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Notes to the financial statements

ACCOUNTING POLICIES

(Current and Deferred Taxes)
									
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.
									
(Construction Contracts and Installment Sales)
									
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of long-term contracts and installment notes receivable for financial and income tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled.
									
(Deferred Taxes Not Provided on Undistributed Earnings of Subsidiary)
									
Since the financial results of the Company and its 60%-owned subsidiary are consolidated for financial reporting but earnings from the investment in the subsidiary are included in taxable income only when they are received, the basis of the investment differs for financial and income tax reporting primarily by the Company's share of the subsidiary's undistributed earnings since the date of acquisition. The undistributed earnings that have been recognized in the Company's financial statements but have not yet been included in its taxable income total approximately $250,000 at December 31, 20X1. Those earnings would become taxable through dividends or sale of the subsidiary, and a substantial portion of any dividends would be nontaxable. Deferred income taxes of approximately $65,000 have not been provided on undistributed earnings of $215,000, which arose in fiscal years before 20X1.
									
(Net Operating Loss Carryforward)
									
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes for operating losses that are available to offset future taxable income.

The Company classifies its marketable debt securities as "held to maturity" if it has the positive intent and ability to hold the securities to maturity. All other marketable securities are classified as "available for sale." Securities classified as "available for sale" are carried in the financial statements at fair value. Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in earnings; unrealized holding gains and losses are reported in other comprehensive income. Securities classified as held to maturity are carried at amortized cost.
									
[If marketable debt securities classified as "available for sale" consist of short-term investments, such as U.S. Treasury bills, carrying amount in the financial statements may be described as follows: Marketable debt securities classified as "available for sale" are carried in the financial statements at cost, which approximates fair value.]
									
[If there are declines in fair value below cost that are other than temporary, a sentence such as the following should be added: For marketable debt securities classified as held-to-maturity, declines in fair value below amortized cost that are other than temporary are included in earnings.]

(Engineering Firm)
				
The Company's revenue is derived primarily from providing engineering services under verbal fixed-fee arrangements. The revenue is recognized on the percentage-of-completion method, measured by the proportion of costs incurred to date to estimated total costs for each job. This method is used because management considers costs incurred to be the best available measure of progress on jobs in process.
				
The costs of jobs in process include all direct material and labor costs and those indirect costs related to job performance. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted jobs are made in the period in which the revisions are determined. The costs of jobs in process are charged to earnings on the percentage-of-completion method used to recognize revenues.
				
(Construction Company)
				
Revenue from construction contracts is recognized on the percentage-of-completion method, measured by the proportion of construction costs incurred to date to estimated total construction costs for each contract. That method is used because management considers costs incurred to be the best available measure of progress on contracts in process.
				
Construction costs of projects under contract include all direct material and labor costs and those indirect costs related to contract performance. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on the uncompleted contracts are made in the period in which such losses are determined. Changes in estimated profitability are recognized in the period in which the revisions are determined. The costs of construction contracts are charged to earnings on the percentage-of-completion method used to recognize revenues.

Trade accounts receivable are reported at the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are reported in the results of operations of the year in which those differences are determined, with an offsetting entry to a valuation allowance for trade accounts receivable. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.
				
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Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings  and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements.

CASH

CHANGE IN ACCOUNTING PRINCIPLES-NO RESTATEMENT

CHANGE IN ACCOUNTING PRINCIPLE-RETROSPECTIVE APPLICATION

CONTINGENCIES
Going Concern

As shown in the accompanying financial statements, the Company incurred a net loss of $1,275,000 during the year ended December 31, 20X6, and as of that date, the Company's current liabilities exceeded its current assets by $327,000 and its total liabilities exceeded its total assets by $2,272,000. Those factors, as well as the uncertain conditions that the Company faces regarding its loan agreements (as discussed in Note B), create uncertainty about the Company's ability to continue as a going concern. Management of the Company has evaluated these conditions and determined that a reduction of liabilities would alleviate this uncertainty. As a result, management has received approval from its bank creditors and is implementing its plan to reduce its liabilities through the sale of assets and issuance of additional stock to shareholders. The Company has contracted with a broker to sell the Company's vacant real property, and in the broker's opinion, a contract should be in place within 6 to 9 months. As discussed in Note F, additional stock in the amount of $500,000 was issued to existing shareholders in March of 20X7.

