ACCTG 230 Lecture 21: Friday 10-20 Notes (asset disposition)
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Use the following financial statements and additional information.
SANCHEZ INC. | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Cash | $ | 101,300 | $ | 48,900 | ||||
Accounts receivable, net | 68,000 | 53,000 | ||||||
Inventory | 69,000 | 96,000 | ||||||
Prepaid expenses | 5,700 | 7,100 | ||||||
Total current assets | 244,000 | 205,000 | ||||||
Equipment | 179,000 | 166,000 | ||||||
Accum. depreciation—Equipment | (45,000 | ) | (15,000 | ) | ||||
Total assets | $ | 378,000 | $ | 356,000 | ||||
Liabilities and Equity | ||||||||
Accounts payable | $ | 33,000 | $ | 40,000 | ||||
Wages payable | 7,000 | 17,000 | ||||||
Income taxes payable | 3,600 | 4,000 | ||||||
Total current liabilities | 43,600 | 61,000 | ||||||
Notes payable (long term) | 43,000 | 85,000 | ||||||
Total liabilities | 86,600 | 146,000 | ||||||
Equity | ||||||||
Common stock, $5 par value | 250,000 | 180,000 | ||||||
Retained earnings | 41,400 | 30,000 | ||||||
Total liabilities and equity | $ | 378,000 | $ | 356,000 | ||||
SANCHEZ INC. | ||||||
Sales | $ | 940,000 | ||||
Cost of goods sold | 575,000 | |||||
Gross profit | 365,000 | |||||
Operating expenses | ||||||
Depreciation expense | $ | 77,000 | ||||
Other expenses | 93,000 | |||||
Total operating expenses | 170,000 | |||||
195,000 | ||||||
Other gains (losses) | ||||||
Gain on sale of equipment | 5,200 | |||||
Income before taxes | 200,200 | |||||
Income taxes expense | 61,280 | |||||
Net income | $ | 138,920 | ||||
Additional Information
a. A $43,000 note payable is retired at its $43,000 carrying (book) value in exchange for cash.
b. The only changes affecting retained earnings are net income and cash dividends paid.
c. New equipment is acquired for $75,000 cash.
d. Received cash for the sale of equipment that had cost $62,000, yielding a $5,200 gain.
e. Prepaid Expenses and Wages Payable relate to Other Expenses on the income statement.
f. All purchases and sales of inventory are on credit.
Make a Journal entry worksheet
1. Reconstruct the journal entry for cash receipts from customers, incorporating the change in the related balance sheet account(s), if any.
2. Reconstruct the journal entry for cash payments for inventory, incorporating the change in the related balance sheet account(s), if any.
3. Reconstruct the journal entry for depreciation expense, incorporating the change in the related balance sheet account(s), if any.
4. Reconstruct the journal entry for cash paid for operating expenses, incorporating the change in the related balance sheet account(s), if any.
5. Reconstruct the journal entry for the sale of equipment at a gain, incorporating the change in the related balance sheet account(s), if any.
6. Reconstruct the journal entry for income taxes expense, incorporating the change in the related balance sheet account(s), if any.
7. Reconstruct the entry to record the retirement of the $43,000 note payable at its $43,000 carrying (book) value in exchange for cash.
8. Reconstruct the entry for the purchase of new equipment.
9. Reconstruct the entry for the issuance of common stock.
10. Close all revenue and gain accounts to income summary.
11. Close all expense accounts to income summary.
12. Close Income Summary to Retained Earnings.
13. Reconstruct the journal entry for cash dividends paid.
Question 1Acompany purchased for cash a machine with a list price of $90,000.The machine was shipped FOB shipping point at a cost of $5,000.Installation and test runs of the machine cost $3,000. Therecorded acquisition costof the machine is whichamount?
1 | $98,000 |
2 | $128,000 |
3 | $90,000 |
4 | $93,000 |
Question 2Small, ordinary repairs made to keepa truck running over its useful life have been debited to theVehicles account. As a result of this, which of the followingoccurred?
1 | The balance in the Vehicles account was correctly stated. |
2 | The balance in the Vehicles account was overstated. |
3 | The expenses for the period were overstated. |
4 | The net income for the period was understated. |
Question 3 Whatis the annual straight-linedepreciation for an asset thatcost $34,600, has an estimated service life of 8 years, and anestimated salvage valueof $1,400?
1 | $4,150 |
2 | $1,450 |
3 | $4,325 |
4 | $4,500 |
Question 4An asset cost $50,000, has anestimated salvage valueof $1,500, and an estimated usefullife of 8 years. What is thedouble-declining-balance depreciationrate?
1 | 20.0% |
2 | 25.0% |
3 | 16.0% |
4 | 32.5% |
Question 5An asset having a four-year servicelife and a salvage valueof $5,000 was acquired for $45,000cash on June 20. Ignore the half-year convention and calculate the depreciation expense at the end of the first year, December 31?
1 | $10,000, under the straight-line method |
2 | $22,500, under the double-declining-balance method |
3 | $7,000, under the straight-line method |
4 | $11,250, under the double-declining-balance method |
Question 6 Publicly traded companies can use adepreciation method that does not conform to generallyaccepted accounting principles but is based on a declining-balancemethod. What is the name of this accelerated depreciation method?
1 | Asset Cost Recovery Statement |
2 | Asset Cost Recognition System |
3 | Modified Accelerated Cost Recovery System |
4 | Accelerated Cost Recovery System |
Question 7 OnJune 28, 2011, a business sold for$1,500 a plant assetthat cost $5,000.The asset had a 5-year useful life, nosalvage value, and had been used by the business sinceJanuary 1, 2008. Straight-linedepreciation was used. Thefiscal year ends on December 31. What was the result of selling theplant asset?
1 | No gain or loss on the disposal of plant assets |
2 | A $1,000 gain on the disposal of plant assets |
3 | A $500 loss on the disposal of plant assets |
4 | A $500 unrecognized gain on the sale of a plant asset. |
Question 8Your company currently is generatingnormal earnings that are equal to a 12% return on net identifiable assets of $450,000. A comparable company is generatingnormal earnings that are equal to 10% return on net identifiableassets of $450,000. What is the estimated goodwill ofyour company, when compared to the other company?
1 | $90,000 |
2 | $45,000 |
3 | $9,000 |
4 | $15,000 |
Question 9The Baker Mining Company acquired aniron ore deposit for $2,000,000. The company's geologist estimatedthe deposit to contain 1,500,000 tons of iron ore. At the end ofthe first year, 60,000 tons had been extracted. The end-of-yearjournal entry to record thedepletion of the iron ore wouldinclude which of the following?
1 | A credit to Iron Ore Inventory of $45,000 |
2 | A credit to Accumulated Depletion of $80,000 |
3 | A debit to Iron Ore Inventory of $50,000 |
4 | None the above, until all of the ore is extracted |
Question 10 Which of the following are investing activities?
1 | Selling a plant asset |
2 | Exchanging an old asset and cash for a new plant asset |
3 | Depreciating or amortizing an asset |
4 | Both (A) and (B) |
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.