Acc 421 Wk 4 Team assignment
trcceyrlc
probsetb_ch24.pdf
P24-1B (Subsequent Events) Your firm has been engaged to examine the financial statements of Sugar- land Corporation for the year 2014. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2007. The client provides you with the information below.
ALMADEN CORPORATION
BALANCE SHEET
DECEMBER 31, 2014
Assets Liabilities
Current assets $1,250,300 Current liabilities $ 826,400 Other assets 4,850,700 Long-term liabilities 1,806,000 Capital 3,468,600
$6,101,000 $6,101,000
An analysis of current assets discloses the following.
Cash (restricted in the amount of $130,000 for plant expansion) $ 200,000 Investments in land 120,000 Accounts receivable less allowance of $60,000 410,000 Inventories (LIFO fl ow assumption) 520,300
$1,250,300
Other assets include:
Prepaid expenses $ 24,700 Plant and equipment less accumulated depreciation of $1,168,000 3,860,000 Cash surrender value of life insurance policy 60,000 Unamortized bond discount 64,750 Notes receivable (short-term) 71,250 Goodwill 350,000 Land 420,000
$4,850,700
Current liabilities include:
Accounts payable $ 380,000 Notes payable (due 2020) 168,400 Estimated income taxes payable 200,000 Premium on common stock 78,000
$ 826,400
Long-term liabilities include:
Unearned revenue $ 706,000 Dividends payable (cash) 150,000 6% bonds payable (due May 1, 2019) 950,000
$1,806,000
Capital includes:
Retained earnings $2,128,600 Common stock, par value $1; authorized 20,000,000 shares, 1,340,000 shares issued 1,340,000
$3,468,600
The supplementary information below is also provided.
1. On August 1, 2014, the corporation issued at 92.5, $950,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every August 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
2. The bookkeeper made the following mistakes. (a) In 2013, the ending inventory was understated by $60,000. The ending inventory for 2014 were
correctly computed.
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B P R O B L E M S
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2 Chapter 24 Full Disclosure in Financial Reporting
(b) In 2014, accrued wages in the amount of $134,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
(c) In 2014, a loss of $78,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
3. A major competitor has introduced a line of products that will compete directly with Sugarland‘s primary line, now being produced in a specially designed new plant. Because of manufacturing in- novations, the competitor’s line will be of comparable quality but priced 25% below Sugarland‘s line. The competitor announced its new line on January 5, 2015. Sugarland indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs.
4. You learned on January 16, 2015, prior to completion of the audit, of heavy damage because of a recent tornado to one of Sugarland’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.
Instructions
Analyze the above information to prepare a corrected balance sheet for Sugarland in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be pre- pared. The books are closed and adjustments to income are to be made through retained earnings.
P24-2B (Segmented Reporting) Hazard Corporation is a diversified company that operates in five differ- ent industries: A, B, C, D, and E. The following information relating to each segment is available for 2015.
A B C D E
Sales revenue $340,000 $120,000 $80,000 $20,000 $490,000
Cost of goods sold 195,000 95,000 30,000 8,000 300,000 Operating expenses 60,000 50,000 35,000 6,000 110,000
Total expenses 255,000 145,000 65,000 14,000 410,000
Operating profi t (loss) $ 85,000 $ (25,000) $15,000 $ 6,000 $ 80,000
Identifi able assets $126,000 $ 30,000 $52,000 $ 5,000 $389,000
Sales of segments A and C included intersegment sales of $45,000 and $76,000, respectively.
Instructions
(a) Determine which of the segments are reportable based on the: (1) Revenue test. (2) Operating profit (loss) test. (3) Identifiable assets test.
(b) Prepare the necessary disclosures required by GAAP.
*P24-3B (Ratio Computations and Additional Analysis) Montana Corporation was formed 5 years ago through a public subscription of common stock. Steve Young, who owns 20% of the common stock, was one of the organizers of Montana and is its current president. The company has been successful, but it cur- rently is experiencing a shortage of funds. On June 10, Steve Young approached the Jersey National Bank, asking for a 24-month extension on two $75,000 notes, which are due on April 30, 2015, and August 31, 2015. Another note of $20,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Young explained that Montana’s cash flow problems are due primarily to the company’s desire to finance a $400,000 plant expansion over the next 2 fiscal years through internally generated funds.
The commercial loan officer of Jersey National Bank requested financial reports for the last 2 fiscal years. These reports are reproduced below and on the next page.
