See the attach file 2017-09-08 - GLO-STICK, INC. - ASSIGNMENT 1 - AIPA.pd

FSI Financial Statement Investigation A02-04-2015 Revised 09-08-2017 WRITE-UP ASSIGNMENT #1 Glo-Stick, Inc. In late 2016, Norman Davis, the estranged brother of Mary Davis (the president and chief executive officer of Sunshine Lite-Stick, Inc.), formed a company, Glo-Stick, Inc., to compete with his sister's company, Sunshine Lite-Stick, Inc. Mary Davis was stunned when she learned of her brother's actions to form Glo-Stick at the end of 2016. She had anticipated that competition for her Sunshine Lite-Stick product would likely appear after five years. Her brother's formation of Glo-Stick would represent real direct competition to Sunshine. Norman Davis had been careful in obtaining a separate patent for the technology needed to develop the Glo-Stick product for his company so as not to violate the patent rights for the Sunshine product. On January 1, 2017, Norman Davis, established Glo-Stick, Inc. with 300,000 shares of Glo-Stick common stock at $1 per share. Glo-Stick raised $300,000 of cash by selling all 300,000 shares to Norman Davis for $300,000 on January 1, 2017. Also, on January 1, 2017, Glo-Stick, Inc., entered into the following transactions: January 1Borrowed $300,000 from a local bank to help the Company finance the business. January 1Purchased the Glo-Stick patent from Norman Davis for $120,000 in cash. January 1Paid $200,000 for a building where the Glo-Sticks would be manufactured. January 1Paid $150,000 for machinery that would be used to produce the Glo-Sticks. January 1Paid $50,000 to suppliers for plastics and chemicals to be used in the production of GloSticks. During 2017, Glo-Stick, Inc. went into operation. To prepare the financial statements in early January 2018, Brian Murray, the firm's bookkeeper, produced the following data: 1. Besides the $50,000 of plastics and chemicals purchased on January 1, 2017, during 2017 GloStick, Inc. purchased an additional $250,000 of plastics and chemicals from suppliers. Of this $250,000 total, during the year the Company paid its suppliers cash of $200,000 and still owed suppliers $50,000 on December 31, 2017. 2. Throughout 2017, Glo-Stick, Inc., paid advertisers $20,000 to market Glo-Sticks. The Company expected to pay another $20,000 for advertising in 2018. 3. During the 12 months ended December 31, 2017, the Company expended $400,000 on direct manufacturing labor, and on manufacturing-related overhead (rent, utilities, supervisory labor). 4. An additional $120,000 was spent on corporate salaries and other corporate expenses. 5. During the twelve months ended on December 31, 2017, Glo-Stick sold $950,000 of its product. Norman J. Bartczak, Columbia University, prepared this case as a basis for class discussion. It is not i ntended to illustrate either effective of ineffective handling of an administrative situation. Copyright 2015, 2017 Norman J. Bartczak. 1 Glo-Stick, Inc. - Written Assignment #1 A02-04-2015 Revised 09-08-2017 The largest single purchaser still owed Glo-Stick, Inc., $100,000. All other customers' accounts were paid in full by year-end. 6. On December 31, 2017, the Company paid the local bank $25,000 in interest on the $300,000 bank loan. The $300,000 principal on the bank loan was still owed to the bank at year-end and was not due to be paid back until January 1, 2020. In preparing his state of the corporation report, Davis noted with some anxiety that the company's bank balance had fallen to $165,000 from the $600,000 originally raised on January 1, 2017 from the sale of its shares and the bank loan. It bothered him because he believed that the company was really doing quite well, and he failed to understand why the bank account did not appear to reflect this condition. In surveying the transactions incurred by Glo-Stick, Inc., over the entire year, he noted the following: 1. The building in which the Glo-Sticks would be manufactured was expected to last for 40 years. 2. The machinery used in the production of the Glo-Sticks was general purpose machinery, not restricted to Glo-Stick production, that might reasonably be expected to last for 10 years. 3. There was still an inventory at December 31 of $25,000 worth of plastics and chemicals in the warehouse; however, there were no finished or partially finished Glo-Sticks at year-end. 4. The Glo-Stick patent has a legal life of 20 years but Norman Davis was convinced that another competitor to Sunshine and Glo-Stick would most likely appear after 4 years. Questions: 1. Using the attached T-Accounts, as best you can record (\"bookkeep\") the transactions for the Glo-Stick, Inc. from the period January 1, 2017 through December 31, 2017. Assume the Company's tax rate is 40%. Also, assume that the Company uses straight-line depreciation and straight-line amortization. 2. Close out to the Income Statement T-Account to the Balance Sheet T-Accounts. How much net income (exclusive on income taxes) did Glo-Stick, Inc. earn in 2017? 3. Based on your results, in your opinion, did Glo-Stick perform better, the same, or worse than Sunshine Lite-Stick in its first year of operations. Briefly explain below. 6 Glo-Stick, Inc. - Written Assignment #1 A02-05-2015 Revised 09-08-2017 GLO-STICK, INC. 1. Using the following T-Accounts, record (\"bookkeep\") the transactions for Glo-Stick, Inc. from the period January 1, 2017 through December 31, 2017. NOTE: You will need to supply \"titles\". The number of TAccounts supplied is \"suggestive\" as to how many you will need. Balance Sheet T-Accounts ----------------------------------------------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | 5 Glo-Stick, Inc. - Written Assignment #1 A02-04-2015 Revised 09-08-2017 GLO-STICK, INC. Balance Sheet T-Accounts (continued) ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | 6 Glo-Stick, Inc. - Written Assignment #1 A02-05-2015 Revised 09-08-2017 GLO-STICK, INC. Balance Sheet T-Accounts (continued) ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | ----------------------------------------------| | | | | | | | | ----------------------------------------------| | 5 Glo-Stick, Inc. - Written Assignment #1 A02-04-2015 Revised 09-08-2017 Income Statement T-Accounts to be "Closed Out" to Retained Earnings on the Balance Sheet --------------------------------------------------------------------------------Expenses | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6