For the four years ended December 31, 2004

(in 000s except per share amounts)

2004 2003 2002 2001

Net Revenues and Gains $27,500 $26,300 $25,100 $20,900

Expenses and Losses

Cost of Sales 15,200 12,150 9,845 9,200

Operating Expenses 3,160 3,075 2,890 2,300

Other 4,570 3,966 3,146 2,214

Taxes 1,690 2,671 3,318 2,515

Net Income $2,880 $4,438 $5,901 $4,671

Common Shares Outstanding 3,000 3,000 3,000 3000

Well, Michael explained, the company that ZonTech sold the stock to, GreenSel, is having their own cash flow problems right now. They couldnt afford to give ZonTech cash, so ZonTech accepted a noninterest-bearing note due in 5 years. Although ZonTech wont see the cash for five years, since the title to the stock has passed to the new owners, it can record the gain on the sale. Lily pondered this information for a few minutes, and then queried, Why a non-interest bearing note? Most companies with a credit rating like GreenSel are paying about 15% on loans for transactions like this one.

Well, ZonTech was carrying the investment at $5,100,000 and sold it to GreenSel for $8,000,000. So they booked a $2,900,000 gain on the transaction, Michael confidentially replied.

Q2) Assuming Victor Hines LLP owed a duty of care to the Bank of Green Valley, did Victor Hines, LLP breach that duty of care? In determining whether breach occurred, make sure to perform the following accounting analysis:

1. Recreate the journal entry that ZonTech made when it sold the stock to GreenSel. How much gain was recognized on the sale of the stock? How much cash inflow did this transaction create for ZonTech

2. Calculate the present value of the note receivable using a 15% interest rate. Using the present value of the note as the only economic benefit received, recalculate the gain or loss on the transaction. At the end of the year Zon Tech would have had to declare interest receivable on the note this would set off alarms as to where is the note payable.