Exam 17 January 2019, questions and answers PDF

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Chapter 3 BALANCE SHEET 3 partial list of accounts for Johnson and Clark, in alphabetical order, is presented below: Accounts Payable Accounts Receivable Accrued Salaries Payable Accumulated Depreciation—Buildings Accumulated Depreciation—Equipment Additional Paid-In Capital—Common Stock Allowance f...

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Chapter 3 BALANCE SHEET 3.A partial list of accounts for Johnson and Clark, in alphabetical order, is presented below: Accounts Payable Accounts Receivable Accrued Salaries Payable Accumulated Depreciation—Buildings Accumulated Depreciation—Equipment Additional Paid-In Capital—Common Stock Allowance for Doubtful Accounts Bank Loan (long-term) Bonds Payable Buildings Cash in Bank Commission Expense Common Stock Current Portion of Long-Term Debt Equipment FICA Taxes Payable Franchise Goodwill Interest Income Interest Receivable Inventory—Ending Balance Land Land Held for Future Plant Site Loss on Sale of Equipment Marketable Securities Minority Interest Notes Payable (long-term) Obligations on Long-Term Loans Patent Preferred Stock Premium on Bonds Payable Prepaid Expenses Purchases Retained Earnings Sales Sales Salaries Expense Treasury Stock Unearned Rent Revenue Required:

Prepare a balance sheet in good format, without monetary amounts, for December 31, 2008. Use the format Current Assets; Property, Plant, and Equipment; Investments; Intangibles; Current Liabilities; Long-Term Liabilities; and Stockholders' Equity. Do not use the accounts not found on the balance sheet.

ANS: Johnson and Clark Balance Sheet December 31, 2008 Assets Current Assets: Cash in Bank Marketable Securities Accounts Receivable Less: Allowance for Doubtful Accounts Interest Receivable Inventory (ending balance) Prepaid Expenses Total Current Assets Property, Plant, and Equipment: Land Buildings Less: Accumulated Depreciation—Buildings Equipment Less: Accumulated Depreciation—Equipment Investments: Land Held for Future Plant Site Intangibles: Franchise Patent Goodwill Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Accrued Salaries Payable FICA Taxes Payable Unearned Rent Revenue Current Portion of Long-Term Debt Total Current Liabilities Long-Term Liabilities: Bonds Payable Plus: Premium on Bonds Payable Notes Payable—Long-Term Bank Loan—Long-Term Obligations on Long-Term Loans

Minority Interest

Stockholders' Equity: Preferred Stock Common Stock Additional Paid-In Capital—Common Stock Retained Earnings Less: Treasury Stock Total Liabilities and Stockholders' Equity 4.The following is a partial listing of accounts for Euisara, Inc., for the year ended December 31, 2008. Required: Prepare a balance sheet in good format for December 31, 2008. Finished Goods Current Maturities of Long-Term Debt Accumulated Depreciation Accounts Receivable Sales Revenue Treasury Stock Prepaid Expenses Deferred Taxes (long-term liability) Interest Expense Allowance for Doubtful Accounts Retained Earnings Raw Materials Accounts Payable Cash and Cash Equivalents Sales Salaries Expense Cost of Goods Sold Investment in Unconsolidated Subsidiaries Income Taxes Payable Work In Process Additional Paid-In Capital Equipment Long-Term Debt Rent Income Common Stock Notes Payable (short-term) Income Tax Expense

$

9,718 1,257 9,980 24,190 127,260 251 2,199 8,506 2,410 915 18,951 9,576 19,021 8,527 872 82,471 3,559 8,356 1,984 9,614 41,905 15,258 2,468 3,895 6,156 2,461

ANS: Euisara, Inc. Balance Sheet December 31, 2008 Assets Current Assets: Cash and Cash Equivalents Accounts Receivable Less: Allowance for Doubtful Accounts Inventories: Raw Materials Work In Process Finished Goods Prepaid Expenses Total Current Assets Tangible Assets: Equipment Less: Accumulated Depreciation

