Alex carried on a relatively successful business as a manufacturer of a cleaning product that was well
Question:
Alex carried on a relatively successful business as a manufacturer of a cleaning product that was well received by the users. After several years of slow but steady growth in sales, his accountant suggested that he expand the business by the incorporation of a company. This would permit the sale of shares to acquire the capital necessary for a new plant and equipment. A company was eventually incorporated, but instead of selling shares to acquire the necessary capital to expand the business, Alex decided to arrange a $200,000 loan from his banker. To do so, however, Alex needed the accountant to prepare financial statements for the company to deliver to the bank. Preparing the financial statements, the accountant failed to notice that the existing land and plant building were not acquired by the corporation, but retained by Alex, and simply leased to the company on an annual basis. The accountant had included the land and building (which had a value of $250,000) as an asset of the corporation on the financial statements, without checking with Alex to determine if the property had been transferred. When the error was discovered later during negotiations with the bank, the bank insisted that Alex guarantee the loan
Managerial accounting
ISBN: 978-0471467854
1st edition
Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin