Week Three ACC 421 Assignments
P4-3 (Irregular Items) Maher Inc. reported income from continuing operations before taxes during 2010 of $790,000. Additional transactions occurring in 2010 but not considered in the $790,000 are as follows.
1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $90,000 during the year. The tax rate on this item is 46%.
2. At the beginning of 2008, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2008, 2009, and
2010 but failed to deduct the salvage value in computing the depreciation base.
of securities held as a part of its portfolio resulted in a
loss of $57,000 (pretax). Sale
4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable).
5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations.
6. The corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2008 income by $60,000 and decrease 2009 income by $20,000 before taxes. The FIFO method has been used for 2010. The tax rate on these items is 40%.
Prepare an income statement for the year 2010 starting with income from continuing operations before taxes.
Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)
E5-5 (Preparation of a Corrected Balance Sheet) Bruno Company has decided to expand its operations.
The bookkeeper recently completed the balance sheet presented on the next page in order to obtain additional funds for expansion.
DECEMBER 31, 2010
Accounts receivable (net) 340,000
Inventories at lower of average cost or market 401,000
Trading securities—at cost (fair value $120,000) 140,000
Property, plant, and equipment
Building (net) 570,000
Office equipment (net) 160,000
Land held for future use 175,000
Cash surrender value of life insurance 90,000
Prepaid expenses 12,000
Accounts payable 135,000
Notes payable (due next year) 125,000
Pension obligation 82,000
Rent payable 49,000
Premium on bonds payable 53,000
Bonds payable 500,000
Common stock, $1.00 par, authorized
400,000 shares, issued 290,000 290,000
Additional paid-in capital 180,000
Retained earnings ?
Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is $160,000 and for the office equipment, $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.
E5-12 (Preparation of a Balance Sheet) Presented below is the trial balance of Vivaldi Corporation at
December 31, 2010.
Cash $ 197,000
Sales $ 7,900,000
Trading Securities (at cost, $145,000) 153,000
Cost of Goods Sold 4,800,000
Long-term Investments in Bonds 299,000
Long-term Investments in Stocks 277,000
Short-term Notes Payable 90,000
Accounts Payable 455,000
Selling Expenses 2,000,000
Investment Revenue 63,000
Dividends Payable 136,000
Accrued Liabilities 96,000
Accounts Receivable 435,000
Accumulated Depreciation—Buildings 352,000
Allowance for Doubtful Accounts 25,000
Administrative Expenses 900,000
Interest Expense 211,000
Extraordinary Gain 80,000
Long-term Notes Payable 900,000
Bonds Payable 1,000,000
Accumulated Depreciation—Equipment 60,000
Common Stock ($5 par) 1,000,000
Treasury Stock 191,000
Retained Earnings 78,000
Paid-in Capital in Excess of Par 80,000
Totals $12,315,000 $12,315,000
Prepare a balance sheet at December 31, 2010, for Vivaldi Corporation. Ignore income taxes.
E5-15 (Preparation of a Statement of Cash Flows) Presented below is a condensed version of the comparative balance sheets for Sondergaard Corporation for the last two years at December 31.
Cash $157,000 $ 78,000
Accounts receivable 180,000 185,000
Investments 52,000 74,000
Equipment 298,000 240,000
Less: Accumulated depreciation (106,000) (89,000)
Current liabilities 134,000 151,000
Capital stock 160,000 160,000
Retained earnings 287,000 177,000
Investments were sold at a loss (not extraordinary) of $7,000; no equipment was sold; cash dividends paid were $50,000; and net income was $160,000.
(a) Prepare a statement of cash flows for 2010 for Sondergaard Corporation.
(b) Determine Sondergaard Corporation’s free cash flow.
E18-15 (Installment-Sales Method and Cost-Recovery Method) Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis, uses the installment sales method of profit recognition in accounting for all its sales. The following data were taken from the 2010 and 2011 records.
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2010 $130,000 $240,000
Cash collections on sales of 2011 –0– $160,000
The amounts given for cash collections exclude amounts collected for interest charges.
(a) Compute the amount of realized gross profit to be recognized on the 2011 income statement, prepared using the installment-sales method.
(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2011.
(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.
P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2010, Torvill Construction Company
Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2012, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2010, 2011, and 2012.
At At At
12/31/10 12/31/11 12/31/12
Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000
Estimated costs to complete the contract 1,200,000 800,000 –0–
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012.
(Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012.
(Ignore income taxes.)
E24-2 (Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
______ 2. Introduction of a new product line.
______ 3. Loss of assembly plant due to fire.
of a significant portion of the company’s assets. Sale
______ 5. Retirement of the company president.
______ 6. Issuance of a significant number of shares of common stock.
______ 7. Loss of a significant customer.
______ 8. Prolonged employee strike.
______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy.
______ 10. Hiring of a new president.
______ 11. Settlement of prior year’s litigation against the company.
______ 12. Merger with another company of comparable size.
*E24-4 (Ratio Computation and Analysis; Liquidity) As loan analyst for Madison Bank, you have been presented the following information.
Plunkett Co. Herring Co.
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders’ Equity
Current liabilities $ 300,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 710,000 902,000
Total liabilities and stockholders’ equity $1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.