Accounting 372
homework 2
E5-6. (Corrections
of a Balance Sheet)
The bookkeeper
for Geronimo Company has prepared the following balance sheet as of
July 31, 2014.
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The following
additional information is provided.
1. Cash includes
$1,200 in a petty cash fund and $15,000 in a bond sinking fund.
2. The net
accounts receivable balance is comprised of the following two items: (a)
accounts receivable $44,000 and (b) allowance for doubtful accounts $3,500.
3. Inventory
costing $5,300 was shipped out on consignment on July 31, 2014. The ending
inventory balance does not include the consigned goods. Receivables in the
amount of $5,300 were recognized on these consigned goods.
4. Equipment had
a cost of $112,000 and an accumulated depreciation balance of $28,000.
5. Income taxes
payable of $6,000 were accrued on July 31. Geronimo Company, however, had
set up a cash fund to meet this obligation. This cash fund was not included in
the cash balance but was offset against the income taxes payable amount.
Instructions
Prepare a corrected
classified balance sheet as of July 31, 2014, from the available
information, adjusting the account balances using the additional information.
E5-9. (Current
Assets and Current Liabilities)
The current
assets and current liabilities sections of the balance sheet of Allessandro
Scarlatti Company appear as follows.
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ALLESSANDRO
SCARLATTI COMPANY
Balance Sheet (Partial)
December 31, 2014
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Cash
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$ 40,000
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Accounts
payable
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$ 61,000
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Accounts
receivable
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$89,000
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Notes payable
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67,000
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Less:
Allowance for doubtful accounts
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7,000
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82,000
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$128,000
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Inventory
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171,000
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Prepaid
expenses
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9,000
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$302,000
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The following
errors in the corporation's accounting have been discovered:
1. January 2015
cash disbursements entered as of December 2014 included payments of accounts
payable in the amount of $39,000, on which a cash discount of 2% was taken.
2. The
inventory included $27,000 of merchandise that had been received at December 31
but for which no purchase invoices had been received or entered. Of this
amount, $12,000 had been received on consignment; the remainder was purchased
f.o.b. destination, terms 2/10, n/30.
3. Sales
for the first four days in January 2015 in the amount of $30,000 were entered
in the sales journal as of December 31, 2014. Of these, $21,500 were sales on
account and the remainder were cash sales.
4. Cash,
not including cash sales, collected in January 2015 and entered as of December
31, 2014, totaled $35,324. Of this amount, $23,324 was received on account
after cash discounts of 2% had been deducted; the remainder represented the
proceeds of a bank loan.
Instructions
a. Restate the
current assets and current liabilities sections of the balance sheet in
accordance with good accounting practice. (Assume that both accounts receivable
and accounts payable are recorded gross.)
b. State the net
effect of your adjustments on Allessandro Scarlatti Company's retained earnings
balance.
P5-5 (Balance
Sheet Adjustment and Preparation)
Presented below
is the balance sheet of Sargent Corporation for the current year, 2014.
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The following
information is presented.
1 The current
assets section includes cash $150,000, accounts receivable $170,000 less
$10,000 for allowance for doubtful accounts, inventories $180,000, and unearned
rent revenue $5,000. Inventoy is stated on the lower-of-FIFO-cost-or-market.
2. The investments
section includes the cash surrender value of a life insurance contract $40,000;
investments in common stock, short-term (trading) $80,000 and long-term
(available-for-sale) $270,000; and bond sinking fund $250,000. The cost and
fair value of investments in common stock are the same.
3. Property,
plant, and equipment includes buildings $1,040,000 less accumulated
depreciation $360,000; equipment $450,000 less accumulated depreciation
$180,000; land $500,000; and land held for future use $270,000.
4. Intangible
assets include a franchise $165,000; goodwill $100,000; and discount on bonds
payable $40,000.
5. Current
liabilities include accounts payable $140,000; notes payable—short-term $80,000
and long-term $120,000; and income taxes payable $40,000.
