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ACCT200 Lecture Notes - Lecture 4: Historical Cost, Common Stock, Retained Earnings

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taupelion650
5 Apr 2016
School
University of Delaware
Department
Accounting
Course
ACCT200
Professor
Debessay Araya

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Document Summary

*keep in mind the left side vs. right side of the equation. Stewardship function: a duty to protect and use the assets of a business for the benefits of the owners. Year 1 jan 1: company has 200 cash, 1800 land, liability 600, and common stock 1000. No, he only has in cash: suppose they sell the land that previously cost for cash, can they pay a. Year 1 jan 1: cash 500, land 1500, liability 600, common stock 1000, retained earnings 400. 500 + 1500 = 600 + 1000 + 400: assume debt is due, can they repay the creditor, no they do not have enough cash. What percent of assets was acquired from creditors: 30% What percent of assets was acquired from owners: 50% What percent of assets were acquired from earning activities: 20% An appraiser determines that as of december 1 year 1 the market value of the land is.

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Related Questions

Introduction

Jones Widget Company (JWC) incorporated at the beginning of2014. Below is the post closing trial balance as of 12/31/2014.
Account Title Balance
Cash 10,900
AccountsReceivable 8,950
Allowance for DoubtfulAccounts 1,095
Inventory 11,560
Prepaid Rent 3,000
Equipment 39,000
AccumulatedDepreciation 3,800
Accounts Payable 0
Sales Tax payable 600
FICA Taxes Payable 1,000
Federal Income Tax(FIT) Payable 600
Wages Payable 1,350
Unemployment taxespayable 1,000
Unearned Revenue 3,750
Interest Payable 360
Notes Payable 16,000
Common Stock 20,300
Add'l PIC 16,210
RE - December 31,2014 12,545
Treasury Stock 5,200
Additional Information:
•

JWC establishes a policy that it will sell inventory at $150 perunit. Sales taxes are 6%. JWC will use the FIFO method and recordCOGS on a perpetual basis.
•

Employee wages are $3,800 per month. Employees are paid on the16th for the first half of the month and on the first of thefollowing month for the second half of each month. The income taxeswithheld are $300 each paycheck, and the FICA taxes are $250 perpaycheck. The withholding and the employer’s matching contributionare paid monthly on the second day of the month. In addition,unemployment taxes of $65 are accrued with each payroll. The taxesare paid on March 31.
•

The Beginning inventory of $11,560 consists of 170 units.
• ThePrepaid Rent balance is for January 2015.
•

The equipment was purchased on July 1, 2014. It is beingdepreciated using the straight line method.
•

Unearned Revenue is for 25 units ordered and paid for in advanceby two customers in late December. One order will be filled inJanuary, the remainder in early February.
•

The Notes payable represents a $16,000 bank loan received onOctober 1, 2013 at 9% annual interest.
• The parvalue on the common stock is $2.
• Thetreasury stock account has 400 shares.
• Record alltransactions to the nearest dollar.
Below are transactions for January2015
Jan 1 PaidDecember 31 payroll previously accrued.
Jan 2 A $104,0006% six year bond is issued. The effective yield is 7%.
6% 7%
Present Value of $1factors .7050 .6663
Present Value of anAnnuity of $1 factors 4.9173 4.7665
Jan 2

A truck is purchased for $17,000 cash. It is estimated the truckwill be used for 50,000 miles and will have no salvage value.(Record the purchase to the account "Vehicles").
Jan 2

Payroll taxes payable (FIT & FICA) recorded in December areremitted to the IRS.
Jan 5 A $1,050customer account is written off as uncollectible.
Jan 6

Sales on account of 165 units of inventory occur during January.Include sales tax of 6%.
Jan 10

Sales taxes of $600 which had been collected and recorded inDecember are paid to the state.
Jan 11 Anadditional 60 units of inventory are purchased on account for$3,900.
Jan 12

The equipment purchased in 2014 for $39,000 is sold for $37,000.No additional depreciation is recorded for January.
Jan 14

Having sold the equipment, JWC pays off the note in full. Theamount paid is $16,414 which includes an additional $54 interestthrough Jan 14.
Jan 15

A portion of the advance order from December (20 units) isdelivered. There is no sales tax on this order.
Jan 16