MONTANA CORPORATION
BALANCE SHEET
MARCH 31
2015 2014
Assets
Cash $ 24,900 $ 21,600 Notes receivable 120,000 105,000 Accounts receivable (net) 215,000 205,000 Inventories (at cost) 180,000 160,000 Plant & equipment (net of depreciation) 2,060,000 1,960,800
Total assets $2,599,900 $2,452,400
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B Problems 3
Instructions
(a) Compute the following items for Montana Corporation. (1) Current ratio for fiscal years 2014 and 2015. (2) Acid-test (quick) ratio for fiscal years 2014 and 2015. (3) Inventory turnover for fiscal year 2015. (4) Return on assets for fiscal years 2014 and 2015. (Assume total assets were $2,200,500 at 3/31/13.) (5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from
fiscal year 2014 to 2015. (b) Identify and explain what other financial reports and/or financial analyses might be helpful to the
commercial loan officer of Jersey National Bank in evaluating Steve Young’s request for a time extension on Montana’s notes.
(c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year 2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Montana’s desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Jersey National Bank grant the extension on Montana’s notes considering Steve Young’s statement about financing the plant expansion through internally generated funds? Discuss.
*P24-4B (Horizontal and Vertical Analysis) Presented below are comparative balance sheets for the JMar Company.
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Liabilities and Stockholders’ Equity
Accounts payable $ 94,000 $ 90,000 Notes payable 170,000 123,000
Accrued liabilities 9,500 12,000 Common stock (300,000 shares, $5 par) 1,500,000 1,500,000 Retained earningsa 826,400 727,400
Total liabilities and stockholders’ equity $2,599,900 $2,452,400
aCash dividends were paid at the rate of $0.50 per share in fi scal year 2014 and $0.75 per share in fi scal year 2015.
MONTANA CORPORATION
INCOME STATEMENT
FOR THE FISCAL YEARS ENDED MARCH 31
2015 2014
Sales revenue $2,938,000 $2,600,900 Cost of goods solda 1,680,000 1,410,000
Gross Margin 1,258,000 690,900 Operating expenses 718,000 1,180,000
Income before income taxes 540,000 500,000 Income taxes (40%) 216,000 200,000
Net income $ 324,000 $ 300,000
aDepreciation charges on the plant and equipment of $120,000 and $112,500 for fi scal years ended March 31, 2014 and 2015, respectively, are included in cost of goods sold.
JMAR COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2015 AND 2014
December 31
2015 2014
Assets
Cash $65,000 $50,000 Accounts receivable (net) 368,000 318,000 Short-term investments 420,000 250,000 Inventories 619,000 580,000 Prepaid expenses 20,000 20,000 Fixed assets 2,816,000 2,540,000 Accumulated depreciation (1.200,000) (1,000,000)
$3,108,000 $2,750,000
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4 Chapter 24 Full Disclosure in Financial Reporting
Instructions
(Round to two decimal places.)
(a) Prepare a comparative balance sheet of JMar Company showing the percent each item is of the total assets or total liabilities and stockholders’ equity.
(b) Prepare a comparative balance sheet of JMar Company showing the dollar change and the percent change for each item.
(c) Of what value is the additional information provided in part (a)? (d) Of what value is the additional information provided in part (b)?
*P24-5B (Dividend Policy Analysis) Joy Inc. went public 3 years ago. The board of directors will be meet- ing shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Joy Inc. operations.
($000 omitted) 2015 2014 2013 2012 2011
Sales revenue $50,000 $48,000 $42,000 $36,000 $28,000 Net income 6,000 5,600 4,800 3,800 2,000 Average total assets 55,000 49,000 46,000 40,000 34,000 Current assets 20,000 19,000 16,000 14,000 11,000 Working capital 11,500 11,000 8,800 7,300 6,000 Common shares Number of shares outstanding (000) 5,000 5,000 5,000 100 100 Average market price $9 $7 $6 _ _
Instructions
(a) Suggest factors to be considered by the board of directors in establishing a dividend policy. (b) Compute the rate of return on assets, profit margin on sales, earnings per share, price-earnings ratio,
and current ratio for each of the 5 years for Joy Inc. (c) Comment on the appropriateness of declaring a cash dividend at this time, using the ratios com-
puted in part (b) as a major factor in your analysis.
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Liabilities and Stockholders’ Equity
Accounts payable $ 185,000 $ 340,000 Accrued expenses 90,000 75,000 Bonds payable 600,000 480,000 Capital stock 1,750,000 1,550,000 Retained earnings 483,000 305,000
$3,108,000 $2,750,000
JMAR COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2015 AND 2014
(CONTINUED)
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