ACTG 2011 Lecture Notes - Lecture 10: Current Liability, Net Income, Audit
Document Summary
Get access
Related Documents
Related Questions
Measures of liquidity, solvency, and profitability
The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.60 on December 31, 20Y2.
| Marshall Inc. | ||
| Comparative Retained Earnings Statement | ||
| For the Years Ended December 31, 20Y2 and 20Y1 | ||
| Â | 20Y2 | 20Y1 |
| Retained earnings, January 1 | $3,704,000 | $3,264,000 |
| Net income | $ 600,000 | $ 550,000 |
| Dividends: | Â | Â |
| On preferred stock | (10,000) | (10,000) |
| On common stock | (100,000) | (100,000) |
| Increase in retained earnings | $ 490,000 | $ 440,000 |
| Retained earnings, December 31 | $4,194,000 | $3,704,000 |
 Â
| Marshall Inc. | ||
| Comparative Income Statement | ||
| For the Years Ended December 31, 20Y2 and 20Y1 | ||
| Â | 20Y2 | 20Y1 |
| Sales | $ 10,850,000 | $10,000,000 |
| Cost of goods sold | (6,000,000) | (5,450,000) |
| Gross profit | $ 4,850,000 | $ 4,550,000 |
| Selling expenses | $ (2,170,000) | $ (2,000,000) |
| Administrative expenses | (1,627,500) | (1,500,000) |
| Total operating expenses | $(3,797,500) | $ (3,500,000) |
| Operating income | $ 1,052,500 | $ 1,050,000 |
| Other revenue and expense: | Â | Â |
| Other revenue | 99,500 | 20,000 |
| Other expense (interest) | (132,000) | (120,000) |
| Income before income tax expense | $ 1,020,000 | $ 950,000 |
| Income tax expense | (420,000) | (400,000) |
| Net income | $ 600,000 | $ 550,000 |
 Â
 Â
| Marshall Inc. | ||
| Comparative Balance Sheet | ||
| December 31, 20Y2 and 20Y1 | ||
| Â | 20Y2 | 20Y1 |
| Assets | Â | |
| Current assets: | Â | Â |
| Cash | $1,050,000 | $ 950,000 |
| Marketable securities | 301,000 | 420,000 |
| Accounts receivable (net) | 585,000 | 500,000 |
| Inventories | 420,000 | 380,000 |
| Prepaid expenses | 108,000 | 20,000 |
| Total current assets | $ 2,464,000 | $2,270,000 |
| Long-term investments | 800,000 | 800,000 |
| Property, plant, and equipment (net) | 5,760,000 | 5,184,000 |
| Total assets | $ 9,024,000 | $8,254,000 |
| Liabilities | Â | |
| Current liabilities | $ 880,000 | $ 800,000 |
| Long-term liabilities: | Â | Â |
| Mortgage note payable, 6% | $ 200,000 | $ 0 |
| Bonds payable, 4% | 3,000,000 | 3,000,000 |
| Total long-term liabilities | $ 3,200,000 | $3,000,000 |
| Total liabilities | $ 4,080,000 | $3,800,000 |
| Stockholders’ Equity |  | |
| Preferred 4% stock, $5 par | $ 250,000 | $ 250,000 |
| Common stock, $5 par | 500,000 | 500,000 |
| Retained earnings | 4,194,000 | 3,704,000 |
| Total stockholders’ equity | $ 4,944,000 | $4,454,000 |
| Total liabilities and stockholders’ equity | $ 9,024,000 | $8,254,000 |
Determine the following measures for 20Y2. Round to one decimal place, including percentages, except for per-share amounts, which should be rounded to the nearest cent.