$ 8,527 $ 24,190 (915)

$

9,576 1,984 9,718

23,275

21,278 2,199 $ 55,279

$ 41,905 (9,980)

31,925

Investments: Investments in Unconsolidated Subsidiaries

3,559

Total Assets Liabilities and Stockholders' Equity Current Liabilities: Current Maturities of Long-Term Debt Notes Payable Accounts Payable Income Taxes Payable Total Current Liabilities Long-Term Liabilities: Long-Term Debt Deferred Taxes Total Long-Term Liabilities Stockholders' Equity: Common Stock Additional Paid-In Capital Retained Earnings Less: Treasury Stock

$ 90,763

$ 1,257 6,156 19,021 8,356 $ 34,790

$15,258 8,506 23,764

$ 3,895 9,614 18,951 $32,460 (251)

32,209

Total Liabilities and Stockholders' Equity

$ 90,763

6. The following balance sheet, prepared by Whoops Bookkeeping Service, has been given to you to review. Required: Prepare a corrected, properly classified balance sheet in report form. Butler Corporation Balance Sheet For Year Ended December 31, 2008 Current Assets: Cash Accounts Receivable

Current Liabilities: $

6,200 Accounts Payable 13,000 Wages Payable

$ 15,000 2,000

Accumulated Depreciation Inventory Treasury Stock Property, Plant, and Equipment: Land Trademarks Buildings Equipment Intangibles: Organization Costs Discount on Bonds Payable Investments: Long-Term Investment in Bonds Marketable Securities— Short-Term Total Assets

30,000 —Equipment

Accumulated Depreciation 10,000 —Buildings 7,000Long-Term Liabilities: 5,000 Current Taxes Payable 45,000 Premium on Common Stock 17,000 Bonds Payable

Notes Payable—Long Term

5,000 10,000

4,000 3,000 60,000 10,000

4,000 2,000Owners' Equity:

Common Stock Retained Earnings Allowance for Doubtful 8,000 Accounts 7,000 $154,200

31,200 12,000 2,000

$154,200

ANS: Butler Corporation Balance Sheet December 31, 2008 Assets Current Assets: Cash Marketable Securities Accounts Receivable Less: Allowance for Doubtful Accounts Inventory Total Current Assets Tangible Assets: Land Equipment Less: Accumulated Depreciation—Equipment Buildings Less: Accumulated Depreciation—Buildings

$ 6,200 7,000 $13,000 (2,000)

11,000 30,000 $ 54,200

$ 7,000 $17,000 (5,000) 45,000 (10,000)

12,000 35,000

Investments: Investment in Bonds

8,000

Intangibles: Trademarks Organization Costs Total Assets

$ 5,000 4,000

Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Wages Payable Current Taxes Payable Total Current Liabilities Long-Term Debt: Notes Payable—Long-Term Bonds Payable Less: Discount on Bonds Payable Total Long-Term Debt Owners' Equity: Common Stock Premium on Common Stock Retained Earnings Treasury Stock Total Liabilities and Stockholders' Equity

54,000

9,000 $125,200

$15,000 2,000 4,000 $ 21,000

$10,000 $60,000 (2,000)

58,000 68,000

31,200 3,000 12,000 (10,000)

36,200 $125,200

7.Required: Using the information given below, prepare a classified balance sheet in good form for Babic Company at December 31, 2008. Accounts Payable Accounts Receivable Accrued Liabilities Accumulated Depreciation Cash Common Stock Convertible Debentures Deferred Income Taxes (long-term liability) Equipment Inventory Land Marketable Securities Paid-In Capital in Excess of Par Retained Earnings Treasury Stock

$

83,000 109,000 22,000 326,000 32,000 107,000 561,000 117,000 1,070,000 146,000 917,000 11,000 141,000 952,000 24,000

