Costs that are added to an asset account
5	Costs of items added to a land-related account, like paving and landscaping
6	A bundled purchase of assets
7	Lessee does not report the asset
8	Like straight-line, but the denominator is not time
9	A tax-based allocation of cost that is not GAAP
10	Justification for expensing small items
11	Included with land cost
12	Expensed immediately
13	Results in less depreciation each year than the year before
CHOICES:
	Materiality
	Book value
	MACRS
	Land improvements
	Capital expenditures
	Accelerated depreciation
	Lump sum purchase
	Depreciable base
	Survey and title fees
	Abnormal damage during installation
	Operating lease
	Allocation
	Units-of-output method

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I-10.01

I 10.01 Worksheet


1	Cost minus salvage value
	Depreciable base
2	Cost minus accumulated depreciation
3	Depreciation is a process of this, rather than valuation
4	Costs that are added to an asset account
5	Costs of items added to a land-related account, like paving and landscaping
6	A bundled purchase of assets
7	Lessee does not report the asset
8	Like straight-line, but the denominator is not time
9	A tax-based allocation of cost that is not GAAP
10	Justification for expensing small items
11	Included with land cost
12	Expensed immediately
13	Results in less depreciation each year than the year before

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I-10.01

I. 11.01 Problem

Tidwell Corporation's accounting staff was unsure of how to account for certain expenditures relating to its property, plant, and equipment. As a result, the company has delayed recording entries related to the following transactions. In addition, until these items are resolved, the determination of depreciation expense for the year has been delayed.
Item A	The company's delivery truck, originally costing $90,000 and having a 6-year life with no salvage value, was substantially overhauled at a cost of $10,000. This expenditure occurred at the beginning of the year, when the truck was two years old. This action restored the truck to "like-new" condition, and extended the useful life by an additional three years.
Item B	At mid-year, the company added a new $65,000 dust handling unit to the heating and ventilation system in its inventory warehouse. This new feature is supposed to reduce dust from the air and provide for a cleaner environment in which to store inventory. The new dust unit has a 10-year physical life, but it is anticipated that it will be scrapped six and one-half years after its installation, when the primary heating system is replaced. As of the beginning of the year, the heating and ventilation system had a cost of $240,000 and accumulated depreciation of $100,000.
Item C	The company entered into a 5-year contract with Reliable Maintenance Services Company. The agreement provides for Tidwell to make monthly payments of $1,500 for all routine cleaning and maintenance activities on shop equipment. Two months of services had been provided and paid as of the end of the year. As of the beginning of the year, shop equipment had a remaining net book value of $300,000, and a remaining life of three years.
Item D	Tidwell entered into a joint agreement with several other companies to mutually acquire an easement on an adjoining tract of land. The easement was needed to provide right-of-way for a future rail transport line extension that will benefit all of the participating companies. Tidwell paid $10,000 for its share of the access easement. The easement is perpetual in nature.
Prepare journal entries for each of the four described expenditures. Then, calculate depreciation, as appropriate, for the expenditure and/or related assets. Assume straight-line depreciation in each case.

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I-11.01

I 11.01 Worksheet


GENERAL JOURNAL
Date	Accounts	Debit	Credit
Item A
Item B
Item C
Item D

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I-11.01

Sheet2

I 14.01 Problem

Summary information for Branford Corporation's balance sheet follows:
		BRANFORD CORPORATION
		Balance Sheet
		August 15, 20X4
			Assets
			Cash		$ 125,000
			Accounts receivable		250,000
			Inventory		750,000
			Property, plant, & equipment (net)		860,000
			Total assets		$ 1,985,000
			Liabilities
			Accounts payable	$ 125,000
			Accrued liabilities	260,000
			Notes payable	290,000
			Total liabilities		$ 675,000
			Stockholders' equity
			Common stock, $5 par	$ 700,000
			Paid-in capital in excess of par	300,000
			Retained earnings	310,000
			Total stockholders' equity		1,310,000
			Total liabilities and equity		$ 1,985,000
Branford's business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital:
DEBT OPTION: Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on this note would be 7%, and the note would require monthly payments.
COMMON STOCK OPTION: Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly issued common shares. Common shares have been paying a dividend of $0.50 per share. Branford anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION: Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION: Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred stock to be issued at par.
CONVERTIBLE PREFERRED STOCK OPTION: Branford has identified a retirement fund that will pay $1,000,000 for 4% cumulative preferred stock to be issued at par. The preferred stock must be convertible into 25,000 shares of common stock at the option of the retirement fund.
(a)	Prepare the revised balance sheets that would result under each of the five alternative financing scenarios.
(b)	Which of the alternative financing scenarios involve fixed committed payments to investors, and which involve discretionary payments?
(c)	Which one of the alternative financing scenarios presents the least risk to existing shareholders? Which one of the scenarios involves the most ownership dilution for existing shareholders?
(d)	Which scenario is most risky, and does it require any ownership dilution for existing shareholders?
(e)	What is the price per share that is implicit in the common stock alternative? What price per share must the common stock reach before convertible preferred shares might logically be converted? Why might the preferred share alternatives involve different yields?
(f)	Evaluate the balance sheets prepared in part (a). Which appear similar? Given that certain balance sheets appear similar, yet the fundamental economic positions vary, what is to be learned about carefully examining financial statements and notes?

