Severn Logistics Severn Logistics (SL) was privately incorporated in 1985 and services the Greater Toronto Area and the Highway 11 corridor in Ontario. SL is in the less than load business, making its money by filling the trucks with several smaller loads and delivering them to and from Toronto.

Recently, the financial controller for SL retired, leaving the owner, Sven Bower looking for a new one. After several months of interviews, Sven made an offer to you for the position and with a hefty pay raise and substantial benefits, you accepted. This is your first week on the job, it is now December 31, and you need to make all of the property, plant, and equipment journal entries today that havent been done as of yet. SLs year end is December 31.

The following events require your attention:

On July 1, SL purchased land south west of Toronto that has the potential to be another loading terminal. In addition to the land, the purchase also included two transport trailers and one cube van. The total purchase price was $5.6 million and was paid 40% in cash and the balance as a five-year loan. The loan carries an interest rate of prime plus 2% with equal annual principal payments (every July 1). Interest is also paid annually on July 1. Appraisers have valued the land at $6 million, the two transport trailers at $220,000 each, and the cube van at $110,000. Although the transaction has taken place and possession has transferred, no entry has been made. The expected useful life of the trailers and the van are estimated at six years each. SL depreciates its trailers on a straight-line basis. Residual value is estimated at $10,000 for each trailer and zero for the van. On August 1, SL sold one of its buildings in Northern Ontario for $600,000. The building originally cost SL $250,000 and had accumulated depreciation of $118,000 at the time of the sale. Depreciation of $15,000 that had accumulated up to August 1 had not been recorded in the books. The proceeds were received in cash. On January 1, the previous controller determined that trucks with a cost of $575,000 and accumulated depreciation of $115,000 would actually have an estimated useful life of eight more years with no residual. The previous estimated useful life had been 10 years, with two years having already passed (so the useful life of nine years is from January 1 and beyond). A customer list from MTC Transport was purchased by SL on September 1 for $75,000 cash. It is expected that the list will generate revenues for the next six years. SL has internally developed a strong customer list of its own. The owner, Sven, has stated that this list is worth about $220,000 if sold. A warehouse terminal and land in the Kawartha area was purchased on November 1 for $750,000 cash. The land is valued at $600,000 and the terminal at $150,000. SL depreciates terminals at 6% per year using the declining-balance method. SL has an administrative building just west of Ottawa that is recorded on its books at $800,000. The building was purchased five years ago and has been depreciated over 20 years. On December 31, it was determined that there was a major soil issue around the building, which will make it difficult to sell. It is estimated that the buildings fair value and value in use is now 30% of its original cost, with an estimated $40,000 in costs to sell. Additional information:

SL records its depreciation to the nearest month. In other words, an asset purchased October 1 would have its depreciation prorated (3/12ths). No entries have been made to reflect any of the transactions above. Prime is currently at 2%. Required Prepare journal entries, with supporting documentation, for the issues above. State any assumptions that you make.

Stealth Sky Views Stealth Sky Views (SSV) is a private company that operates tourist rides from St Johns, Newfoundland. Tourists pay for a one-hour ride that takes them to Signal Hill and up the coast. Sam, the owner, has noticed a significant increase in his rider base and is now looking at expanding by purchasing a new plane. Sam is considering several finance options (Exhibit I) and would like you, his accountant, to assist him.

Exhibit I Seaplane Financing Options The plane Sam wants to buy is expected to cost $500,000. The freight charges to deliver the plane will amount to $5,000 and the plane is expected to last 15 years with proper maintenance and will have a salvage value of $20,000. Sam depreciates his assets on a straight-line basis. Sam would like you to provide the initial recording of the asset. You may assume that payment will be some form of loan for this portion and that the $5,000 delivery will be paid in cash; in other words, it will not be part of the financing. Sam would also like you to prepare the journal entry to record depreciation for the first year.

Financing Option #1 Obtain a $500,000 loan from the Royal Bank of Ryan. The loan would be repayable in five equal principal payments plus interest on December 31 of each year. The loan would carry an interest rate of 6%. Sam would like to see the entry for the receipt of the loan and the recording of the journal entries on December 31.

Financing Option #2 Issue $500,000 of bonds. The bond issue would be developed with a stated rate of 6% and would be a 10-year bond with interest paid semi-annually on June 30 and December 31. The current market rate for a similar bond is 4%. Sam would like the journal entry for the bond issue and the journal entry for the first two interest payments. SSV would use the effective interest rate to amortize any bond discount or premium.

Financing Option #3 Issue 50,000 common shares at $10 per share to private investors. Sam currently has 100,000 common shares outstanding, with his wife holding half and Sam holding half. He also has 5,000 preferred shares outstanding. They are all owned by his father and are cumulative, paying a dividend of $4 per share. For the first time, no dividends were paid last year. It would be expected that a $100,000 dividend would be declared on November 1 of this year with a payment date of February 1. Sam would like the journal entry for the issuance of the shares and any dividend entries for this year under the assumption the dividend does get declared.

Required Provide Sam with a report that calculates each of the three financing options he has laid out, along with journal entries where requested. He would ideally like to minimize the amount of cash that he is required to repay over the next three years in order to cover operating costs. He would also like you to comment on the advantages and disadvantages of the various options. You may assume that the receipt of any cash and the purchase of the plane take place on January 1 and that SSV has a December 31 year end.

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