ANS: Babic Company Balance Sheet December 31, 2008 Assets Current Assets: Cash Marketable Securities Accounts Receivable Inventory Total Current Assets Tangible Assets: Land Equipment Less: Accumulated Depreciation Total Assets

$

32,000 11,000 109,000 146,000 $ 298,000

$ $1,070,000 (326,000)

917,000 744,000

1,661,000 $1,959,000

Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable Accrued Liabilities Total Current Liabilities Convertible Debentures Deferred Income Taxes Stockholders' Equity: Common Stock Paid-In Capital in Excess of Par Retained Earnings Less: Treasury Stock Total Liabilities and Stockholders' Equity

$

83,000 22,000 $

107,000 141,000 952,000 $1,200,000 (24,000)

105,000 561,000 117,000

$

1,176,000 $1,959,000

8. Required: Match each account to the proper account description by placing the appropriate letter before the account name; not all letters will be used. Account ____ 1. Accounts Payable ____ 2. Accounts Receivable ____ 3. Accrued Liabilities ____ 4. Accumulated Depreciation ____ 5. Cash ____ 6. Common Stock ____ 7. Convertible Debentures ____ 8. Deferred Income Taxes (liability) ____ 9. Equipment ____ 10. Inventory ____ 11. Land ____ 12. Marketable Securities ____ 13. Minority Interest ____ 14. Paid-In Capital in Excess of Par ____ 15. Retained Earnings ____ 16. Treasury Stock

a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t.

Account Descriptions Stocks and bonds of other companies held for the purpose of exercising control. An accumulation of the sum of the expense since the beginning of the benefit period. Outside ownership in the equity of consolidated subsidiaries. Machinery and tools, valued at historical cost. Monies due because expenses, such as salaries, are incurred in a different period than when the cash outlay occurs. The most liquid of assets, it may also include savings accounts. Goods on hand. A potential liability created by differing tax and reporting methods. Ownership and debt instruments readily converted to cash. An expenditure made in advance of the use of the service or good. Monies due from customers arising from sale or service rendered. The capital stock of residual owners. Bonds that can be exchanged for stock at the option of the holder. Undistributed earnings of the corporation. Shares of the firm's own stock that have been repurchased. Monies due for goods bought for use or resale. Excess over legal par paid at time of sale. Nondepreciable real estate. Collections in advance of service. Securities that give the holder the right to buy additional shares of common stock at a fixed price.

ANS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

p k e b f l m h d g r i c q n o

Account Descriptions a, j, s, and t are not used. 9.An item of equipment acquired on January 1, at a cost of $100,000, has an estimated use of 50,000 hours. During the first three years, the equipment was used 11,000, 8,000, and 7,000 hours, respectively. The equipment has an estimated life of five years and an estimated salvage of $10,000. Required:

Determine the depreciation for each of the three years, using the straight-line method, the double declining-balance method, the sum-of-the-years'-digits method, and the units-of-production method. ANS: Straight-Line:

$100,000 - $10,000 = $18,000 Each Year 5

Declining-Balance = Year 1: 1/5  2  $100,000 = $40,000 1st Year Year 2: 1/5  2  ($100,000 - $40,000) = $24,000 2nd Year Year 3: 1/5  2  ($100,000 - $64,000) = $14,400 3rd Year Sum-of-the-Years'-Digits: Year 1: 5/15  ($100,000 - $10,000) = $30,000 Year 2: 4/15  ($100,000 - $10,000) = $24,000 Year 3: 3/15  ($100,000 - $10,000) = $18,000 Units-of-Production Method: Year 1: 11,000  $1.80 = $19,800 ($100,000 - $10,000) ÷ 50,000 = $1.80 per unit) Year 2: 8,000  $1.80 = $14,400 Year 3: 7,000  $1.80 = $12,600 10. Smith Company has had 10,000 shares of 8%, $100 par-value preferred stock, and 15,000 shares of $10 par-value common stock outstanding for the last two years. During the most recent year, dividends paid totaled $100,000; in the prior year, dividends paid totaled $60,000. Required: Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each of the years, given the following independent assumptions: a. Preferred stock is nonparticipating and noncumulative. b. Preferred stock is nonparticipating and cumulative.

