ACC 342 Lecture Notes - Lecture 6: Withholding Tax, Confidence Interval, Current Liability

Excess capacity

Krogh Lumber's 2016 financial statements are shown here.

Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 61% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
%

Now suppose 2017 sales increase by 20% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 84% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

Complete P9-3 using the template provided here.

Problems: For partial credit, work must be shown in an orderlyfashion. Answers will be graded based on their ability tocommunicate the problem solvingprocess. 30 points

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.

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.

i need you to prepare a completeclassified balance sheet based on the trial balance and theadditional information. Next, I need you to prepare a multi-stepincome statement based on the same information. Then, calculate thefinancial ratios provided.