As shown in the accompanying financial statements, the Company incurred a net loss of $1,275,000 during the year ended December 31, 20X6, and as of that date, the Company's current liabilities exceeded its current assets by $327,000 and its total liabilities exceeded its total assets by $2,272,000. Those factors, as well as the uncertain conditions that the Company faces regarding its loan agreements (as discussed in Note B), create a substantial doubt about the Company's ability to continue as a going concern for the year following the date the financial statements are available to be issued. Management of the Company has evaluated these conditions and has proposed a plan to reduce its liabilities through sales of assets and issuance of additional stock to shareholders. The ability of the Company to continue as a going concern and meet its obligations as they become due is dependent on acceptance of the plan by the Company's bank creditors and management's ability to successfully implement the plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

(Fair Value of Recourse Obligation Not Recorded due to Immateriality of Expected Losses)
				
The Dealership has sold customer installment contracts to lending institutions. All of the contracts are for sales to individuals located in the same metropolitan area as the dealership. The buyers of the contracts generally retain small portions of the amounts for which contracts were sold as reserves, which are released to the dealership as the customers make monthly payments. The remainder is remitted to the dealership, normally within 30 days.
				
Sales or recourse contracts are not significant to earnings in 20X1 or 20X0, and the maximum exposure for repossession losses under recourse contracts is not significant at the end of either year. In the event of default under a recourse arrangement, the Dealership pays the lending institution a predetermined amount and repossesses and sells the secured vehicle. Because the maximum exposure under the present recourse obligations is not significant, no provision has been made for future losses that may result under them.
				
(Liability Recorded for Fair Value of Recourse Obligation)
				
The Company has sold loans receivable with full or partial recourse to financial institutions. The financial institutions retain portions of the proceeds from the loan sales as reserves, which are released to the Company as the loans are repaid. The outstanding balance of the recourse loans at December 31, 20X1, was approximately $1,217,000. Under those loans, the Company has maximum recourse obligations of $250,000, of which $50,000 has been recorded as the estimated fair value of the recourse obligations. In the event of default, the Company pays the financial institution a predetermined amount or forecloses and sells the real estate securing the loan.

In connection with the sale of Lane, Incorporated, in January 20X0, the Company guaranteed Lane's debt, totaling approximately $1,750,000 at April 30, 20X2, and $2,250,000 at April 30, 20X1. The guarantee is scheduled to expire in January 20X3. Examples of events that would require the Company to provide a cash payment pursuant to the guarantee include a loan default, which would result from Lane's failure to service its debt when due or noncompliance with financial covenants, and inadequacy of asset collateral. Because the fair value of Lane's asset collateral exceeds the amount of the debt obligation, significant losses are not anticipated. There is currently no recorded liability for potential losses under this guarantee, nor is there any liability for the Company's obligation to "stand ready" to fund such guarantee. Based on information gathered as part of its monitoring of risks, the Company believes there is only a remote possibility Lane will not remain current with its debt payments and the Company will be required to perform under the guarantee.

DEBT

DISCONTINUED OPERATIONS

ENVIRONMENTAL REMEDIATION COSTS

FINANCIAL INSTRUMENTS

The Company and its subsidiaries are engaged primarily in the manufacture and sale of highly diversified lines of medical, agricultural, and chemical products principally in North America. The Company performs ongoing credit evaluations of its customers' financial condition and, generally,requires no collateral from its customers.
				
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Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivables. The Company places its temporary cash investments with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across different industries and geographic areas. As of December 31, 20X1, the Company had no significant concentrations of credit risk.
				
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The credit risk for customer accounts is concentrated because the balances due from the Company's three largest customers comprise substantially all of the carrying amount. However, customer accounts typically are collected within a short period of time, and, based on its assessment of current conditions, management believes realization losses on amounts outstanding at the end of 20X5 will be immaterial, as they were in 20X4. Accordingly, customer accounts are reported at the amount of principal outstanding.
				
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The credit risk for trade accounts receivable is concentrated because most of the balances are due from individuals located in the same geographical region. Charges to the results of operations for changes in estimates of the amount collectible from trade accounts receivable totaled $44,311 in 20X5 and $37,985 in 20X4. The valuation allowance is $75,000 at the end of 20X5 and 20X4.

As disclosed in Note C, the note payable to ABC Bank at the end of 20X1 bears interest at prime payable when the note matures. To minimize the effect of changes in prime, the entity entered into an interest rate swap contract under which it pays interest at a fixed 8% rate and receives interest at prime. The cumulative $8,000 gain from changes in the swap contract's fair value that is included in other comprehensive income will be reclassified into net income when interest is paid.
				
The Company uses significant amounts of cotton in manufacturing its products. At March 31, 20X1, the Company's primary cotton supplier required a one-year firm commitment for the purchase of 250,000 pounds of cotton at a price of $.50 per pound. Since the Company expects market demand and price for cotton to decrease, the Company's risk management strategy with regard to cotton is to pay the market price for cotton at the delivery date. Consequently, the Company entered into a forward contract for delivery of 250,000 pounds of cotton on March 31, 20X2, at a $.50 per pound forward price.

