Reference no: EM131305530

REQUIREMENT 1 -

It was early November 20X5, and the Hydromaint people requested a meeting with you and Tom Lockhart.  They wished to brief you on several 20X5 events and strategy changes. Nick Riley reported that the maintenance business had grown significantly during 20X5. The company now has contracts in Missouri, Kansas, and parts of Illinois.

Ray Ballard reported that the company had decided to give up their board seat with PVCO, effective January 1, 20X5, to concentrate on their new goal of manufacturing their own line of pumps, valves, and parts.

You asked Ray what interest he now had in the operation of PVCO.  He responded that Hydromaint's influence was now nil over this privately held company.  Although he had little or no contact with PVCO personnel, Hydromaint would continue to hold its stock as an investment.

Ray went on to say that the company had acquired the stock of a small manufacturer in Kansas City. The company was LS Pump/Value, Ltd. and was a family business. However, two aging sisters who held a 40 percent interest were interested in selling out. Two younger brothers (also with a 40 percent interest) are actively involved in managing the business and want to continue to do so. Their successful management of the growing business had caught the interest of Nick and Ray. They had known and respected the Santano brothers for years.  Their product line was top quality and their company seemed to be well-respected in the industry.  Because Luis and Carl Santano would remain with the company, the people at Hydromaint were very excited to become affiliated with LS-Pump/Valve.

This, of course, required financing. Jerry Loos reported that a NYSE dealer was successful in placing an issue of 5,600 shares of $100 par value, convertible preferred stock at $195 per share.  Appropriate filings were made with the SEC and the State of Missouri, and the preferred stock was issued on March 1, 20X5. A total of 10,000 shares were authorized. The dividend rate is 6 percent, participating to 8 percent.  The conversion rights call for common shares to be exchanged for the preferred shares on a share-for-share basis. The dealer absorbed the issue costs and recovered the profit margin on the sale to the public. The preferred stock has preference in involuntary liquidation to the extent of the issue price.

This stock issue provided a good portion of the financing needed to buy out the Santano sisters. The Santano sisters' stock was purchased on March 31, and Ray Ballard was named to the LS Pump/Valve board on the same date. Nick also mentioned that due to its strong cash position, the Company had purchased 980 shares of the common stock on April 1, 20X5 from Ray's father to keep in treasury.

Of course, Coe & Lane was expected to continue to provide the independent audit. Jerry called you in mid-December with a problem. He indicated that Hydromaint's board had decided to declare a cash dividend of $50,000 to the current shareholders on December 17. Given the participating aspect of the preferred stock issue and the April purchase of the treasury shares, Jerry was trying to figure out how to allocate the $50,000 among the current preferred and common stockholders before the looming January 20X6 payment date. He assured you that no other common or preferred stock transactions had occurred as of the declaration date.

REQUIRED: Prepare a schedule for Jerry showing the appropriate allocation of the $50,000 dividend among the preferred and common shareholders, and provide a concise explanation of your calculations in a short letter, in proper form, addressed to the client.

REQUIREMENT 2 -

In early January 20X6, you received an invitation to meet at the local country club to discuss the upcoming Hydromaint audit with Nick Riley, Ray Ballard, and Jerry Loos.

Ray noted that in a surprise year end move, Hydromaint had negotiated to acquire LS-Pump/Valve (the business and selected net assets). To complete the purchase, Hydromaint paid $2,103,350 cash and gave up its shares of LS-Pump/Valve. No cash was transferred from LS-Pump to Hydromaint. The Santano brothers agreed to settle LS-Pump's tax and a few other obligations, and LS-Pump was dissolved. Luis and Carl Santano have enthusiastically agreed to continue to manage the pump/valve manufacturing business as senior vice-presidents of Hydromaint. For details of the net assets acquired by Hydromaint, refer to the journal entry made to record the acquisition transaction. Jerry reported that he used LS Pump's 20X5 year-end financials to make the entry.

