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SOLUTIONS TO EXERCISES

EXERCISE 5-5

 

Uhura Company

Balance Sheet

December 31, 2004

Assets

Current assets

 

 

 

      Cash

 

 

$   230,000

      Trading securities—at fair value

 

 

120,000

      Accounts receivable

 

$357,000

 

            Less allowance for doubtful
               accounts

 


    17,000


340,000

      Inventories, at lower of average
         cost or market

 

 


401,000

      Prepaid expenses

 

 

      12,000

            Total current assets

 

 

1,103,000

 

 

 

 

Long-term investments

 

 

 

      Land held for future use

 

175,000

 

      Cash surrender value of life
         insurance

 


    90,000


265,000

 

 

 

 

Property, plant, and equipment

 

 

 

      Building

$730,000

 

 

            Less accum. depr.—building

  160,000

570,000

 

      Office equipment

265,000

 

 

            Less accum. depr.—office
               equipment


  105,000


  160,000


730,000

 

 

 

 

Intangible assets

 

 

 

      Goodwill

 

 

       80,000

             Total assets

 

 

$2,178,000

EXERCISE 5-5 (Continued)

 

Liabilities and Stockholders’ Equity

Current liabilities

 

 

 

      Accounts payable

 

$  105,000

 

      Bank overdraft

 

30,000

 

      Notes payable (due next year)

 

125,000

 

      Rent payable

 

      49,000

 

            Total current liabilities

 

 

$309,000

 

 

 

 

Long-term liabilities

 

 

 

      Bonds payable

$500,000

 

 

      Add premium on bonds payable

    53,000

$553,000

 

      Pension obligation

 

    82,000

    635,000

            Total liabilities

 

 

944,000

 

 

 

 

Stockholders’ equity

 

 

 

      Common stock, $1 par, authorized
         400,000 shares, issued 290,000
         shares



290,000

 

 

      Additional paid-in capital

  160,000

450,000

 

      Retained earnings

 

  784,000

 

            Total stockholders’ equity

 

 

  1,234,000

            Total liabilities and stock-
               holders’ equity

 

 


$2,178,000

 

EXERCISE 5-6

 

 

Geronimo Company

 

Balance Sheet

 

As of July 31, 2004

 

Assets

 

Current assets

 

 

 

 

      Cash

 

 

$  60,000*

 

      Accounts receivable

 

$  46,700**

 

 

            Less allowance for doubtful
               accounts

 


      3,500


43,200

 

      Inventories

 

 

     65,300***

 

            Total current assets

 

 

168,500

 

 

 

 

 

 

Long-term investments

 

 

 

 

      Bond sinking fund

 

 

15,000

 

 

 

 

 

 

Property, plant, and equipment

 

 

 

 

      Equipment

 

112,000

 

 

      Less accumulated depreciation—equipment

    28,000

84,000

 

 

 

 

 

 

Intangible assets

 

 

 

 

      Patents

 

 

    21,000

 

             Total assets

 

 

$288,500

Liabilities and Stockholders’ Equity

Current liabilities

 

 

 

      Notes and accounts payable

 

$  52,000****

 

      Taxes payable

 

      6,000

 

            Total current liabilities

 

 

58,000

 

 

 

 

Long-term liabilities

 

 

    75,000

            Total liabilities

 

 

133,000

 

 

 

 

Stockholders’ equity

 

 

  155,500

            Total liabilities and stock-
               holders’ equity

 

 


$288,500

*

($69,000 – $15,000 + $6,000)

**

($52,000 – $5,300)

***

($60,000 + $5,300)

****

($44,000 + $8,000)

 

 

 

 

 

EXERCISE 5-7

 

Current assets

 

 

 

      Cash

 

$  87,000*

 

      Less cash restricted for plant expansion

 

  (50,000)

$  37,000

      Trading securities at fair value (cost,
         $31,000)

 

 


29,000

      Accounts receivable (of which $50,000 is
         pledged as collateral on a bank loan)

 


161,000

 

      Less allowance for doubtful accounts

 

   (12,000)

149,000

      Interest receivable [($40,000 X 12%) X 8/12]

 

 

3,200

      Inventories at lower of cost (determined
         using LIFO) or market

 

 

 

            Finished goods

 

52,000

 

            Work-in-process

 

34,000

 

            Raw materials

 

  207,000

  293,000

                  Total current assets

 

 

$511,200

 

*An acceptable alternative is to report cash at $37,000 and simply report the cash restricted for plant expansion in the investments section.