ANS: a. Preferred Common Stock Stock Year 1 Dividends, $60,000 Preferred Stock 10,000  $100  8% = $80,000

$ 60,000

-0-

$ 80,000

$20,00 0

$ 60,000

-0-

$ 20,000 80,000 $100,000

-0-

Year 2 Dividends, $100,000 Preferred Stock 10,000  $100  8% = $80,000 b. Year 1 Dividends, $60,000 Preferred Stock 10,000  $100  8% = $80,000 Year 2 Dividends, $100,000 Preferred Stock Carryover from Year 1 10,000  $100  8% = $80,000

Chapter 4 INCOME STATEMENT 2. Information related to Batavia Furniture Company for the year ended December 31, 2008, follows. Cost of Goods Sold Dividends Declared Flood Loss (pre-tax) General Expense Other Income Other Expense Retained Earnings, January 1, 2006 Sales Selling Expense

$ 70,000 5,000 12,000 8,000 9,000 11,000 116,000 131,000 7,000

Required: Prepare in good form a multiple-step income statement for the year 2008. Assume a 50% tax rate and that 5,000 shares of common stock were outstanding during the year.

ANS: Batavia Furniture Company Income Statement For the Year Ended December 31, 2008 Sales Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses General Expenses Operating Income Other Income Other Expense Income Before Tax Income Tax Income Before Extraordinary Items Flood Loss, Net of $6,000 Tax Net Income

$131,000 70,000 $ 61,000 $7,000 8,000

Per Share of Common Stock: Income Before Extraordinary Item Extraordinary Item Net Income

15,000 $ 46,000 9,000 (11,000) $ 44,000 22,000 $ 22,000 6,000 $ 16,000

$ $

4.40 (1.20) 3.20

6.Oregm Imports engages in the retail sale of household products and clothing. During 2008, the company disposed of the clothing segment. Oregm Imports had 150,000 shares of stock outstanding all year. The results of operations for 2008 follow. Household Products Net sales Cost of goods sold Operating expenses Loss on disposal of clothing business (before income tax effect) Interest expense Extraordinary loss from expropriation of operations in foreign country (before income tax effect)

$15,000,000 11,400,000 1,400,000

Clothing $3,900,000 3,500,000 300,000 680,000

40,000

80,000

Income taxes of 40% apply to all items. Required: Prepare a multiple-step income statement for the year ended December 31, 2008, in good format. ANS: Oregm Imports

Income Statement For the Year Ended December 31, 2008 Net sales Cost of goods sold Gross profit Operating expenses Operating income Interest expense Income Income tax (40%) Income from continuing operations Discontinued operations: Income during year Less: taxes Loss from disposal Less: taxes Income before extraordinary loss Extraordinary item: Loss from expropriation Less: taxes Net income

$15,000,000 11,400,000 $ 3,600,000 1,400,000 $ 2,200,000 40,000 $ 2,160,000 864,000 $ 1,296,000

$100,000 (40,000) $680,000 272,000

$ 60,000 (408,000) $ $ 80,000 (32,000) $

(348,000) 948,000

(48,000) 900,000

Per common share: Income from continuing operations Discontinued operations Income before extraordinary loss Extraordinary item Net income

$8.64 (2.32) $6.32 (0.32) $6.00

Chapter 5 BASICS OF ANALYSIS PROBLEMS 1. Comparative income statements for 2008 and 2007 follow. 2008 Sales Cost of Sales Gross Profit Operating Expenses Operating Income Interest Expense Earnings Before Tax Income Taxes Net Income

$9,434,000 7,075,400 $2,358,600 1,367,690 $ 990,910 157,500 $ 833,410 400,000 $ 433,410

