I need help with the journal entries please for #1 and #2. Case Background Introduction: The projected company is ValueV
Posted: Wed May 04, 2022 6:55 am
I need help with the journal entries please for #1 and #2.
Case Background Introduction:
The projected company is ValueVehicle (VV), which is a
hypothetical electrical vehicle manufacturer. VV is a public listed
company and is required to comply with all regulations from SEC and
GAAP. Your group is the accounting department, and you are
responsible for disclosing financial information to the SEC and the
public.
Company basic
financial information
VV (formerly ValueVehicle, Inc.)
is an American electric vehicle and clean energy company based in
Fayetteville, North Carolina. VV's current products include
electric cars (the Model 100, Model 101, and Model 102). VV was
founded in July 2008. After 12 years in the market, VV earned its
fame as the electric passenger car manufacturer, with a market
share of 14% of the plug-in segment and 21% of the battery-electric
part.
VV started its IPO in 2012 and became a
public company, and it has 2 million outstanding shares. The stock
market price is $100 per share on December 1, 2021. The primary
financial statutes (on December 1, 2021) are illustrated as
follows:
Total assets: $2 billion. Current
assets: $50 million (including finished products inventory $30
million). Long-term liability: $50 million. Current liability: $10
million. Common stock: $10 million (VV has no dilutive shares,
bonds, or preferred shares).
The profit target in 2021 is to
earn $10 million net income, which also means that the targeted EPS
is $5 per share. By November 30, 2021, VV has achieved $8 million
net income (after tax and interest). To achieve the
targeted goal, VV needs to have a two million dollar net income
(after tax and interest deduction, the income tax rate is 21%) in
the last month of 2021. The transactions of this
month are illustrated as follows. Your team is required to record
the transactions in December 2021 based on your professional
judgment.
Please recognize the following detailed
transactions and complete the journal entries. You need to make the
necessary argument if the journal entries have several
options.
1. On December 22, the accounting team is required to
make a financing decision for the 2022 annual budget. VV has a $5
million budget shortage that needs financing. You have three
options available for the demanding $5 million. First, VV can
borrow the money from a local bank with a 12% annual interest.
Second, sell $5 million treasury stocks. Third, initiate $5 million
non-participatory preferred stocks with a 12% dividend ratio.
Please select one option and clarify your reasons.
I think option 2 would be best but I'm not sure how to put
that as an entry.
2. VV bought $20 million in equity securities from J
Company. The investment is 19% of the voting common stock of the J
Company, but the CFO of J company is selected from VV. VV has
impact on the J Company's decision-making. VV uses an equity
approach to record this investment. The balance of the J company
investment in December 2021 is $20 million. Some managers argue
that the impact is not significant and want to change the
accounting approach to use fair value and recognize the investment
gains. The J Company has zero net income in 2021, but its stock
price has increased to $21.4 million. Do you agree with the change
and recognize the $1.4 million gains? Please clarify your reasons
for your judgment.
Case Background Introduction:
The projected company is ValueVehicle (VV), which is a
hypothetical electrical vehicle manufacturer. VV is a public listed
company and is required to comply with all regulations from SEC and
GAAP. Your group is the accounting department, and you are
responsible for disclosing financial information to the SEC and the
public.
Company basic
financial information
VV (formerly ValueVehicle, Inc.)
is an American electric vehicle and clean energy company based in
Fayetteville, North Carolina. VV's current products include
electric cars (the Model 100, Model 101, and Model 102). VV was
founded in July 2008. After 12 years in the market, VV earned its
fame as the electric passenger car manufacturer, with a market
share of 14% of the plug-in segment and 21% of the battery-electric
part.
VV started its IPO in 2012 and became a
public company, and it has 2 million outstanding shares. The stock
market price is $100 per share on December 1, 2021. The primary
financial statutes (on December 1, 2021) are illustrated as
follows:
Total assets: $2 billion. Current
assets: $50 million (including finished products inventory $30
million). Long-term liability: $50 million. Current liability: $10
million. Common stock: $10 million (VV has no dilutive shares,
bonds, or preferred shares).
The profit target in 2021 is to
earn $10 million net income, which also means that the targeted EPS
is $5 per share. By November 30, 2021, VV has achieved $8 million
net income (after tax and interest). To achieve the
targeted goal, VV needs to have a two million dollar net income
(after tax and interest deduction, the income tax rate is 21%) in
the last month of 2021. The transactions of this
month are illustrated as follows. Your team is required to record
the transactions in December 2021 based on your professional
judgment.
Please recognize the following detailed
transactions and complete the journal entries. You need to make the
necessary argument if the journal entries have several
options.
1. On December 22, the accounting team is required to
make a financing decision for the 2022 annual budget. VV has a $5
million budget shortage that needs financing. You have three
options available for the demanding $5 million. First, VV can
borrow the money from a local bank with a 12% annual interest.
Second, sell $5 million treasury stocks. Third, initiate $5 million
non-participatory preferred stocks with a 12% dividend ratio.
Please select one option and clarify your reasons.
I think option 2 would be best but I'm not sure how to put
that as an entry.
2. VV bought $20 million in equity securities from J
Company. The investment is 19% of the voting common stock of the J
Company, but the CFO of J company is selected from VV. VV has
impact on the J Company's decision-making. VV uses an equity
approach to record this investment. The balance of the J company
investment in December 2021 is $20 million. Some managers argue
that the impact is not significant and want to change the
accounting approach to use fair value and recognize the investment
gains. The J Company has zero net income in 2021, but its stock
price has increased to $21.4 million. Do you agree with the change
and recognize the $1.4 million gains? Please clarify your reasons
for your judgment.