Following are the financial statements for Griffin Inc. for the year 2017:
Additional information: Griffin Inc. has authorized 500,000 shares of 10%, $10 par value, cumulative preferred stock. There were 100,000 shares issued and outstanding at all times during 2017. The firm also has authorized 5 million shares of $1 par common stock, with 4 million shares issued and outstanding. On January 1, 2017, Griffin Inc. acquired an asset, a piece of specialized heavy equipment, for $8 million, using cash the company had in the bank. The asset is depreciated using the straight-line method over eight years with zero salvage value. Required The management of Griffin Inc. is considering the financial statement impact of methods of financing that could have been used to acquire the equipment. For each alternative (a) and (b), provide the additional entries needed and indicate the effect on the accounting equation, and prepare revised 2017 financial statements. Assume that the following alternative actions would have taken place on January 1, 2017: a. Instead of acquiring the equipment with cash on hand, Griffin Inc. issued bonds for $8 million and purchased the equipment with the proceeds of the bond issue. Assume that the bond interest of $0.5 million was accrued and paid on December 31, 2017. A portion of the principal also is paid each year for eight years. On December 31, 2017, the company paid $1 million of principal and anticipated another $1 million of principal to be paid in 2018. Assume that the equipment would have an eight-year life and would be depreciated on a straight-line basis with zero salvage value. b. Instead of acquiring the equipment with cash on hand, Griffin Inc. issued 200,000 additional shares of 10% preferred stock to raise $8 million and purchased the equipment for $8 million with the proceeds from the stock issue. Dividends on the stock are declared and paid annually. Assume that a dividend payment was made on December 31, 2017. Assume that the equipment would have an eight-year life and would be depreciated on a straight-line basis with zero salvage value.
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