Homework Help for Accounting (page 1822)

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Numerous frauds in the early 2000s spurred Sarbanes-Oxleylegislation (SOX). SOX changed the way businesses looked at andreported their internal control structure. Internal controls areneeded both to prevent and deter fraud as well as errors.Segregation of duties is the most commonly considered internalcontrol. Ben's Barn is a successful, locally owned, organic farmer.Ben and his wife sell produce at local farmer's markets. The farmis the primary source of income for Ben and his family. Ben hasbeen in business for 10 years, and has developed a reputation forhigh quality produce. Ben's extensive greenhouses allow him to growvarieties not native to the local area, which commanded higherprices in the local markets. This summer, the weather was perfectand Ben had a bumper crop. Ben and his wife could not keep up, andmade the decision to hire a part-time temporary employee for thefirst time. Ben took great pride in his produce, and made thedecision to send the employee to the farmer's market so that hecould tend to the harvest and provide the care he thought itneeded. Ben and the employee would load the produce in thecompany's truck, and take it the farmer's market three (3) timesper week. Once set up, Ben would spend some time talking with theother vendors and regular customers, and then return to the farm.The employee was responsible for cash sales to the marketcustomers. Some inventory was sold by the item, while otherinventory was sold by weight. They set up a small scale at thebooth each day to weigh produce. A portable cash register was alsotaken to register sales and provide receipts to customers. Theregister kept a duplicate copy of the receipts for reconciliation.The register also featured subtotaling features which would add thesales for the day. At the end of the day, Ben would return to helpload the remaining produce and close the produce stand for the day.He would change out the register tape, but like any good farmer,often left the tapes in a folder in his truck until he couldremember to take them into the house/office. At the end of eachweek, Ben's wife made a trip to the bank to deposit cash receiptsand to get the proper change/denominations to start the new week'scash box. Since her husband was so busy, she wasn't able to catchup with him to get the register receipts to match to deposits, soshe just counted the cash and deposited it. For his records, Benrecorded every detail of the harvest. He wanted to know how to planfor the next season. He recorded quantities and weights of produceharvested by variety. He tracked the harvest daily, but neverreconciled it to sales at the market and produce that was returnedfrom the market. Harvest continued to be exceptionally busy. As aresult, Ben could barely keep up with writing his employee a weeklypayroll check. When the bank statements came at the end of themonth, he was too busy for paperwork and failed to reconcilestatements until the following month. After all, he and his wifehad run the business for 10 years this way, he would catch up onpaperwork when it slowed down. At the end of the season, Benfinally slowed down enough to catch up on paperwork. He began toreview the bank statements, and noticed that deposits were lessthan they had been in prior years, when harvests had not been asgood. Ben was certain that he had sold more inventory. In fact, heknew he had because half-way through the season he had added anadditional day of sales (a 4th market) each week. Ben had helpedload the truck at the end of each day, and only a small amount everreturned to the farm. What could have happened? Did the employeehave something to do with this? Would Ben ever know how much helost? For this exercise, your job is to identify controls and putcontrols in place to prevent the loss of a company's liquid assets:cash & inventory. Identify appropriate controls to prevent theabove losses. Why do you believe those controls are needed and whywould they be effective?

The financial statements for Castile Products, Inc., are givenbelow:

Castile Products, Inc.
Balance Sheet
December 31
Assets
Current assets:
Cash $ 19,000
Accounts receivable, net220,000
Merchandise inventory 330,000
Prepaid expenses 8,000

Total current assets 577,000
Property and equipment, net 850,000

Total assets $ 1,427,000

Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 270,000
Bonds payable, 12% 390,000

Total liabilities 660,000
Stockholders’ equity:
Common stock, $5 par value $140,000
Retained earnings 627,000

Total stockholders’ equity 767,000

Total liabilities and stockholders' equity $1,427,000

Castile Products, Inc.
Income Statement
For the Year Ended December 31
Sales $ 2,250,000
Cost of goods sold 1,170,000

Gross margin 1,080,000
Selling and administrative expenses 570,000

Net operating income 510,000
Interest expense 46,800

Net income before taxes 463,200
Income taxes (30%) 138,960

Net income $ 324,240

Account balances at the beginningof the year were: accounts receivable, $190,000; and inventory,$310,000. All sales were on account. Assets at the beginning of theyear totaled $1,050,000, and the stockholders’ equity totaled$645,000.