6. Long-term
liabilities are composed solely of 7% bonds payable due 2022.
7. Stockholders'
equity has preferred stock, no par value, authorized 200,000 shares, issued
70,000 shares for $450,000; and common stock, $1.00 par value, authorized
400,000 shares, issued 100,000 shares at an average price of $10. In addition,
the corporation has retained earnings of $320,000.
Instructions
Prepare a
balance sheet in good form, adjusting the amounts in each balance sheet
classification as affected by the information given above.
P5-7 (Preparation
of a Statement of Cash Flows and Balance Sheet)
Aero Inc. had
the following balance sheet at December 31, 2013.
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During 2014, the
following occurred.
1. Aero
liquidated its available-for-sale investment portfolio at a loss of $5,000.
2. A tract of
land was purchased for $38,000.
3. An additional
$30,000 in common stock was issued at par.
4. Dividends
totaling $10,000 were declared and paid to stockholders.
5. Net income
for 2014 was $35,000, including $12,000 in depreciation expense.
6. Land was
purchased through the issuance of $30,000 in additional bonds.
7. At December
31, 2014, Cash was $70,200, Accounts Receivable was $42,000, and Accounts
Payable was $40,000.
Instructions
a Prepare a
statement of cash flows for the year 2014 for Aero.
b. Prepare the
unclassified balance sheet as it would appear at December 31, 2014.
c. Compute
Aero's free cash flow and current cash debt coverage for 2014.
d. Use the
analysis of Aero to illustrate how information in the balance sheet and
statement of cash flows helps the user of the financial statements.
CA5-1.
(Reporting the Financial Effects of Varied Transactions)
In an
examination of Arenes Corporation as of December 31, 2014, you have learned
that the following situations exist. No entries have been made in the
accounting records for these items
1. The
corporation erected its present factory building in 1999. Depreciation was
calculated by the straight-line method, using an estimated life of 35 years.
Early in 2014, the board of directors conducted a careful survey and estimated
that the factory building had a remaining useful life of 25 years as of January
1, 2014.
2. An
additional assessment of 2013 income taxes was levied and paid in 2014.
3. When
calculating the accrual for officers' salaries at December 31, 2014, it was
discovered that the accrual for officers' salaries for December 31, 2013, had
been overstated.
4. On
December 15, 2014, Arenes Corporation declared a cash dividend on its common
stock outstanding, payable February 1, 2015, to the common stockholders of
record December 31, 2014.
Instructions
Describe fully
how each of the items above should be reported in the financial statements of
Arenes Corporation for the year 2014.
CA5-3. (Critique
of Balance Sheet Format and Content)
Presented below
is the balance sheet of Sameed Brothers Corporation (000s omitted).
SAMEED BROTHERS
CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash $26,000
Marketable
securities 18,000
Accounts
receivable 25,000
Inventory 20,000
Supplies 4,000
Stock investment
in subsidiary company 20,000 $113,000
Investments
Treasury stock 25,000
Property, plant,
and equipment
Buildings and
land 91,000
Less:
Reserve for depreciation 31,000 60,000
Other assets
Cash surrender
value of life insurance 19,000
Total assets $217,000
Liabilities and
Stockholders' Equity
Current
liabilities
Accounts payable $22,000
Reserve
for income taxes 15,000
Customers'
accounts with credit balances 1 $ 37,001
Deferred credits
Unamortized
premium on bonds payable 2,000
Long-term
liabilities
Bonds payable 60,000
Total
liabilities 99,001
Common stock
Common stock,
par $5 85,000
Earned
surplus 24,999
Cash
dividends declared 8,000 117,999
Total
liabilities and stockholders' equity $217,000
Instructions
Evaluate the
balance sheet presented. State briefly the proper treatment of any item
criticized.
5. A company has purchased a tract of land and
expects to build a production plant on the land in approximately 5
years. During the 5 years before construction, the land will be idle. Under
IFRS, the land should be reported as:
(a) land
expense.
