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Accounting Case: LaSorda Company's management has always relied on very conservative accounting policies, resulting in the following balance sheet as of December 31, 20X8.
LASORDA COMPANY BALANCE SHEET DECEMBER 31, 20X8
ASSETS
Current assets
Cash
$ 15,000
Short-term investments in stock
$ 45,000
Less: Allowance for decline in market value
5,000
40,000
Accounts receivable
$ 75,000
Less: Allowance for uncollectable
7,500
67,500
Inventory
125,000
Total current assets
$247,500
Property, plant, & equipment
Land
$ 85,000
Buildings
$289,000
Less: Accumulated depreciation
78,319
210,681
Equipment
$ 80,000
48,000
32,000
Total property, plant & equipment
327,681
Intangibles
Patent
28,000
Total assets
$603,181
LIABILITIES & STOCKHOLDERS" EQUITY
Current liabilities
Accounts payable
$ 22,000
Salaries payable
7,000
Taxes payable
8,000
Total current liabilities
$ 37,000
Long-term liabilities
Bank loans payable
115,000
Total liabilities
$152,000
Stockholders' equity
Common stock
$ 50,000
Retained earnings
401,181
451,181
Total liabilities & stockholders' equity
George LaSorda, president of the company has been approached by a party desiring to buy the firm at a price equal to 200% of stockholders' equity. George agreed that the price would be fair if stockholders' equity were revised to reflect the following:
Instructions -
a. Which of George's preferences violate generally accepted accounting principles? Briefly explain the reason for the violation other than consistency principle.
b. Prepare the balance sheet and compute the purchase price that would result if George's preferences were used. Use generally accepted accounting principles throughout, especially where George's alternatives are technically incorrect. (Hint: All changes in the company's income will be reflected by the changes in retained earnings.) Ignore the consistency principle violations.
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