Assignment 1:
1. E3-18 (Page 152)
The current asset section of the Excalibur Tire Company's balance sheet consists of cash, marketable securities, accounts receivable and inventories. The December 31, 2011, balance sheet revealed the following:
Given:
Inventories $840,000
Total assets $2,800,000
Current ratio 2.25
Acid-test ratio 1.2
Debt to equity ratio 1.8
Required:
Determine the following 2011 balance sheet items:
1. Current Assets
2. Shareholders' Equity
3. Noncurrent Assets
4. Long-term Liabilities
2. E3-20 (Page 152)
Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D) or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken.
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Action
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Current Ratio
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Acid - Test
Ratio
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Debt to
Equity Ratio
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1. Issuance of long-term bonds
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2. Issuance of short-term notes
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3. Payment of accounts payable
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4. Purchase of inventory on account
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5. Purchase of inventory for cash
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6. Purchase of equipment with a
4-year note
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7. Retirement of bonds
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8. Sale of common stock
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9. Write-off of obsolete inventory
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10. Purchase of short-term investment for cash
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11. Decision to refinance on a long-term basis some currently maturing debt
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3. Judgment Case 3-5 (Page 161)
Review the balance sheet provided for Marcus Clothing Corporation and the additional information provided on page 162. Identify and explain the deficiencies in the statement prepared by the company's accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.
You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant
MARCUS CLOTHING CORPORATION
Balance Sheet At December 31, 2011
Assets
Current assets:
Cash $ 137,000
Accounts receivable, net 80,000
Note receivable 53,000
Inventories 240,000
Investments 66,000
______________
Total current assets 576,000
Other assets:
Land 200,000
Equipment, net 320,000
Prepaid expenses 27,000
Patent 22,000
__________
Total other assets 569,000
_________________
Total assets $1,145,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 125,000
Salaries payable 32,000
______________
Total current liabilities 157,000
Long-term liabilities:
Note payable $ 100,000
Bonds payable 300,000
Interest payable 20,000
______________
Total long-term liabilities 420,000
Shareholders' equity:
Common stock 500,000
Retained earnings 68,000
__________
Total shareholders' equity 568,000
_____________________
Total liabilities and shareholders' equity $1,145,000
In the course of your examination you uncover the following information pertaining to the balance sheet:
1. The company rents its facilities. The land that appears in the statement is being held for future sale.
2. The note receivable is due in 2013. The balance of $53,000 includes $3,000 of accrued interest. The next interest payment is due in July 2012.
3. The note payable is due in installments of $20,000 per year. Interest on both the notes and bonds is payable annually.
4. The company's investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.
Required:
Identify and explain the deficiencies in the statement prepared by the company's accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.
4. Integrating Case
Review the information pertaining to the audit of Covington Pike Corporation in problem 5-23 on pages 296-297 of your text. Use the list of ratios and the notes provided to approximate the current year's balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with calculations you use to estimate each amount reported.
You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still hold, prior years' ratios can be used to estimate what current balances should approximate. However you never actually performed this kind of analysis until now. The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these reflect the relationships maintained by Covington Pike in recent years.
Profit margin on sales = 5%
Return on assets = 7.5%
Gross profit margin = 40%
Inventory turnover ratio = 6 times
Receivables turnover ratio = 25
Acid-test ratio = .9 .
Current ratio = 2 to 1
Return on shareholders' equity = 10%
Debt to equity ratio = 1/3
Times interest earned ratio = 12 times
Jotted in the margins are the following notes:
- Net income $15,000
- Only one short-term note ($5,000); all other current liabilities are trade accounts
- Property, plant, and equipment are the only noncurrent assets
- Bonds payable are the only noncurrent liabilities
- The effective interest rate on short-term notes and bonds is 8%
- No investment securities
- Cash balance totals $ 15,000
Required:
You are requested to approximate the current year's balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported.
5. Complete the following activities and submit your answers to your instructor in a Word document formatted to proper APA specifications. Include any relevant supporting calculations.
Chapter 4: E4-16 - page 215
The following summary transactions occurred during 2011 for Bluebonnet Bakers:
Cash Received from:
Customers $ 380,000
Interest on note receivable 6,000
Principal on note receivable 50,000
Sale of investments 30,000
Proceeds from note payable 100,000
Cash paid for:
Purchase of inventory $ 160,000
Interest on note payable 5,000
Purchase of equipment 85,000
Salaries to employees 90,000
Principal on note payable 25,000
Payment of dividends to shareholders 20,000
The balance of cash and cash equivalents at the beginning of 2011 was $17,000.
Required:
Prepare a statement of cash flows for 2011 for Bluebonnet Bakers. Use the direct method for reporting operating activities.
6. E4-19 - page 215
The following transactions occurred during March 2011 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. [These are the same transactions analyzed in Exercise 2-1, when we determined their effect on elements of the accounting equation.]
1. Issued 30,000 shares of capital stock in exchange for $300,000 in cash.
2. Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable was signed for the balance owed.
3. Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.
4. Credit sales for the month totaled $120,000. The cost of the goods sold was $70,000.
5. Paid $5,000 in rent on the warehouse building for the month of March.
6. Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2011.
7. Paid $70,000 on account for the merchandise purchased in 3.
8. Collected $55,000 from customers on account.
9. Recorded depreciation expense of $1,000 for the month on the equipment.
Required:
1. Analyze each transaction and classify each as a financing, investing and/or operating activity (a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark (V) in the appropriate column(s). Example:
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Financing
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Investing
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Operating
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1. $ 300,000
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2. Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $40.000.
7. Judgment Case 4-9 - page 227
Each of the following situations occurred during 2011 for one of your audit clients:
1. The write-off of inventory due to obsolescence.
2. Discovery that depreciation expenses were omitted by accident from 2010's income statement.
3. The useful lives of all machinery were changed from eight to five years.
4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.
5. Ten million dollars face value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of $500,000. The company considers the event unusual and infrequent.
6. Restructuring costs were incurred.
7. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.
8. The inventory costing method was changed from FIFO to average cost.
Required:
1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):
a. As an extraordinary item.
b. As an unusual or infrequent gain or loss.
c. As a prior period adjustment.
d. As a change in accounting principle.
e. As a discontinued operation.
f. As a change in accounting estimate.
g. As a change in accounting estimate achieved by a change in accounting principle.
2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2.
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Situation
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Treatment (a-g)
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Financial Statement Presentation
(CO, BC, or RE)
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1.
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9. Chapter 5: E5-3 - page 275 - 276
Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2011 and 2012:
2011 2012
Installment sales $ 360,000 $ 350,000
Cost of installment sales 234,000 245,000
Cash collections on installment sales during:
2011 150,000 100,000
2012 _ 120,000
Required:
Prepare summary journal entries for 2011 and 2012 to account for the installment sales and cash collections. The company uses the perpetual inventory system.
10.
On June 15, 2011, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of 2013, just in time for the 2013 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
2011 2012 2 013
_____________________________________________________________________________________
Costs incurred during the year $ 40 $ 80 $ 50
Estimated costs to complete as of 12/31 120 60 _
Required:
1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage- of-completion method.
2. How much revenue will Sanderson report in its 2011 and 2012 income statements related to this contract using the percentage-of-completion method?
3. Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method.
4. Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate.
5. Suppose the estimated costs to complete at the end of 2012 are $80 million instead of $60 million. Determine the amount of gross profit or loss to be recognized in 2012 using the percentage-of-completion method.