(b) property,
plant, and equipment.
(c) an
intangible asset.
(d) a long-term
investment.
E6-4 (Computation
of Future Values and Present Values)
Using the
appropriate interest table, answer the following questions. (Each case is
independent of the others).
a. What is the
future value of 20 periodic payments of $4,000 each made at the beginning of
each period and compounded at 8%?
b. What is the
present value of $2,500 to be received at the beginning of each of 30 periods,
discounted at 10% compound interest?
c. What is the
future value of 15 deposits of $2,000 each made at the beginning of each period
and compounded at 10%? (Future value as of the end of the fifteenth period.)
d. What is the
present value of six receipts of $1,000 each received at the beginning of each
period, discounted at 9% compounded interest?
E6-7
(Computation of Bond Prices)
What would you
pay for a $50,000 debenture bond that matures in 15 years and pays $5,000 a
year in interest if you wanted to earn a yield of:
8%? 10%?
12%?
E6-12. (Analysis
of Alternatives)
The Black
Knights Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV
dinners, would like to increase its market share in the Sunbelt. In order to do
so, Black Knights has decided to locate a new factory in the Panama City area.
Black Knights will either buy or lease a site depending upon which is more
advantageous. The site location committee has narrowed down the available sites
to the following three buildings.
Building A:
Purchase for a
cash price of $600,000, useful life 25 years.
Building B:
Lease for 25
years with annual lease payments of $69,000 being made at the beginning of the
year.
Building C:
Purchase for
$650,000 cash. This building is larger than needed; however, the excess space
can be sublet for 25 years at a net annual rental of $7,000. Rental payments
will be received at the end of each year. The Black Knights Inc. has no
aversion to being a landlord.
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Instructions
In which
building would you recommend that The Black Knights Inc. locate, assuming a 12%
cost of funds?
E6-13. (Computation
of Bond Liability)
George Hincapie
Inc. manufactures cycling equipment. Recently, the vice president of operations
of the company has requested construction of a new plant to meet the increasing
demand for the company's bikes. After a careful evaluation of the request, the
board of directors has decided to raise funds for the new plant by issuing
$2,000,000 of 11% term corporate bonds on March 1, 2014, due on March 1, 2029,
with interest payable each March 1 and September 1. At the time of issuance,
the market interest rate for similar financial instruments is 10%.
Instructions
As the
controller of the company, determine the selling price of the bonds.
E6-16 (Retirement
of Debt)
Jesper Parnevik
borrowed $70,000 on March 1, 2012. This amount plus accrued interest at 12%
compounded semiannually is to be repaid March 1, 2022. To retire this debt,
Jesper plans to contribute to a debt retirement fund five equal amounts
starting on March 1, 2017, and for the next 4 years. The fund is expected to
earn 10% per annum.
Instructions
How much must be
contributed each year by Jesper Parnevik to provide a fund sufficient to retire
the debt on March 1, 2022
P6-1
(Various Time Value Situations)
Answer each of
these unrelated questions.
a. On January 1,
2014, Fishbone Corporation sold a building that cost $250,000 and that had
accumulated depreciation of $100,000 on the date of sale. Fishbone received as
consideration a $240,000 non-interest-bearing note due on January 1, 2017.
There was no established exchange price for the building, and the note had no
ready market. The prevailing rate of interest for a note of this type on
January 1, 2014, was 9%. At what amount should the gain from the sale of the
building be reported?
b. On January 1,
2014, Fishbone Corporation purchased 300 of the $1,000 face value, 9%, 10-year
bonds of Walters Inc. The bonds mature on January 1, 2024, and pay interest
annually beginning January 1, 2015. Fishbone purchased the bonds to yield 11%.