 

EXERCISE 5-8

 

1.         Dividends payable of $2,375,000 will be reported as a current liability [(1,000,000 – 50,000) X $2.50].

 

2.         No amounts are reported as a current or long-term liability. Stock dividends distributable are reported in the stockholders' equity section.

 

3.         Bonds payable of $25,000,000 and interest payable of $3,000,000 ($100,000,000 X 12% X 3/12) will be reported as a current liability. Bonds payable of $75,000,000 will be reported as a long-term liability.

 

4.         Customer advances of $17,000,000 will be reported as a current liability ($12,000,000 + $30,000,000 – $25,000,000).

 

 EXERCISE 5-12

 

John Nalezny Corporation

 

Balance Sheet

 

December 31, 2004

 

Assets

 

Current assets

 

 

 

 

      Cash

 

$197,000

 

 

      Trading securities

 

153,000

 

 

      Accounts receivable

$435,000

 

 

 

             Less allowance for doubtful accounts

                   

  (25,000)

 

410,000

 

 

      Inventories

 

 597,000

 

 

             Total current assets

 

 

1,357,000

 

 

 

 

 

 

Long-term investments

 

 

 

 

      Investments in bonds

 

299,000

 

 

      Investments in stocks

 

  277,000

 

 

              Total long-term investments

 

 

576,000

 

 

 

 

 

 

Property, plant, and equipment

 

 

 

 

      Land

 

260,000

 

 

      Building

1,040,000

 

 

 

            Less accum. depreciation

 (152,000)

888,000

 

 

       Equipment

600,000

 

 

 

            Less accum. depreciation

   (60,000)

540,000

 

 

       Total property, plant, and  equipment

 

 

1,688,000

 

 

 

 

 

 

Intangible assets

 

 

 

 

      Franchise (net of $80,000 amortization)

 

160,000

 

 

      Patent (net of $30,000 amortization)

 

  195,000

 

 

            Total intangible assets

 

 

     355,000

 

             Total assets

 

 

$3,976,000

Liabilities and Stockholders’ Equity

Current liabilities

 

 

 

      Accounts payable

 

$  455,000

 

      Short-term notes payable

 

90,000

 

      Dividends payable

 

136,000

 

      Accrued liabilities

 

      96,000

 

              Total current liabilities

 

 

$ 777,000

 

 

 

 

Long-term debt

 

 

 

      Long-term notes payable

 

900,000

 

      Bonds payable

  1,000,000

 

           Total long-term liabilities

 

 

  1,900,000

            Total liabilities

 

  2,677,000

 

 

 

Stockholder’s equity

 

 

 

      Paid-in capital

 

 

 

            Common stock ($5 par)

$1,000,000

 

 

            Additional paid-in capital

        80,000

1,080,000

 

      Retained earnings**

    410,000

 

      Total paid-in capital and  retained earnings

1,490,000

 

       Less treasury stock

  (191,000)

 

              Total stockholders’ equity

 

  1,299,000

              Total liabilities and stockholders’

                 equity

 

 

 

$3,976,000

**Computation of Retained Earnings:

 

 

Sales

 

$8,100,000

Investment revenue

 

63,000

Extraordinary gain

 

80,000

Cost of goods sold

 

(4,800,000)

Selling expenses

 

(2,000,000)

Administrative expenses

 

(900,000)

Interest expense

 

   (211,000)

Net income

 

$    332,000

 

 

 

Beginning retained earnings

 

$218,000

Prior period adjustment—depreciation error

 

(140,000)

Beginning retained earnings, restated

 

$  78,000

Net income

 

  332,000

Ending retained earnings

 

$410,000

 

EXERCISE 5-13 (15-20 minutes)

(a)

4.

(f)

1.

(k)

1.

(b)

3.

(g)

5.

(l)

2.

(c)

4.

(h)

4.

(m)

2.

(d)

3.

(i)

5.

 

 

(e)

1.