IMPAIRMENT LOSS

INCOME TAXES

As of December 31, 20X9, we believe that it is reasonably possible the balance of the gross unrecognized tax benefits could decrease by $400 to $11,300 in the next 12 months due to ongoing activities with various taxing jurisdictions that we expect may give rise to settlements or the expiration of statute of limitations. We continually evaluate expiring statutes of limitations, audits, proposed settlements, changes in tax law, and new authoritative rulings.
				
We recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision. As of January 1, 20X9, accrued interest and penalties associated with uncertain tax positions were $5,600 and $6,000, respectively. For the year ended December 31, 20X9, accrued interest and accrued penalties associated with uncertain tax positions increased by $3,900 and $600, respectively.
				
We file income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. The Internal Revenue Service (IRS) completed its examination of our fiscal years 20X4 and 20X5 federal income tax returns in the last quarter of fiscal year 20X8. The returns for those years are subject to an appeals proceeding, which we anticipate will be concluded by the second quarter of fiscal year 20Y0. We expect the outcome of the appeals proceeding will not result in a material change to our financial position or results of operations. Our U.S. federal income tax returns prior to fiscal year 20X4 are closed. U.S. state jurisdictions have statutes of limitations that generally range from three to five years. Our tax returns are currently under examination in various U.S. state jurisdictions.
				
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At December 31, 20X1, the total unrecognized tax benefits were $1.7 million, and accrued interest and penalties were $228,000. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the amount recorded would reduce the effective tax rate. With an average statute of limitations of about 5 years, up to $105,700 of the unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is reasonably possible that an additional reduction in unrecognized tax benefits may occur within the fiscal year due to settlement of several worldwide tax disputes; however, quantification of an estimated range and timing cannot be made at this time.
				
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The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 20X1. The Internal Revenue Service (IRS) began an examination of the Company's U.S. income tax returns for 20X2 through 20X4 in the second quarter of 20X7 that is estimated to be completed by the end of 20X8. As of December 31, 20X7, the IRS has proposed significant adjustments to the Company's transfer pricing tax position. Management is currently evaluating those proposed adjustments. The Company does not anticipate the adjustments, if accepted, would result in a material change to its financial position. The Company does, however, anticipate that it is reasonably possible that an additional payment of $80,000 to $100,000 will be made by the end of 20X8.
				
Included in the balance at December 31, 20X7, is $60,000 of tax positions for which the deductibility is certain but for which there is uncertainty regarding the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
				
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 20X7 and 20X6, the Company recognized approximately $10,000 and $11,000, respectively, in interest and penalties. The Company recognized approximately $60,000 and $50,000 for the payment of interest and penalties accrued at December 31, 20X7 and 20X6, respectively.

LIFO INVENTORIES

INVESTMENTS

LEASES-LESSEES

LEASES-LESSORS

PRIOR-PERIOD ADJUSTMENTS

PROPERTY AND EQUIPMENT

STOCKHOLDERS' EQUITY

SUBSEQUENT EVENTS

VARIABLE INTEREST ENTITIES

In 20X1, two stockholders of Progressive, Inc. (Progressive), Sam Jones and Jane Brown, formed an LLC, Jones and Brown Realty, LLC (Realty), to lease real estate to Progressive and other businesses. However, rentals to third parties were not material.
				
Progressive provided substantial financing to Realty, and the economic substance of the relationship between Progressive and Realty, was that Progressive had a controlling financial interest in Realty even though it has only a 30% ownership interest. Accordingly, prior-year financial statements presented the consolidated financial results of Progressive and Realty, with all significant balances and transactions between the two entities eliminated.
				
A recent change in accounting principles generally accepted in the United States of America has enabled Progressive to prepare its financial statements as if it never had a controlling financial interest in Realty and consolidation was not required. Progressive believes this accounting alternative is preferable because it more closely aligns with the needs of the primary users of the financial statements. Accordingly, the accompanying financial statements present only the financial results of Progressive, and beginning equity has been reduced by $56,000 to eliminate the portion of the equity of Realty attributed to equity investors other than Progressive.

Since 20X1, ABC Company has leased its operating facilities from DEF Company under a lease that is renewed annually. Lane Samuels, who owns substantially all the equity of ABC Company, owns all the equity of DEF Company and guarantees the debt of DEF Company. The carrying amount of that debt at the end of the year was $700,000. The debt is secured by the operating facilities and is payable to a bank in monthly installments through April 20X6 when the $600,000 remaining principal balance is due. The debt bears interest at .5% above the bank's base rate, which resets periodically. However, the interest will not be less than 4%, which was the rate at the end of the year.
				
1 As discussed in paragraph 507.2 , ASU 2016-01 exempts nonpublic entities from the fair value disclosure requirements for financial instruments measured at amortized cost. The following illustrative disclosures are not applicable to nonpublic entities that choose to early adopt the amendments to FASB ASC 825-10-50 or to years beginning after December 15, 2018 for those that do not early adopt these amendments.