How much did Fishbone pay for the bonds?
c. Fishbone
Corporation bought a new machine and agreed to pay for it in equal annual
installments of $4,000 at the end of each of the next 10 years. Assuming that a
prevailing interest rate of 8% applies to this contract, how much should
Fishbone record as the cost of the machine?
d. Fishbone Corporation purchased a special
tractor on December 31, 2014. The purchase agreement stipulated that Fishbone
should pay $20,000 at the time of purchase and $5,000 at the end of each of the
next 8 years. The tractor should be recorded on December 31, 2014, at what
amount, assuming an appropriate interest rate of 12%?
e. Fishbone
Corporation wants to withdraw $120,000 (including principal) from an investment
fund at the end of each year for 9 years. What should be the required initial
investment at the beginning of the first year if the fund earns 11%?
P6-5. (Analysis
of Alternatives)
Julia Baker died,
leaving to her husband Brent an insurance policy contract that provides that
the beneficiary (Brent) can choose any one of the following four options.
(a) $55,000
immediate cash.
(b) $4,000 every
3 months payable at the end of each quarter for 5 years.
(c) $18,000
immediate cash and $1,800 every 3 months for 10 years, payable at the beginning
of each 3-month period.
(d) $4,000
every 3 months for 3 years and $1,500 each quarter for the following 25
quarters, all payments payable at the end of each quarter.
Instructions
If money is
worth 2½% per quarter, compounded quarterly, which option would you recommend
that Brent exercise?
P6-6.
(Purchase Price of a Business)
During the past
year, Stacy McGill planted a new vineyard on 150 acres of land that she leases
for $30,000 a year. She has asked you, as her accountant, to assist her in
determining the value of her vineyard operation.
The vineyard
will bear no grapes for the first 5 years (1-5). In the next 5 years (6-10),
Stacy estimates that the vines will bear grapes that can be sold for $60,000
each year. For the next 20 years (11-30), she expects the harvest will provide
annual revenues of $110,000. But during the last 10 years (31-40) of the
vineyard's life, she estimates that revenues will decline to $80,000 per year.
During the first
5 years, the annual cost of pruning, fertilizing, and caring for the vineyard
is estimated at $9,000; during the years of production, 6-40, these costs will
rise to $12,000 per year. The relevant market rate of interest for the entire
period is 12%. Assume that all receipts and payments are made at the end of each
year.
Instructions
Dick Button has
offered to buy Stacy's vineyard business by assuming the 40-year lease. On the
basis of the current value of the business, what is the minimum price Stacy
should accept?
P6-12
(Pension Funding)
Craig Brokaw,
newly appointed controller of STL, is considering ways to reduce his company's
expenditures on annual pension costs. One way to do this is to switch STL's
pension fund assets from First Security to NET Life. STL is a very well-respected
computer manufacturer that recently has experienced a sharp decline in its
financial performance for the first time in its 25-year history. Despite
financial Problems, STL still is committed to providing its employees with good
pension and postretirement health benefits.
Under its
present plan with First Security, STL is obligated to pay $43 million to meet
the expected value of future pension benefits that are payable to employees as
an annuity upon their retirement from the company. On the other hand, NET Life
requires STL to pay only $35 million for identical future pension benefits.
First Security is one of the oldest and most reputable insurance companies in
North America. NET Life has a much weaker reputation in the insurance industry.
In pondering the significant difference in annual pension costs, Brokaw asks
himself, “Is this too good to be true?”
Instructions
Answer the
following questions.
a. Why might NET
Life's pension cost requirement be $8 million less than First Security's
requirement for the same future value?
b. What ethical
issues should Craig Brokaw consider before switching STL's pension fund assets?
c. Who are the
stakeholders that could be affected by Brokaw's decision?
TUTORIAL
PREVIEW
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(a)
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Future value of an ordinary annuity of
$4,000 a period for 20 periods at 8%
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$183,047.84 |
($4,000 X 45.76196) |
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Factor (1 + .08)
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X 1.08
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Future value of an annuity
due of $4,000 a period at 8%
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$197,692 |
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