2007 $7,862,000 5,660,640 $2,201,360 1,365,060 $ 836,300 126,000 $ 710,300 317,200 $ 393,100

Required: a. Prepare a vertical common-size analysis of this statement for each year, using sales as the base. b. Comment briefly on the changes between the two years, based on the vertical common-size statement. ANS: a. Sales Cost of Sales Gross Profit Operating Expenses Operating Income Interest Expense Earnings Before Tax Income Taxes Net Income

2008

2007

100.0% 75.0 25.0 14.5 10.5 1.7 8.8 4.2 4.6%

100.0% 72.0 28.0 17.4 10.6 1.6 9.0 4.0 5.0%

b. Cost of sales as a percent of sales have risen substantially. This increase is nearly offset by a decline in operating expense. Interest expense and taxes have both risen slightly in relation to sales.

2. Toledo Toy, a manufacturer of infants’ blocks, presented the following data in its last annual report. This trend analysis begins with the year of formation, 2005.

Sales Cost of Sales Net Income Cases of Blocks Shipped

2008

2007

2006

2005

$61,000 $41,300 $9,919 33,126

$41,000 $28,175 $6,412 22,681

$25,000 $17,201 $3,850 13,900

$13,000 $9,000 $2,000 7,400

Required: a. Using 2005 as the base year, perform a horizontal, common-size analysis. b. Comment on the results of the horizontal analysis. ANS: a. Sales Cost of Sales Net Income Cases of Blocks Shipped

2008

2007

2006

469.2 458.9 496.0 447.6

315.4 313.1 320.6 306.5

192.3 191.1 192.5 187.8

2005 100.0% 100.0% 100.0% 100.0%

b. Sales have risen rapidly. The cost of sales have risen more slowly than sales. Also, there has been a much faster rise in net income than in sales. The cases of blocks shipped have increased more slowly than sales dollars, indicating a rise in selling price or an improved mix of sales towards more expensive blocks.

3. The following are simplified, vertical, common-size balance sheets for three firms—a retailer, a service firm, and a manufacturer. Assets Cash Receivables Inventory Total Current Assets Plant, Property, and Equipment (net) Investments Total Assets

Firm A

Firm B

Firm C

6.1% 23.2 31.1 60.4 30.3 9.3 100.0%

8.1% 4.4 1.5 14.0 83.4 2.6 100.0%

8.7% 12.1 24.5 45.3 51.8 2.9 100.0%

29.3%

11.5%

21.6%

Liabilities and Stockholders' Equity Total Current Liabilities

Long-Term Debt Total Stockholders' Equity Total Liabilities and Stockholders' Equity

18.1

24.8

37.8

52.6 100.0%

63.7 100.0%

40.6 100.0%

Required: Match the statements to the type of firm and explain your choice. ANS: Firm A is the retailing firm, due to the heavy investment in receivables and inventory with limited fixed assets. The store facilities may be rented. Firm B is the service firm, due to the limited inventory. Firm C is the manufacturing firm, due to the combined heavy investment in inventory and fixed assets. Also, it uses substantial long-term debt.

4. a. Listed below are three groupings of financial ratios. Liquidity Long-term borrowing ability Profitability Required: Briefly describe what each one measures. b. Listed below are three groups of users of financial statements. Suppliers of raw materials Potential stockholders Bondholders Required: For each group, select the type of ratios from part (a) that each group might be most interested in. Briefly explain your choice. ANS: a. Liquidity ratios measure the firm's ability to pay its current obligations. Long-term borrowing ability measures the degree of protection of long-term suppliers of funds. Profitability ratios measure the earning ability of the firm. b. Suppliers of raw materials would be most interested in liquidity since their goods and related obligations are primarily short-term. Potential stockholders would be most interested in the earning ability of the firm since they share in residual profits. Bondholders would be most interested in the long-term borrowing capacity since this measures the risk of default.

Chapter 6 Liquidity PROBLEMS 1. Required: Determine the cost of goods sold of a firm with the financ...