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I 14.01 Worksheet

(a)
DEBT OPTION:
	BRANFORD CORPORATION
	Balance Sheet
	August 15, 20X4
		Assets
		Cash		$ -
		Accounts receivable		250,000
		Inventory		750,000
		Property, plant, & equipment (net)		860,000
		Total assets		$ -
		Liabilities
		Accounts payable	$ 125,000
		Accrued liabilities	260,000
		Notes payable	-
		Total liabilities		$ -
		Stockholders' equity
		Common stock, $5 par	$ -
		Paid-in capital in excess of par	-
		Retained earnings	310,000
		Total stockholders' equity		-
		Total liabilities and equity		$ -
COMMON STOCK OPTION:
	BRANFORD CORPORATION
	Balance Sheet
	August 15, 20X4
		Assets
		Cash		$ -
		Accounts receivable		250,000
		Inventory		750,000
		Property, plant, & equipment (net)		860,000
		Total assets		$ -
		Liabilities
		Accounts payable	$ 125,000
		Accrued liabilities	260,000
		Notes payable	-
		Total liabilities		$ -
		Stockholders' equity
		Common stock, $5 par	$ -
		Paid-in capital in excess of par	-
		Retained earnings	310,000
		Total stockholders' equity		-
		Total liabilities and equity		$ -
NONCUMULATIVE PREFERRED STOCK OPTION:
	BRANFORD CORPORATION
	Balance Sheet
	August 15, 20X4
		Assets
		Cash		$ -
		Accounts receivable		250,000
		Inventory		750,000
		Property, plant, & equipment (net)		860,000
		Total assets		$ -
		Liabilities
		Accounts payable	$ 125,000
		Accrued liabilities	260,000
		Notes payable	-
		Total liabilities		$ -
		Stockholders' equity
		Preferred stock, 8% noncumulative	$ -
		Common stock, $5 par	-
		Paid-in capital in excess of par	-
		Retained earnings	310,000
		Total stockholders' equity		-
		Total liabilities and equity		$ -
CUMULATIVE PREFERRED STOCK OPTION:
	BRANFORD CORPORATION
	Balance Sheet
	August 15, 20X4
		Assets
		Cash		$ -
		Accounts receivable		250,000
		Inventory		750,000
		Property, plant, & equipment (net)		860,000
		Total assets		$ -
		Liabilities
		Accounts payable	$ 125,000
		Accrued liabilities	260,000
		Notes payable	-
		Total liabilities		$ -
		Stockholders' equity
		Preferred stock, 6% cumulative	$ -
		Common stock, $5 par	-
		Paid-in capital in excess of par	-
		Retained earnings	310,000
		Total stockholders' equity		-
		Total liabilities and equity		$ -
CONVERTIBLE PREFERRED STOCK OPTION:
	BRANFORD CORPORATION
	Balance Sheet
	August 15, 20X4
		Assets
		Cash		$ -
		Accounts receivable		250,000
		Inventory		750,000
		Property, plant, & equipment (net)		860,000
		Total assets		$ -
		Liabilities
		Accounts payable	$ 125,000
		Accrued liabilities	260,000
		Notes payable	-
		Total liabilities		$ -
		Stockholders' equity
		Preferred stock, 4% convert/cumul.	$ -
		Common stock, $5 par	-
		Paid-in capital in excess of par	-
		Retained earnings	310,000
		Total stockholders' equity		-
		Total liabilities and equity		$ -
(b)
(c)
(d)
(e)
(f)

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