Objectives: Demonstrate application of accounting concepts related to debt and fixed assets.
· Calculation of interest on discounted and non-discounted notes.
· Recommend best financing option and provide supporting evidence
· Create required accounts to record liabilities
· Calculate required adjustments
· Calculate depreciation using various methods
· Determine book value of assets
· Make appropriate recommendations regarding asset dispositions
Scenario: Eric’s Electronics (EE) sells computer parts. You are the company accountant and have been charged with making several decisions regarding the company’s future.
Part 1: 10%
The company has outgrown its current facility and must borrow $250,000. The company has sent you to speak with the Bank about the financing options. After determining the best option, you must justify your selection to the Board of Directors.
Part 2: 40%
Eric’s Electronics offers a warranty on its parts of 90 days. You must make certain that the proper accounts are created and maintained.
Part 3: 50%
The company owns fixed assets and with the expansion it must determine whether assets should be replaced. You have been asked to provide the required financial information that will support the recommended course of action.
PART 1: Eric’s Electronics has found a perfect location to house the increasing production. The company will need to have $250,000 and anticipates paying off the loan in 15 months. The company has sent you to identify the possible financing options.
The bank has several options for loans and is willing to make the following arrangements for Eric’s Electronics:
1. 15 month Discounted Note at 5%
2. 15 month Note at 5.5%
3. 15 month Discounted Note for $225,000 at 4.5% concurrent with a 3 month note at 7.5% for the remainder of the amount required to be borrowed.
Given these three options, you are required to determine the best option for the company and present your finding to the Board of Directors with supporting calculations. Be sure to show the total interest paid, the interest rate, and the amount of the Note.
PART 2: Eric’s Electronics sells computer parts. The company is required to warranty its products for 90 days. Historical Data indicates that 4% of monthly sales result in warranty claims. The monthly sales for February were $567,550.
The following warranty claims were made against the February sales.
3/10 $75 3/13 $145 3/15 $222 3/18 $108
3/21 $119 3/24 $281 3/27 $101 3/29 $41
3/31 $588 4/01 $66 4/04 $218 4/08 $951
4/15 $1040 4/17 $71 4/19 $822 4/23 $403
4/27 $52 4/28 $373 4/29 $169 5/02 $600
5/05 $2775 5/09 $313 5/12 $781 5/14 $385
5/16 $488 5/20 $1089 5/24 $966 5/26 $509
5/28 $776 5/29 $182 5/30 $426 5/31 $600
6/01 $1006 6/04 $2611 6/10 $490 6/15 $745
6/20 $38 6/21 $1245 6/25 $949 6/27 $800
6/28 $459 6/29 $530 6/30 $295 7/01 $1267
Prepare the journal entries to create and close the warranty period for the contingent liability due to sales from February.
Post claims to the appropriate T-accounts to illustrate the journal entries.
Part 3 Eric’s Electronics is moving into new facilities and must determine whether it should retain or replace various fixed assets. Complete the analysis of each of the following transactions.
1. On March 19, 2007 the company purchased a diagnostic system for $197,000. The system has a useful life of 10 years and a residual value of $15,000. The company depreciates this asset using Double Declining Balance. On July 18, 2016 the company has an offer to sell the system for $19,000. Show the journal entry that would record this transaction. What would you recommend that the company do and why?
2. On July 14, 2011 the company purchased a point of sale computer system for $82,000. The system has a useful life of 8 years and a residual value of $10,000. The company depreciates this asset using Straight Line. On April 3, 2016 the company has the option to trade this system for a newer model with an MSRP of $100,000. Eric’s Electronics would pay $50,000 in addition to the trade. What would the journal entry be to record this transaction? What is your recommendation and why?
3. This year the company purchased a service vehicle on November 11, for $49,000. The vehicle has a useful life of 7 years or 140,000 miles with a residual value of $7,000. The company is unsure whether to use Straight Line or Units of Production Method. It is anticipated that the vehicle will be driven at least 30,000 miles per year. Which method of depreciation should Eric’s Electronics use? Provide calculations to justify your position.
4. On May 24 of this year Eric’s Electronics purchased the new facility on ½ acre of land for $250,000. Current land cost is $10,000 per acre. The company will use Straight Line Depreciation with a 25 year useful life and a residual value of $50,000. Record the journal entry for this purchase. Record the journal entry for the first year depreciation