.494px;=”” block;=”” baseline;=”” 14px;=”” sans-serif;=”” arial,=”” helvetica,=”” neue”,=”” “helvetica=”” web”,=”” grot=”” “haas=”” inherit;=”” 6px;=”” 0px=”” border-box;=””>LaSorda Company’s management has always relied on very conservative accounting policies, resulting in
the following balance sheet as of December 31, 2014.
LASORDA COMPANY
BALANCE SHEET
DECEMBER 31, 2014
ASSETS
Current assets
Cash
Short-term investments in stock
Less: Allowance for decline in market value
Accounts receivable
Less: Allowance for uncollectable
Inventory
Total current assets
Property, plant, & equipment
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total property, plant & equipment
Intangibles
Patent
Total assets $ 15,000
$ 45,000
5,000
$ 75,000
7,500 40,000
67,500
125,000
$247,500 $ 85,000
$289,000
78,319
$ 80,000
48,000 210,681
32,000
327,681
28,000
$603,181 LIABILITIES & STOCKHOLDERS” EQUITY
Current liabilities
Accounts payable
Salaries payable
Taxes payable
Total current liabilities
Long-term liabilities
Bank loans payable
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total liabilities & stockholders’ equity $ 22,000
7,000
8,000
$ 37,000
115,000
$152,000
$ 50,000
401,181 451,181
$603,181 George LaSorda, president of the company has been approached by a party desiring to buy the firm at a
price equal to 200% of stockholders’ equity. George agreed that the price would be fair if stockholders’
equity were revised to reflect the following: Short-term investments-The market value of the short-term investments was $85,000 on
December 31, 2014. The reported cost of $45,000 was accurate; however, the $5,000 allowance
was established long ago, and investment values have since recovered. This recovery has never
been recognized. George desires to report the company’s holdings at the market value of
$85,000.
Accounts receivable- The Allowance account is presently equal to 10% of the outstanding
receivables balance. LaSorda believes that the company should estimate uncollectible accounts
at 2% of the firm’s sales ($400,000). The balance in the Allowance account at the beginning of
the year was $3,000, and customer write-offs during 2014 totaled $7,000.
Inventory- Inventory is valued by using the LIFO method. George reports that income for the last
three years would have been $45,000 higher had FIFO been employed. (The company is only
three years old.) LaSorda desires to use FIFO when calculating the revised stockholder’s equity
figure.
Buildings-The company’s three-year-old buildings are being depreciated by the double-declining
balance method, based on a 20-year life and $30,000 residual value. George believes the
straight-line method would be more appropriate.
Equipment-The equipment, which is two years old and has no residual value, is being
depreciated using an accelerated method over a five-year life. Again, George prefers the straightline method.
Patent- The patent was acquired for $28,000 at the beginning of the current year. George
believes that this intangible should not be amortized and desires to report the patent at
acquisition cost. The original service life of the intangible should have been estimated at 10
years. Instructions
a. Which of George’s preferences violate generally accepted accounting principles? Briefly
explain the reason for the violation other than consistency principle.
b. Prepare the balance sheet and compute the purchase price that would result if George’s
preferences were used. Use generally accepted accounting principles throughout, especially
where George’s alternatives are technically incorrect.
Hint: All changes in the company’s income will be reflected by the changes in retained
earnings. Ignore the consistency principle violations.