Discussion and journal

Discussion topic

Your uncle and two friends started a small hardware store several years ago. The company has expanded and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question:

We have some friends who own a hardware store in the next state. They had been having some trouble, so at the beginning of the current year, our company bought 35% of their company for a considerable amount of money. We have plans to help them get their operations turned around. We believe, in the long run, that this investment will be very profitable as they begin to make the changes we suggest. This year, that other company only made a profit of $40,000 and paid a total cash dividend of $10,000. However, in the future, we believe that they will do much better. Weve never owned a portion of a business like this before. How do we go about accounting for our ownership interest in this other company? How would you respond?

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Please respond to each of the following questions.

Part 1:

Your roommate is an English major. The roommates parents own a chain of ice cream shops located throughout Florida. One day, while returning a book at the library, your roommate poses this question:

My parents came up with this great idea. They started selling gift cards this year right before Christmas. A lot of our older customers bought bunches of these cards to give to their children and grandchildren as presents. This was one of my parents best ideas ever; the money really poured into each of the shops. However, when I asked my parents about their net income for the year, they said that these sales had not affected net income. That makes absolutely no sense. They sold thousands of gift cards for ice cream and got real money. How could their net income have not gone up through the roof? How would you respond?

Part 2:

Your roommate is an English major. The roommates parents own a chain of ice cream shops located throughout Florida. One day, while warming up to go jogging, your roommate poses this question:

My parents plan to build four new shops in the next year or so. They will need several million dollars to construct these facilities and add the necessary equipment and furniture. I thought they were going to obtain this money by adding one or two new owners. Instead, they borrowed the money by issuing bonds to a number of investors throughout the state. I dont like debt; it scares me. I dont understand why they would have taken on so much debt when they could simply have gotten new ownership involved. Why would they have made this decision? How will this affect their financial statements in the future? How would you respond?

Defend your answer to both parts with at least one article found in the CSU Online Library and include a reference list at the end of your response. The following tutorials may be helpful in locating articles in the library.

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