Reference no: EM131405125

Problem -

HIJ, Inc. presents the preliminary trial balance at 12/31/16 and the related information set out below. Entries for the related information have not been recorded, but routine transactions for operation of the company during the year have been recorded. Accordingly, you have an unadjusted trial balance at 12/31/16 . The trial balance for 12/31/15, also called the prior year trial balance, is a post-closing trial balance. The following information, for which no adjustment has been made, is available:

The unadjusted 2016 trial balance is in an Excel file, together with the prior year trial balance.

On June 30, 2016, HIJ, Inc. sold plant equipment (asset D) for $65,000. The equipment was purchased January 1, 2013 for 81,000. HIJ, Inc. used the 150% declining balance method for this asset, over an estimated useful life of 7 years, with salvage value set at $10,000. Payment received included $8,000 cash and the buyer's note for the balance. The note requires equal annual principal payments over 5 years from date, together with interest at 8%. Additionally, depreciation expense for 2016 of $90,000, related to other depreciable assets of $896,000 is appropriate and has not been recorded.

HIJ, Inc.'s book tax rates are 15% on the first $50,000 of income and 35% on the excess over $50,000.

Early in January, this year, an unusual event occurred when a big wind caused a boom to collapse, destroying $261,000 of outdoor rigging and electronic gear (asset E) that had just been installed. While this kind of accident has occurred before, it has not happened often. The boom was part of a new business venture the company began early last year. The destroyed boom can be sold for scrap in the open market at 15% of cost. The equipment related to the outdoor rigging venture, bought early last year (depreciation: straight line, no salvage, 5 year life) can be sold on the used equipment market for book value. Management is disheartened, and is abandoning this component of the business. Had the venture continued, it would have had separate cash flows and operations. The company estimates that 50% of the overall SG&A for the January was directly related to the outdoor rigging and that the SG&A costs for the year are incurred at a smooth rate all year long.

The company invests in trading securities. Year end market prices were:

Security	Price per share
Security X	3
Security Y	6
Security Z	14

 

Shares	Extension	Total
4,000	12,000
2,000	12,000
1,500	21,000	45,000

The company held 4,000 shares of X, 2,000 shares of Y and 1,500 shares of Z at 12/31/16.

The company owns 1,000 shares of HAL Corp., which are held for sale as an investment. At the end of 2016, HAL was priced at $24 per share. HIJ, Inc. bought this investment in 2015 at $16 per share. At year end 2015 , HAL was trading at $15.

HIJ, Inc. owns DFE Co., which they bought for $391,000 several years ago. It is fully consolidated and the correct consolidation entries have already been recorded in the HIJ, Inc. trial balance. Due to changing technology, HIJ, Inc. determined to examine the investment to see if it was impaired. The identifiable assets originally appraised at $277,000. The new appraisal, at December 31, 2016, puts the total fair value for DEF at $326,000, with identifiable assets at $261,000.

HIJ, Inc. has an amount of $977,000 in a suspense account on its trial balance. The details of this amount are:

Legal & administrative cost of obtaining patent	$163,000
Cost of development of product patented	$488,000
Cost of defense of 2016 law suit challenging the patent	$326,000

Other than any assets discussed above, the company has plant and equipment with cost, acquisition dates, etc., as shown:

Acquired		Life	Cost	Salvage
1/1/2013	Machine A	5 years	$65,000	10%
1/1/2014	Machine B	7 years	$6,000	None
1/1/2007	Building	35 years	$611,000	None

All are depreciated by the straight line method. 2016 depreciation has not been recorded. On 01-01-16, the company changed its estimate for the life of Machine B to 10 years from 7 years.

Capitalization:

a. HIJ, Inc. began 2016 with 32,600 shares of $10 par common stock that were initially issued for $17.50 per share. These shares have been recorded.

b. There is one issue of non-cumulative 6% $500 par preferred stock. There are 3,256 shares issued and outstanding and the dividend was declared during 2016, payable January 15 2017, to holders of record December 31, 2016. These shares have already been recorded.

c. On May 1, 2016, the company sold as additional 150 bonds with warrants attached. The bonds, which mature in 2031, had a face value of $1,000 each, with 6% annual rate interest coupon interest due June 1 and December 1. Each bond carries 10 warrants to buy one share of the common stock of the company at $35.00 per share one warrant +$35 buys one share.) The bonds were sold to a private investor at 103 (priced to yield 8%), plus accrued interest. By comparison to other similar securities, the company has determined that the day after the sale the fair value of the bonds without the warrants was 98, and that the warrants would be expected to trade at 14. On December 31, 2016, 750 warrants (with the appropriate amount of cash) were tendered to the company in exchange for common stock. The average price of the common stock during 2016 was $40 per share.

d. On September 1, 2016, the company purchased 5,000 shares of its common stock for $3.50 per share.

Performance & incentive compensation

a. The company adopted a stock based incentive compensation plan, effective January 01, 2016. Under the plan, the President/CEO was granted 30,000 share options on HIJ, Inc.'s common stock. The EVP Operations and the CFO each received 20,000 share options. The options strike price is $50 per share. The company uses the US Treasury yield on the 10-year Treasury Bill as an approximation of the risk free rate. Historically, the standard deviation of the returns on the company's stock has been about $5.92. These options vest ratably per year over a three year period.

Leases -

a. The company leases its main offices for $3,500 per month. On its face, the lease expires December 31, 2019, but there is an option to extend for an additional 5 years at $4,500 per month. The space was built out by the lessor, to suit the lessee, prior to occupancy, and there have been no significant improvements to the space since. The company also rents its electronics parts storage warehouse for $1,000 per month. That lease, which expires 12/31/2016, has an automatic rent escalation of 10% per year for every year in which the Consumer Price Index increases. All rent payments for 2016 have been made and the payments have been appropriately recorded. Note: this is space rented for the company to occupy, not space they rent out to others.

b. On July, 01, 2016, leased a new stamping press. The fair value of the equipment is $355,553. The lease calls for 120 monthly payments of $3,000. HIJ, Inc.'s marginal borrowing rate is higher than the 6% rate implicit in the lease. The estimated useful life of the equipment is eight years. The lease does not transfer title to lessee and does not contain any bargain purchase language.

Required: You are the Controller and Chief Financial Officer for HIJ, Inc. Prepare a complete (on paper) set of financial statements, including all appropriate disclosures, for HIJ, Inc. for 2016. Attach all supporting calculations, journal entries, worksheet, etc., in an electronic file of this information.

Attachment:- Assignment Files.rar