REQUIREMENT 12

In early January 20X6, you received an invitation to meet at the local country club to discuss the upcoming Hydromaint audit with Nick Riley, Ray Ballard, and Jerry Loos.

Ray noted that in a surprise year end move, Hydromaint had negotiated to acquire LS-Pump/Valve (the business and selected net assets). To complete the purchase, Hydromaint paid $2,103,350 cash and gave up its shares of LS-Pump/Valve. No cash was transferred from LS-Pump to Hydromaint. The Santano brothers agreed to settle LS-Pump's tax and a few other obligations, and LS-Pump was dissolved. Luis and Carl Santano have enthusiastically agreed to continue to manage the pump/valve manufacturing business as senior vice-presidents of Hydromaint. For details of the net assets acquired by Hydromaint, refer to the journal entry made to record the acquisition transaction. Jerry reported that he used LS Pump?s 20X5 year-end financials to make the entry.

Next, you asked Ray how the purchase was financed. Ray replied that it was partially financed from operations and that the common stock of Hydromaint was split 10 for 1 on December 30, after which Luis and Carl Santano each bought 20,000 shares at $32 per share. The par value of the common stock was changed to $1 to accommodate the stock split. For the same reason, the number of shares authorized was increased to 250,000. Since the preferred stock is convertible, a comparable split of both shares issued and authorized was made to the preferred stock, resulting in 100,000 authorized shares. The par value was changed as well. The deal was closed late in the afternoon on December 31, 20X5.

Finally, Ray informed you that Hydromaint had granted stock options to the officers and stock appreciation rights to Jerry Loos on January 2, 20X5. The vesting period for both of these stock compensation plans is two years. A similar stock options package will go into effect for the Santano brothers on January 1, 20X6.

Jerry Loos assured you that he would have preliminary 20X5 financial statements ready for your review sometime during the third week of January 20X6. Sure enough, you received these statements on January 17^th. As usual, you planned to prepare a set of questions for Jerry's response.

REQUIRED:

Attached are the journal entries and related financial statements prepared by Jerry Loos. Do not expect to find a statement of cash flows, statement of changes in stockholders? equity, notes, or computations for earnings per share. You and Jerry have agreed that you will draft these items after the audit is completed. You and Jerry have agreed that the appropriate accounting for income taxes would have to wait until the completion of the audit. Therefore, Jerry has simply recorded income tax payments and an estimate of income tax expense based on book income. Review this financial information and prepare a list of questions and informational requirements for Jerry Loos. Please be very specific when writing your questions and include the reason for each question (i.e., why do you need the information you are asking for) and, where appropriate, a reference to the appropriate accounting standard using the FASB codification.

Dividend Allocation Preferred Stock: Par Value Shares Issued Preference Rate Participation Rate Common Stock: Par Value Shares Issued Equivalency Rate 6% 6% Dividends Declared Step 1: Preference to preferred shareholders Total prefered par value $0.00 Preference rate 6% Preference to preferred holders $0.00 Step 2: Equivalency to common shareholders Total common par value $0.00 Equivalency rate 6% Equivalency to common holders $0.00 Step 3: Distribution before participation Total dividend declared Preference to preferred holders Equivalency to common holders Remaining participation dividend Step 4: Allocation of remaining dividend Combined common and preferred par value Partical participation % Participating dividend $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 -6% $0.00 If Step 3