How will Slappey Communications’ investment in PP&E affect its financial statements?

Slappey Communications is a technology firm in Birmingham, Alabama, specializing in telecommunications, computer, and network security.  Its owner, Bill Slappey, invested nearly $770,000 in property, plant, and equipment for the business in 2014 (See “Small Firms Poised to Spend More on Plants, Equipment,” A. Loten and V. Monga, Wall Street Journal, September 3, 2014.)

Slappey spent about $100,000 to build a 1,000-square-foot “cloud storage” room, or a warehouse for network servers.  Slappey also spent about $670,000 on computers, servers, and other hardware.

Funding for the 2014 investment in the warehouse and computer hardware came from two sources.  According to the September 3, 2014, Wall Street Journal article, Slappey borrowed about $385,000 and “….used its earnings to fund the rest.”

Questions

1. Assume that Slappey borrowed the funds for the cloud storage room by signing a long-term note. What impact, if any, would this investment have on Slappey’s assets, liabilities, and equity?
2. Will the $100,000 investment in the cloud storage room impact Slappey’s 2014 income statement (again assume that Slappey borrowed the funds)? If so, what account(s) would be impacted?
3. When the Wall Street Journal article states that Slappey “…used its earnings to fund the rest,” what does this statement mean? Where did the funding come from?
4. Now assume that Slappey purchased computer hardware for $300,000 by using “…its earnings to fund the rest.” What impact will that transaction have on Slappey’s balance sheet?  On its income statement for 2014?  What accounts would be affected?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link – link forthcoming)

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