Panache Inc. is a small specialty automobile manufacturer. The company's long-time controller, Celia Brown, retired on January 10, 2016, at the age of eighty-eight years, and the president of the company, Andrew Cartwright, has hired you to be the company's new controller. Andrew would like to take Panache public in the near future, which will require audited financial statements. He has retained the public accounting firm of Booker and Helwig to audit the 2015 financial statements as a preliminary step. He knows that Celia was not always up to date on current issues, and he has asked you to review all of the company's accounting policies and procedures. Your first task is to identify problem areas and make any corrections needed before the audit begins. Andrew wants to be kept informed at all times, and when any problems are identified, he wants to be made aware of the problem as well as your solution. You've spent your first week on the job getting familiar with the company's products and processes. It's time to dig into the company's financial statements, and you decide to look at the company's investment accounting first. The company purchased several securities in 2014, including 30,000 of the 100,000 outstanding shares of Lion Tire. Lion Tire supplies the tires used on all of Panache's vehicles. Mr. Cartwright was asked and agreed to become a member of Lion Tire's board. You find the detailed records for the investment transactions and the financial statements in the Lion Tire file. During your review, you find that all of the investment transactions were properly recorded and reported except for the investment in Lion Tire. Based on your analysis of the Lion Tire transactions, draft the journal entries that should have been made in an Excel spreadsheet. Then, write a memo to Andrew explaining the accounting principles that should have been followed for Panache's investment in Lion Tire. In your memo: Illustrate how the investment will be reported in the company's balance sheet and income statement. Summarize how and why the accounting for this investment is different from the accounting for Panache's other investment securities. Devise three ways, based on past practices, that Panache can improve its future accounting principles for the Lion Tire transactions. Use examples from the Excel spreadsheet when necessary.

Panache Inc. is a small specialty automobile manufacturer. The company's long-time controller, Celia Brown, retired on January 10, 2016, at the age of eighty-eight years, and the president of the company, Andrew Cartwright, has hired you to be the company's new controller. Andrew would like to take Panache public in the near future, which will require audited financial statements. He has retained the public accounting firm of Booker and Helwig to audit the 2015 financial statements as a preliminary step. He knows that Celia was not always up to date on current issues, and he has asked you to review all of the company's accounting policies and procedures. Your first task is to identify problem areas and make any corrections needed before the audit begins. Andrew wants to be kept informed at all times, and when any problems are identified, he wants to be made aware of the problem as well as your solution. You've spent your first week on the job getting familiar with the company's products and processes. It's time to dig into the company's financial statements, and you decide to look at the company's investment accounting first. The company purchased several securities in 2014, including 30,000 of the 100,000 outstanding shares of Lion Tire. Lion Tire supplies the tires used on all of Panache's vehicles. Mr. Cartwright was asked and agreed to become a member of Lion Tire's board. You find the detailed records for the investment transactions and the financial statements in the Lion Tire file. During your review, you find that all of the investment transactions were properly recorded and reported except for the investment in Lion Tire. Based on your analysis of the Lion Tire transactions, draft the journal entries that should have been made in an Excel spreadsheet. Then, write a memo to Andrew explaining the accounting principles that should have been followed for Panache's investment in Lion Tire. In your memo: Illustrate how the investment will be reported in the company's balance sheet and income statement. Summarize how and why the accounting for this investment is different from the accounting for Panache's other investment securities. Devise three ways, based on past practices, that Panache can improve its future accounting principles for the Lion Tire transactions. Use examples from the Excel spreadsheet when necessary.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter10: Stockholder's Equity

Section: Chapter Questions

Problem 92.4C

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Andrew would like to take Panache public in the near future, which will require audited financial statements. He has retained the public accounting firm of Booker and Helwig to audit the 2015 financial statements as a preliminary step. He knows that Celia was not always up to date on current issues, and he has asked you to review all of the company's accounting policies and procedures. Your first task is to identify problem areas and make any corrections needed before the audit begins.

Andrew wants to be kept informed at all times, and when any problems are identified, he wants to be made aware of the problem as well as your solution.

You've spent your first week on the job getting familiar with the company's products and processes. It's time to dig into the company's financial statements, and you decide to look at the company's investment accounting first.

The company purchased several securities in 2014, including 30,000 of the 100,000 outstanding shares of Lion Tire. Lion Tire supplies the tires used on all of Panache's vehicles. Mr. Cartwright was asked and agreed to become a member of Lion Tire's board. You find the detailed records for the investment transactions and the financial statements in the Lion Tire file. During your review, you find that all of the investment transactions were properly recorded and reported except for the investment in Lion Tire.

Based on your analysis of the Lion Tire transactions, draft the journal entries that should have been made in an Excel spreadsheet. Then, write a memo to Andrew explaining the accounting principles that should have been followed for Panache's investment in Lion Tire. In your memo:

Illustrate how the investment will be reported in the company's balance sheet and income statement.
Summarize how and why the accounting for this investment is different from the accounting for Panache's other investment securities.
Devise three ways, based on past practices, that Panache can improve its future accounting principles for the Lion Tire transactions. Use examples from the Excel spreadsheet when necessary.

Panache's general ledger accounts related to Lion Tire are shown below:
Available-for-Sale Securities
Date
Credit I Balance
Description
1/2/07 Purchase 30,000 shares of Lion Tire no-par common stock $360,000
Debit
$360,000
Dividend Income
Date
Credit
Description
Cash dividend received from Lion Tire
Debit
Balance
$15,000
$30,000
4/1/07
$15,000
15,000
10/1/07 | Cash dividend received from Lion Tire

Panache, Inc.
The Lion Tire file contained the following:
1/2/2007
Purchase advice for the purchase of 30,000 shares of Lion Tire at $12 per share
The following balance sheet was also in the file, with a notation that the carrying values
and fair values of Lion's assets were the same.
Lion Tire, Inc.
Balance Sheet
As of December 31, 2006
(in thousands)
Liabilities and Stockholders' Equity
Assets
Current Assets
$ 60,000 Liabilities
$300,000
Property, Plant & Equipment, net
Other Assets
600,000
240,000 | Common Stock, no par
Retained Earnings
Total Stockholders' Equity
180,000
420,000
600,000
Total Assets
$900,000 Total Liabilities and Stockholders' Equity $900,000
4/1/2007
Check stub and copy of deposit ticket with the notation "Dividend received from Lion Tire
@ $.50 per share
10/1/2007
Check stub and copy of deposit ticket with the notation "Dividend received from Lion Tire
@ $.50 per share"
Section of Wal Street Joumal for December 31, 2007, showing Lion Tire stock closed at
a price of $15 per share
12/31/2007
12/31/2007
Condensed income statement and statement of retained earnings for Lion Tire as of
December 31, 2007.
Lion Tire, Inc.
Income Statement
For the Year Ended December 31, 2007
Lion Tire, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2007
$ 420,000
Revenues
Expenses
$600,000
408.000
$192.000
Beginning Retained Eamings
Add Net Income
192.000
612,000
100,000
$512.000
Net Income
Less: Cash Dividends
Ending Retained Earnings
Page 1 of 2
ACC5328 Financial Accounting II
e 2008 Sguth LInbuergity

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