| 1. Working Capital | $ | Â |
| 2. Current ratio | Â | |
| 3. Quick ratio | Â | |
| 4. Accounts receivable turnover | Â | |
| 5. Number of days’ sales in receivables |  | |
| 6. Inventory turnover | Â | |
| 7. Number of days’ sales in inventory |  | |
| 8. Ratio of fixed assets to long-term liabilities | Â | |
| 9. Ratio of liabilities to stockholders’ equity |  | |
| 10. Times interest earned | Â | |
| 11. Asset turnover | Â | |
| 12. Return on total assets | % | |
| 13. Return on stockholders’ equity | % | |
| 14. Return on common stockholders’ equity | % | |
| 15. Earnings per share on common stock | $ | Â |
| 16. Price-earnings ratio | Â | |
| 17. Dividends per share of common stock | $ | Â |
| 18. Dividend yield |
Review of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value)
Assume an investee has the following financial statement information for the three years ending December 31, 2013:
| (At December 31) | 2011 | 2012 | 2013 |
|---|---|---|---|
| Current assets | $310,500 | $416,550 | $428,205 |
| Tangible fixed assets | 844,500 | 861,450 | 992,595 |
| Intangible assets | 75,000 | 67,500 | 60,000 |
| Total assets | $1,230,000 | $1,345,500 | $1,480,800 |
| Current liabilities | $150,000 | $165,000 | $181,500 |
| Noncurrent liabilities | 330,000 | 363,000 | 399,300 |
| Common stock | 150,000 | 150,000 | 150,000 |
| Additional paid-in capital | 150,000 | 150,000 | 150,000 |
| Retained earnings | 450,000 | 517,500 | 600,000 |
| Total liabilities and equity | $1,230,000 | $1,345,500 | $1,480,800 |
| (For they year ended December 31) | 2011 | 2012 | 2013 |
|---|---|---|---|
| Revenues | $1,275,000 | $1,380,000 | $1,455,000 |
| Expenses | 1,162,500 | 1,260,000 | 1,314,000 |
| Net income | $112,500 | $120,000 | $141,000 |
| Dividends | $37,500 | $52,500 | $58,500 |
Assume that on January 1, 2011, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee's identifiable net assets had fair values that approximated their historical book values. In addition, the acquisition resulted in no goodwill or bargain purchase gain recognized in the consolidated financial statements of the investor company. Assuming that the investor company uses the equity method to account for its investment in the investee, what is the balance in the "investment in investee" account in the investor company's preconsolidation balance sheet on December 31, 2013?
A. $900,000
B. $750,000
C. $675,000
D. $1,480,800
Assume that on January 1, 2011, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee's identifiable net assets had fair values that approximated their historical book values. In addition, the acquisition resulted in no goodwill or bargain purchase gain recognized in the consolidated financial statements of the investor company. Assuming that the investor company uses the equity method to account for its investment in the investee, what is the balance in the "income from investee" account in the investor company's preconsolidation income statement for the year ended December 31, 2013?
A. $58,500
B. $141,000
C. $112,500
D. $82,500
Required: Prepare a multiple-step income statement in good form.
Calculate retained earnings as of December 31.
Prepare a classified balance sheet ingood form.
Calculate the providedratios 20 points
Additional Information:
Assume that all taxes are at 30% unless otherwise indicated. Theincome tax expense on continuing operations and the income taxliability have not yet been recorded.
Line Item 1 refers to a loss of $70,000 on uninsured damagedfrom a meteor that crashed into a plant facility in New Mexico. Themeteor is considered BOTH UNUSUAL AND INFREQUENT. The applicabletax rate was 35%.
Line Item 2 is income from the publishing division of the firmprior to May 1, 2016. On May 1, management decided to spin-off[discontinue] the operations.
Line Item 3 is also related to the publishing division mentionedin “c” above. Actual losses on the divisions operations after May 1totaled $50,000. Management further expected additional losses of$30,000 on operations and a loss of $220,000 on the sale of thedivision’s assets.
Line Item 4 arose from the sale of long-term investments. Theportfolio that originally cost $250,000 was sold for $284,000.
Line Item 5 arose from discovery of equipment, costing $600,000that had been written off in 2014 as an operating expense. As ofthe beginning of the 2016 the accumulated depreciation was$100,000. The book value of the equipment was $500,000.
Line Item 6 refers to restructuring costs.
Line Item 7 refers to inventory that was on Hand on December 31,and was discovered to be obsolete during the year-end count onJanuary 15, 2017.
The investment account represents two portfolios. The firstportfolio cost $200,000 and is worth $215,000. These stocks andbonds are available currently for sale to raise cash resources. Theother investment, costing $1,000,000 and worth $1,000,000, will beheld indefinitely [long-term] by management.
