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.

This Week's Task:

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.

Panache, Inc.

The Lion Tire file contained the following:

1/2/2007 Purchase advice for the purchases 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.

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" 12/31/2007 Section of Wall Street Journal for December 31 2007. showing Lion Tire stock closed at a price of $15 per share 12/31/2007 Condensed income statement and statement of retained earnings for Lion Tire as of December 31, 2007

Panche's general ledger accounts related to Lion Tire are shown below:

Assets Current Assets Property, Plant & Equipment, net Other Assets Total Assets Lion Tire, Inc. Balance Sheet As of December 31, 2006 (in thousands) $ 60,000 600,000 240,000 Liabilities and Stockholders' Equity Liabilities $300,000 Common Stock, no par 180,000 Retained Earnings 420,000 Total Stockholders' Equity 600,000 $900,000 Total Liabilities and Stockholders' Equity $900,000 Lion Tire, Inc. Income Statement For the Year Ended December 31, 2007 Revenues Expenses Net Income $600,000 408,000 $192,000 Lion Tire, Inc. Statement of Retained Earnings For the Year Ended December 31, 2007 Beginning Retained Earnings Add Net Income Less: Cash Dividends Ending Retained Earnings $ 420,000 192.000 612,000 100.000 $512.000 Available-for-Sale Securities Date Description Debit 1/2/07 Purchase 30,000 shares of Lion Tire no-par common stock $360,000 Dividend Income Date Description 4/1/07 Cash dividend received from Lion Tire 10/1/07 Cash dividend received from Lion Tire Debit $15,000 15,000 Credit Balance $360,000 Credit Balance $15,000 $30,000