ACCTG415 Study Guide - Quiz Guide: Interest Expense
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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 | ||
20Y2 | 20Y1 | |
Retained earnings, January 1 | $3,704,000 | $3,264,000 |
Net income | $ 600,000 | $ 550,000 |
Dividends: | ||
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 |
Marshall Inc. | ||
Comparative Income Statement | ||
For the Years Ended December 31, 20Y2 and 20Y1 | ||
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: | ||
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 |
Marshall Inc. | ||
Comparative Balance Sheet | ||
December 31, 20Y2 and 20Y1 | ||
20Y2 | 20Y1 | |
Assets | ||
Current assets: | ||
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 | ||
Current liabilities | $ 880,000 | $ 800,000 |
Long-term liabilities: | ||
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 | $ | |
2. Current ratio | ||
3. Quick ratio | ||
4. Accounts receivable turnover | ||
5. Number of days’ sales in receivables | ||
6. Inventory turnover | ||
7. Number of days’ sales in inventory | ||
8. Ratio of fixed assets to long-term liabilities | ||
9. Ratio of liabilities to stockholders’ equity | ||
10. Times interest earned | ||
11. Asset turnover | ||
12. Return on total assets | % | |
13. Return on stockholders’ equity | % | |
14. Return on common stockholders’ equity | % | |
15. Earnings per share on common stock | $ | |
16. Price-earnings ratio | ||
17. Dividends per share of common stock | $ | |
18. Dividend yield |
Selected transactions of Shadrach Computer Corporation duringNovember and December of 2016 are as follows:
Nov. | 1 | Borrowed money from the bank byissuing a non-interest-bearing, $58,000, 90-day note. The note isdiscounted on a 12% basis. |
9 | Sold 125 computers with a 1-yearassurance-type warranty for $5,600 each on credit (ignore cost ofgoods sold). Past experience indicates that warranty costs average$110 per computer. | |
12 | Sold 125 software packages at $270each on credit (ignore cost of goods sold). With each softwarepackage, Shadrach offered a premium in the form of a USB drive forthe return of one proof of purchase. The offer expires June 30,2017. The cost of each USB drive is $5, and Shadrach estimates that80% of the premiums will be redeemed; therefore, 100 USB driveswere purchased on credit. | |
20 | Paid $2,000 in fulfillment of thewarranty agreement on several of the computers sold on November9. | |
30 | Accrued monthly vacation pay.Shadrach has 80 employees who are each paid an average of $180 perday. Shadrach has a policy of allowing each employee 12 daysâ paidvacation per year; the related liability is recorded on a monthlybasis. Employees are paid monthly. | |
30 | Paid monthly payroll. Grosssalaries were $430,000. No vacations were taken during November.Income tax withholdings of 20% are applicable to the salaries ofall employees. A F.I.C.A. tax of 8% for both employees andemployers is also applicable. These rates apply to all salariesbecause no employeeâs salary has exceeded the maximum wage limit.The state allows the corporation a 1% unemployment compensationmerit-rating reduction from the normal rate of 5.4%. The federalunemployment rate is 0.6%. Prior to October, each individualemployee had accumulated a gross salary in excess of $7,000 for2016. | |
Dec. | 14 | Twenty proofs of purchase werereturned from the November 12 sale. |
29 | An individual filed suit againstShadrach for damages caused in a November 5 accident that resultedwhen a member of the sales force hit the individualâs car while onpersonal business. The amount of the suit filed was $1,450. Becausethe employee was on personal business, the companyâs insurancecompany will not pay the claim. In Shadrachâs attorneyâs opinion,the amount of the suit is reasonable; furthermore, the companybelieves it is likely to lose the suit. | |
31 | Accrued monthly vacation pay. | |
31 | Paid monthly payroll. Grosssalaries were $433,000. The salaries included $6,500 of vacationpay in the sales force and $3,300 of vacation pay in the officestaff. The F.I.C.A. tax rate still applies to all wages because noemployeeâs salary exceeded the maximum wage limit. | |
31 | Recorded presidentâs bonus. Thepresident receives a 10% bonus on any income over $240,000, beforededucting income taxes and the bonus. Shadrachâs effective incometax rate is 30%, and income before income taxes and bonus for 2016was $560,000. The bonus will be paid in January 2017. |
Required: | |
Prepare journal entries torecord the preceding transactions of Shadrach Computer Corporationfor 2016. Include year-end accruals. Round all calculations to thenearest dollar. |
Chart of Accounts
CHARTOF ACCOUNTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shadrach Computer Corporation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Pepper, Inc., purcashed 80% of the outstanding stock of the SaltCompany on January 01, 2015, for $2,750,000 cash.
At that date, Salt Company's assets and liabilities had thefollowing fair values and book values:
FMV | BV | |
cash and receivables | 1400000 | 1400000 |
inventory | 1792000 | 1600000 |
plant assets | 5250000 | 5040000 |
curret liabilities | (3500000) | (3500000) |
long term debt | (1800000) | (1800000) |
All of Salt Company's inventory was sold in the followingyear.
Salt Company depreciates plant assets over a 20-year life.
Pepper, Inc. amortizes debt premiums and discounts over its 6years to maturity using straight-line amortization.
Pepper, Inc. accounts for this investment using the equitymethod.
The financial statements for both companies for the year endedDecember 31, 2015, are shown below:
INCOME STATEMENT
For the Period Ending December 31 2015
(a)Pepper, Inc. (b)Salt Company
Revenue (a)$14,000,000 (b)$7,000,000
Income From Sub. (a)678,000 (b)0
Total Revenue (a)14678000 (b)7000000
Cost Of Sales (a)8,000,000 (b)4,250,000
Operating Expenses (a)2,500,000 (b)1,600,000
Interest Expense (a)250,000 (b)150,000
Total Expenses (a)10750000 (b)6000000
Net Income (a)3928000 (b)1000000
STATEMENT OF
RETAINED EARNINGS
-
Begining Balance (a)$4,000,000 (b)$2,540,000
add: net income (a)3928000 (b)1000000
Deduct: Dividends (a)600,000 (b)120,000
Ending Balance (a)7328000 (b)3420000
Balance Sheet | |||||
As of December 31 2015 | |||||
Pepper, Inc. | Salt Company | ||||
Assets | |||||
Cash and Receivables | $ 2,800,000 | $ 1,200,000 | |||
Inventory | 3,600,000 | 1,070,000 | |||
Plant Assets | 5,500,000 | 4,800,000 | (net) | ||
Accumulated Depreciation | (2,500,000) | ||||
Investment in Sub. | 3,332,000 | ||||
Total assets | 12732000 | 7070000 | |||
Liabilities and Equities | |||||
Current Liabilities | $ 1,654,000 | $ 1,400,000 | |||
Long-Term Debt | 2,250,000 | 1,750,000 | |||
Capital Stock | 1,500,000 | 500,000 |
RetainedEarnings 7328000 3420000
Total liab. andequity 12732000 7070000
(1)Using the above data and Excel, prepare a consolidatedworksheet for the period ending December 31, 2015. Be sure allinput data is in a separate part of the schedule so that thesolution will change with changes
(2)Include subschedules to calculate goodwill and the equitymethod subsidiary income for the period
(3)By linking to the work paper prepared in part 1, prepare aformal consolidated income statement, retained earnings statement,and balance sheet as of December 31, 2015
(a) is for pepper (b) is for salt
Please explain how you got your answers. Thank you!