Record and pay payroll for January 1-15. Record the employer’smatching share of FICA taxes And the unemployment taxes also.
Jan 20 200 sharesof the treasury stock are sold for $3,800.
Jan 21 Collections from sales on account totaled $9,900.
Jan 27 Sold theother 200 shares of the treasury stock for $2,000.
Jan 28

JWC declares and distributes a 10% Stock dividend. The marketprice of the stock at the time is $5 per share. (Hint on thestatement of retained earnings, this amount will should be shown asa dividend).
Jan 31

(Adjusting 1) Record depreciation on the truck. During January,the truck is driven 2,500 miles.
Jan 31

(Adjusting 2) It is estimated that 3% of the ending accountsreceivable balance will be uncollectible.
Jan 31 (Adjusting3) Record January rent expired.
Jan 31

(Adjusting 4) Accrue January 31 payroll, which will be payableon February 1. Record the employer’s matching share of FICA taxesalso.
Jan 31

(Adjusting 5) Record ONE MONTH’S interest expense andamortization of premium or discount on the bond. Round to thenearest dollar.
1-a.

Prepare all January journal entries and adjusting entries

1-b.

Post all January entries (transactions and adjustments) to theT-accounts and complete the adjusted trial balance

Scenario: Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors.

The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Lee’s are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they don’t have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them. The Project: There are several financial analysis tasks involved with this project, which are outlined below (#1-8). Once you have worked through each task, you will need to produce a PowerPoint presentation to introduce and highlight your findings. Your PowerPoint presentation should include a title slide, an executive summary slide(s), subsequent slides that illustrate your findings, any additional recommendations that you would like to make, and a conclusion slide. The PowerPoint presentation should be approximately 15-25 slides in length. Include notes in the presentation as needed. You will also need to create a written executive summary (one page in length). Your final submission will include the PowerPoint presentation, the executive summary, and an Excel file with relevant calculations.

1. Financial Statements: Develop an Income Statement for 20XX, Cash Flow Statement for 20XX, and Balance Sheet as of the end of 20XX based on the data provided below for year 20XX. All sales are collected when the sale is made and all expenses are paid when the expense is incurred. Explain the purpose of each financial statement. a. Income Statement Data for 20XX: • Units produced and sold = 420 • Sales ($80 per unit selling price) = $33600 • Cost of goods sold ($30 per unit, all variable costs) = $12600 • Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves) • Advertising fees =$2000 • Bank fees = $150 • Phone/internet = $1200 • Shipping ($3 per unit) = $1260 • Utilities = $900 • Office supplies = $800 • Interest expense on note payable = $350 • Depreciation expense (straight line) = $800 • Income tax rate = 26 %

b. Other Financial Data for 20XX: • Proceeds from sale of equipment = $3000. The equipment originally cost $1000 and had accumulated depreciation of $200. • Purchase of equipment = $1600 (The machine is purchased on the last day of 20XX so no depreciation expense is recorded.) • Repayment of note payable = $5000 • Consider any data relevant from the income statement.

c. Balance Sheet Data for Beginning of 20XX: • Cash and cash equivalents = $10000 • Accounts receivable = $0 (Cash is received at time of sale) • Raw materials inventory = $10500 • Equipment = $5000 (This includes the $1000 cost of the equipment sold in 20XX). • Accumulated depreciation = $1,000 (This includes the accumulated depreciation of 200 for the equipment sold in 20XX. • Accounts payable = $0 (Cash is paid at the time of purchase.) • Note payable = $5000 (This is the note payable which is repaid in 20XX) • Common stock = $15000 • Retained earnings = $4500 2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.

a. Net Profit Margin

b. Quick Ratio c. Debt-to-Equity Ratio 3. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

B. Explain the importance of distinguishing between variable and fixed costs.

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information. a. Cost of goods sold of $35 per unit b. Labor = $400/month •

One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month. c. Advertising fees = $3,000 d. Bank fees = $200 e. Phone/internet = $150 per month f. Shipping = $3 per unit g. Utilities = $100 per month h. Office Supplies = $900 i. Conference Exhibitor Fee = $3000 j. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

4. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

5. Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be prepared for this. Based on the budgeted income statement calculated above for 20XY, create a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY

. 6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one year’s time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)

8. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit and the total contribution margin?