Next, you asked Ray how the purchase was financed. Ray replied that it was partially financed from operations and that the common stock of Hydromaint was split 10 for 1 on December 30, after which Luis and Carl Santano each bought 20,000 shares at $32 per share. The par value of the common stock was changed to $1 to accommodate the stock split. For the same reason, the number of shares authorized was increased to 250,000. Since the preferred stock is convertible, a comparable split of both shares issued and authorized was made to the preferred stock, resulting in 100,000 authorized shares. The par value was changed as well. The deal was closed late in the afternoon on December 31, 20X5.

Finally, Ray informed you that Hydromaint had granted stock options to the officers and stock appreciation rights to Jerry Loos on January 2, 20X5. The vesting period for both of these stock compensation plans is two years. A similar stock options package will go into effect for the Santano brothers on January 1, 20X6. 

Jerry Loos assured you that he would have preliminary 20X5 financial statements ready for your review sometime during the third week of January 20X6. Sure enough, you received these statements on January 17th.  As usual, you planned to prepare a set of questions for Jerry's response.

REQUIRED: Attached are the journal entries and related financial statements prepared by Jerry Loos. Do not expect to find a statement of cash flows, statement of changes in stockholders' equity, notes, or computations for earnings per share. You and Jerry have agreed that you will draft these items after the audit is completed. You and Jerry have agreed that the appropriate accounting for income taxes would have to wait until the completion of the audit. Therefore, Jerry has simply recorded income tax payments and an estimate of income tax expense based on book income.  Review this financial information and prepare a list of questions and informational requirements for Jerry Loos. Please be very specific when writing your questions and include the reason for each question (i.e., why do you need the information you are asking for) and, where appropriate, a reference to the appropriate accounting standard using the FASB codification.

REQUIREMENT 3 -

Jerry Loos called to let you know that he had completed responses to your questions. Your assistant, Pam Mason, was already at Hydromaintreviewing documentation on the purchase of the assets from LS-Pump/Valve.  The workload this year was heavy enough that Mitch Jorgenson was assigned to assist Pam Mason in mailing confirmation letters. 

Attached is your list of questions and Jerry's responses. Based on audit procedures thus far, you and Pam are generally satisfied that the accounts and Jerry's responses are supported by underlying facts. Pam has already audited the payroll and insurance documents and found no discrepancies. She attributed the decrease in wages payable to the fact that there were just a few days and no overtime for the current year in the pay period that extended past year end. In addition to the information from Jerry in response to your questions, Pam Mason noted the following issues:

In her examination of service revenues, Pam found that the unearned revenue account had not been adjusted to reflect the fact that an advance payment customer had switched to monthly billings during the year.

Pam discovered that the rental contract for office equipment had been renegotiated to upgrade the furniture and equipment.  A new five-year lease for $7,200 per year was dated January 1, 20X5.  The useful life of the property covered by the lease would be about 10 years and the purchase price would have been in excess of $50,000. 

Next, Pam asked whether a disclosure was required as a result of the preferred stock issuance.  Also, she had been told by Midwest National Bank that Hydromaint could currently obtain an equipment loan at an interest rate of 6 percent.

Pam also confirmed that Hydromaint's dividend was declared before the LS-Pump/Valve purchase was closed.

Attached are your list of questions and Jerry's responses. Jerry has agreed to adjust the company's accounts for all corrections proposed by C & L.  Except for the issues raised by Pam Mason and those items revealed in your questions and Jerry's responses, no issues have come to light in the course of your audit.

Pam checked with Linda Durkee and was told that she finished her research on stock options and, based on several aspects of the options, found that Hydromaint cannot deduct the intrinsic value of the compensation until the year during which the options are exercised. The same is true for the stock compensation plan provided to Jerry Loos.

REQUIRED: Attached are your questions and Jerry's responses.  Based on this information and the data developed by Pam, prepare your suggested correcting and adjusting journal entries for Hydromaint. Also create the pension disclosure note. Your journal entries must be supported by descriptive explanations, calculations and authoritative sources where appropriate.

Attachment:- Accounting Assignment.rar