Included in goodwill is an amount equal to $100,000 thatmanagement “created” after a successful advertising campaign. Theoffsetting credit was to paid-in capital in excess of par value:common.
During 2016, management decided that the usefulness of thefranchise would only last four of the remaining five years.Consequently, management increased the amortization by $100,000 or25 percent in 2016. The new estimate was used in 2016 and would becontinued for the remaining three years.
Inventory on December 31, 2016 was $200,000 after consideringthe decline from line item 7.
The state authorized 100,000 shares of 8 % preferred stock witha par value of $100 of which 8,000 shares have been issued.
The state also authorized 2,000,000 shares of common stock, witha par value of $10 par value. There are no shares in treasury.
The bonds will be refinanced when they are due in 2017.
Foreign currency translation losses were $ 3,000.
Thornhill Company | ||||
Trial Balance | ||||
as of December 31, 2016 | ||||
Account Title | Debit | Credit | ||
8 %, Preferred Stock | $ - | $ 1,000,000.00 | ||
Accounts Payable | 120,000 | |||
Accounts Receivable | 300,000 | |||
Accumulated Depreciation: building | 970,000 | |||
Accumulated Depreciation: equipment | 3,550,000 | |||
Administrative Expenses | 400,000 | |||
Bond Payable | 4,000,000 | |||
Building | 2,000,000 | |||
Cash | 100,000 | $ - | ||
Common Stock (200,000 shares outstanding) | 5,550,000 | |||
Discount on Bonds Payable | 125,000 | |||
Dividends | 300,000 | |||
Equipment | 5,000,000 | |||
Franchise | 340,000 | |||
Freight-in | 15,000 | |||
Goodwill | 785,000 | |||
Income Taxes Expenses | 88,200 | |||
Income taxes Payable | 88,200 | |||
Interest Expense | 700,000 | |||
Inventory | 170,000 | |||
Investments | 1,200,000 | |||
Land | 800,000 | |||
Long-term Notes Payable | 2,500,000 | |||
Net Sales | 5,300,000 | |||
Paid-in Capital in excess of par value: common | 300,000 | |||
Plant Facilities under Construction | 8,000,000 | |||
Prepaid Expenses | 60,000 | |||
Purchase Discounts | 65,000 | |||
Purchase Returns and Allowances | 125,000 | |||
Purchases | 2,575,000 | |||
Retained Earnings | 747,500 | |||
Selling Expenses | 650,000 | |||
Item 1 (net of taxes of $24,500) | 45,500 | |||
Item 2 (net of taxes of $6,000) | 14,000 | |||
Item 3 (net of taxes of $90,000) | 210,000 | |||
Item 4 | 34,000 | |||
Item 5 (net of taxes of $150,000) | 350,000 | |||
Item 6 | 840,000 | |||
Item 7 | 10,000 | |||
Total | $ 24,713,700 | $ 24,713,700 | ||
Financial Ratios
Current Ratio = Current Assets /Current Liabilities.
Quick Ratio = (Cash + MarketableSecurities + Receivables) / Current Liabilities.
Working Capital = Current Assets -Current Liabilities.
Total debt to total assets = Total Liabilities / TotalAssets.
Gross Profit Rate = Gross Profit/ Net Sales
Netincome as a percentage of sales = Net Income / Net Sales
Return on assets= Operating Income
[Beginning Total Assets + Ending Total Assets]/2
Assume that beginning assets were $13,720,000
Return on stockholders’ equity=
Net Income
[BeginningTotal Stockholders’ Equity + Ending Total Stockholders’Equity]/2
Assume that beginning stockholders’equity was $7,947,500
Price-Earnings Ratio = MarketPrice per Commons Share
Earnings per Common Share
Assume a market price of $ 1.00
Accounts Receivable Turnover = NetSales
Assume that beginning accounts receivable were $ 300,000
Average Collection Period = 365 days/ Accounts Receivable Turnover Ratio
Inventory Turnover = Cost of Goods Sold
Average Sales Period = 365 days /Inventory Turnover Ratio
Operating Cycle = The AverageCollection Period + The Average Sales Period.
The question Requires me to do thebalance sheet and calculate the ratios from the trial balance andthe additional informations. use the same information that is thetrial balance and the additional information to solve forMulti-step income statement.
