XYZ, Inc. owns DFE Co., which they bought for $1,153,000 several years ago. It is fully consolidated and the correct consolidation entries have already been recorded in the XYZ, Inc. trail balance. Due to changing technology, XYZ, Inc. determined to examine the investment to see if it was impaired. The identified assets originally appraised at 817,000. The new appraisal, at December 31, 2014, puts the total fair value for DFE at 961,000 with identifiable assets at $769,000.

XYZ, Inc. has an amount of $2,884,000 in a suspense account on its trial balance. The details of this amount are:

Legal & administrative cost of obtaining patent	$481,000
Cost of development of product patented	$1,442,000
Cost of defense of 2014 law suit challenging the patent	$961,000

Other than any assets discussed above, the company has plant and equipment with cost, acquisition dates, etc., as shown:

Acquired		Life	Cost	Salvage
1/1/2011	Machine A	5 years	$192,000	%10
1/1/2012	Machine B	7 years	$18,000	None
1/1/2005	Building	35 years	$1,802,000	None

All are depreciated by straight line method. 2014 depreciation has not been recorded. On 01-01-14, the company changed its estimate for the life of machine B to 10 years from 7 years.

Capitalization:

XYZ, Inc. began 2014 with 96,100 shares of $10 par common stock that were initially issued for $17.50 per share. These shares have been recorded.

There is one issue of non-cumulative 6% $500 par preferred stock. There are 9,612 shares issued and outstanding and the dividend was declared during 2014, payable January 15 2015, to holders of record December 31, 2014. These shares have already been recorded.

On May 1, 2014, the company sold as additional 150 bonds with warrants attached. The bonds, which mature in 2009, had a face value of $1,000 each, with 6% annual rate interest coupon interest due June 1 and December 1. Each bond carries 10 warrant to buy one share of the common stock of the company at $35.00 per share one warrant +$35 buys one share. The bonds were sold to private investor at 103 (priced yield 8 %), plus accrued interest. By comparison to other similar securities, the company has determined that the day after the sale the fair value of the bonds without the warrants was 98, and the warrants would be expected to trade at 14. On December 31, 2014, warrants (with appropriate amount of cash) were tendered to the company in exchange for common stock. The average price of the common stock during 2014 was $40 per share.

On September 1, 2014, the company purchased 5,000 shares of its common stock for $3.50 per share.

Performance & incentive compensation.

XYZ, Inc. has adopted performance based compensation for the president and for the

Executive vice president for operations. The president receives 3% of the after-tax, after-bonus profit, and the EVPO receives 2%. The bonuses for 2013 were appropriately accrued at year end 2013, and were paid January 15, 2014 (accruals were reversed.)

The company adopted a stock based incentive compensation plan, effective January 1, 2014. Under the plan, the president/CEO was granted 30,000 shares options on XYZ, Inc.s common stock. The EVP operations and the CFO each received 20,000 share options. The options strike price is $50 per share. The company uses the US treasury yield on the 10-year Treasury bill as an approximation of the risk free rate. Historically, the standard deviation of the returns on the companys stock has been about $5.92. These options vest ratably per year over a three year period.

Leases

The company leases its main offices for $3,500 per month. On its face, the lease expires December 31, 2017, but there is an option to extend for an additional 5 years at $4,500 per month. The space was built out by the lessor, to suit the lessee, prior to occupancy, and there have been no significant improvements to the space since. The company also rents its electronic parts storage warehouse for $1,000 per month. That lease, which expires 12.31.201, has an automatic rent escalation of 10% per year for every year in which the consumer price index increases. All rent payments for 2014 have been made and the payments have been appropriately recorded. Note: this is space rented for the company to occupy, not space they rent out to others.

On July, 1, 2014, leased a new stamping press. The fair value of the equipment is $948,142. The lease calls for 120 monthly Payment of $8,000. XYZ, Inc.s marginal borrowing rate is higher than the 6% rate implicit in the lease. The estimated useful life of the equipment is eight years. The lease does not transfer title to lessee and does not contain any bargain purchase language.

Required: you are the controller and chief financial officer for XYZ, Inc. prepare a complete set of financial statements, including all appropriate disclosures, for XYZ, Inc. for 2014. Attach all supporting calculation, journal entries, worksheet, etc., in an electronic file of this information,

This is how it supposed to be done!

Go ahead and enter your beginning numbers (use the 2013 trial; the 2012 trial is for use in making the cash flow worksheet only) and set up your trial balance, including the formulae in the adjusted ending balance column, totals at the bottom, etc. Then, after it is balanced (meaning you got the beginning numbers recorded correctly), post the links to the balance sheet and income statement. Dont worry with the other two financial statements yet.

In the balance sheet and income statement, put in all the headings, totals, sub-totals, and so on, leaving space for earnings per share at the bottom, and not forgetting a couple of rows for the presentation of comprehensive income. Do this even though you may have to add or delete accounts as you go through the problems. Then post the links for all the line items from the trial balance. Do the same for the income statement.

When the balance sheet and income statement are set up and balanced with nothing but the beginning numbers from the adjusted balances in the trial balance, you are ready to solve the first problem. Other than earnings per share, I am not sure it matters in what order you do the problems.

After you are balanced and have posted one journal entry from the first problem, through the trial balance, check to see that you are still in balance