Opinion ID: 1865218
Heading Depth: 1
Heading Rank: 6

Heading: The April 30, 1979 Balance Sheet.

Text: The April 30, 1979 mid-year balance sheet warranted by Hagen was prepared in accordance with an accounting method that recognized income and expense of its tours when the participants were billed. Dittmann traditionally used this accounting method, and after Monson's and Schulz's purchase, Dittmann continued to employ this method in preparing its financial statements up to the time of trial. Throughout this litigation, however, respondent Specialized Tours continually asserts that this method is not in accordance with generally accepted accounting principles. It claims the failure to use these accounting principles amounted to fraud, giving rise to damages under common law fraud and the Minnesota Securities Act. Generally accepted accounting principles would require an income item to be recognized when the service is performed and an expense item to be recognized when the service for which liability is incurred is performed. [3] Accordingly, the accounting method utilized by Dittmann recognized income and expense too early. This fact was not disclosed on the unaudited balance sheet, and conventional accounting principles require such disclosure. Had generally accepted accounting principles been used in the preparation of Dittmann's April 30, 1979 balance sheet with respect to recognizing income and expense, the balance sheet would have shown: (a) An additional deficit in Dittmann's retained earnings account of $85,008; (b) An increase of $37,866 in Dittmann's account payable account; [4] (c) A deficit of $67,452 in Dittmann's stockholder's equity, or $85,008 less than stated. Based upon the undisclosed deficit in Dittmann's retained earnings account, the trial court determined the value of Dittmann on April 30, 1979 to be $462,050. To reach this numerical value, the trial court used the same method of valuation employed by Monson's accountant in determining a reasonable purchase price. Between April 30, 1979 and July 3, 1979, Dittmann also made a number of payments to Hagen. These payments totaled $72,500. Dittmann distributed $33,000 to Hagen as accrued salary. The balance sheet reflected this amount as a liability. Another $20,000 consisted of loan repayments to Hagen and was also shown on the balance sheet. The trial court found the payments to Hagen were within the usual and normal course of Dittmann's business.