Required:
Compute the following:

1.

Gross margin percentage. (Round your percentage answer to 2decimal places (i.e., 0.1234 should be entered as 12.34).)


2.

Net profit margin percentage. (Round your answer to the nearestwhole percentage place (i.e., 0.1234 should be entered as12%).)


3.

Return on total assets. (Round your percentage answer to 1decimal place (i.e., 0.1234 should be entered as 12.3).)


4.

Return on equity. (Round your percentage answer to 1 decimalplace (i.e., 0.1234 should be entered as 12.3).)


5. Was financial leverage positive or negative for theyear?

Positive
Negative

On December 31, 2016, Yard Art Landscaping leased a deliverytruck from Branch Motors. Branch paid $39,000 for the truck. Itsretail value is $42,382.

The lease agreementspecified annual payments of $13,000 beginning December 31, 2016,the inception of the lease, and at each December 31 through 2019.Branch Motors’ interest rate for determining payments was 10%. Atthe end of the four-year lease term (December 31, 2020) the truckwas expected to be worth $11,000. The estimated useful life of thetruck is five years with no salvage value. Both companies usestraight-line depreciation.

Yard Art guaranteed a residualvalue of $5,000. Guarantor Assurance Corporation was engaged toguarantee a residual value of $8,000, but with a deductible equalto any amount paid by the lessee ($8,000 reduced by any amount paidby the lessee). Yard Art’s incremental borrowing rate is 9%.

A $3,000 per year maintenanceagreement was arranged for the truck with an outside service firm.As an expediency, Branch Motors agreed to pay this fee. It is,however, reflected in the $13,000 lease payments.

Collectibility of the lease payments byYard Art is reasonably predictable and there are no costs to thelessor that are yet to be incurred. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriatefactor(s) from the tables provided.)

Required:

1.

How should this lease be classified by Yard Art Landscaping (thelessee)?

2.

Calculate the amount Yard Art Landscaping would record as aleased asset and a lease liability. (Round yourintermediate calculations to the nearest dollaramount.)


3.How should this lease be classified by Branch Motors (thelessor)?

Operating lease

Capital lease: Sales-type lease

Capital lease

Capital lease: Direct financing lease


4.Show how Branch Motors calculated the $13,000 annual leasepayments.

Lessor's Calculation of Lease PaymentsAmount to be recovered(fair value

Less:Present value of the residual value

Amount to be recovered through periodic lease payments

Lease payments at the beginning of each of the next fouryear

Add: Executory costs1,000Lease payments including executorycosts

5.

Calculate the amount Branch Motors would record as salesrevenue. (Round your intermediate calculations to thenearest dollar amount.)

6.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2016. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount

·
1.

Record the lease for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the lease for Branch Motors.

· 4.

Record cash received by Branch Motors

7. Prepare an amortization schedule that describes the patternof interest expense over the lease term for Yard Art.

8.

Prepare an amortization schedule that describes the pattern ofinterest revenue over the lease term for Branch Motors.


9.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2017. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field. Round your intermediate calculations to the nearestdollar amount.)

· 1.

Record the maintenance expense for Yard Art.

2.

Record the lease payment for Yard Art.

3.

Record the depreciation expense for Yard Art.

4.

Record the cash received on lease by Branch Motors.


10.Prepare the appropriate entries for both Yard Art and BranchMotors on December 31, 2019 (the final lease payment). (Ifno entry is required for a transaction/event, select "No journalentry required" in the first account field. Round your intermediatecalculations to the nearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the lease payment for Yard Art.

· 3.

Record the depreciation expense for Yard Art.

· 4.

Record the cash received on lease by Branch Motors.

11.
Prepare the appropriate entries for both Yard Art and Branch Motorson December 31, 2020 (the end of the lease term), assuming thetruck is returned to the lessor and the actual residual value ofthe truck was $3,000 on that date. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field. Round your intermediate calculations to thenearest dollar amount.)

· 1.

Record the maintenance expense for Yard Art.

· 2.

Record the depreciation expense for Yard Art.

· 3.

Record the last payment on lease for Yard Art.

· 4.

Record the last cash receipt on lease and settlement of lease byBranch Motors.


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