(j)

4.

 

 

 

EXERCISE 5-14

Constantine Cavamanlis Inc.

Statement of Cash Flows

For the Year Ended December 31, 2004

Cash flows from operating activities

 

 

      Net income

 

$44,000

      Adjustments to reconcile net income

 

 

         to net cash provided by operating

 

 

         activities:

 

 

            Depreciation expense

$  6,000

 

            Increase in accounts receivable

(3,000)

 

            Increase in accounts payable

    5,000

    8,000

      Net cash provided by operating activities

 

52,000

Cash flows from investing activities

 

 

      Purchase of equipment

 

(17,000)

Cash flows from financing activities

 

 

      Issuance of common stock

20,000

 

      Payment of cash dividends

 (23,000)

 

      Net cash used by financing activities

 

  (3,000)

Net increase in cash

 

32,000

Cash at beginning of year

 

  13,000

Cash at end of year

 

$45,000

 

 

PROBLEM 5-3

 

 

 

Side Kicks Company

 

Balance Sheet

 

December 31, 2004

 

Assets

 

Current assets

 

 

 

 

      Cash

 

$  41,000

 

 

      Accounts receivable

$163,500

 

 

 

            Less allowance for doubtful
               accounts


      8,700


154,800

 

 

      Inventory—at LIFO cost

 

308,500

 

 

      Prepaid insurance

 

     5,900

 

 

            Total current assets

 

 

$  510,200

 

 

 

 

 

 

Long-term investments

 

 

 

 

      Investments in stocks and bonds,
         of which investments costing
         $120,000 have been pledged as
         security for notes payable—at fair
         value

 

 





339,000

 

 

 

 

 

 

Property, plant, and equipment

 

 

 

 

      Cost of uncompleted plant facilities

 

 

 

 

            Land

85,000

 

 

 

            Building in process of
               construction


  124,000


209,000

 

 

      Equipment—at cost

400,000

 

 

 

            Less accum. depreciation

  140,000

  260,000

469,000

 

 

 

 

 

 

Intangible assets

 

 

 

 

      Patents—at cost less amortization

 

 

       36,000

 

            Total assets

 

 

$1,354,200

 

 

Liabilities and Stockholders’ Equity

Current liabilities

 

 

 

      Bank loans payable, secured by
         investments which cost $120,000

 


$  94,000

 

      Accounts payable

 

148,000

 

      Accrued expenses

 

    49,200

 

            Total current liabilities

 

 

$  291,200

 

 

 

 

Long-term liabilities

 

 

 

      11% bonds payable, due
         January 1, 2013

 


400,000

 

       Less unamortized discount on
          bonds payable

 


    20,000


    380,000

            Total liabilities

 

 

671,200

 

 

 

 

Stockholders’ equity

 

 

 

      Capital stock

 

 

 

            Authorized 600,000 shares of $1
               par value; issued and
               outstanding, 500,000 shares



$500,000

 

 

      Additional paid-in capital

   45,000

545,000

 

      Retained earnings

 

  138,000

  683,000

            Total liabilities and
               stockholders’ equity

 

 


$1,354,200

 

 

 

 

 

 

PROBLEM 5-5

 

 

 

                                                           Stephen King Corporation

 

Balance Sheet

 

December 31, 2004

 

Assets

 

Current assets

 

 

 

 

      Cash

 

 

$  114,000

 

      Trading securities—at fair value

 

 

80,000

 

      Accounts receivable

 

$170,000

 

 

            Less allowance for doubtful
               accounts

 


    10,000


160,000

 

      Inventories, at lower of cost
         (determined using FIFO) or market

 

 


    180,000

 

            Total current assets

 

 

$  534,000

 

 

 

 

 

 

Long-term investments

 

 

 

 

      Investments in common stock 
         (available for sale)—at fair value

 


270,000

 

 

      Bond sinking fund

 

250,000

 

 

      Cash surrender value of llife insurance

 

40,000

 

 

      Land held for future use

 

  270,000

830,000

 

 

 

 

 

 

Property, plant, and equipment

 

 

 

 

      Land

 

500,000

 

 

      Buildings

$1,040,000

 

 

 

            Less accum. depreciation—
               building


   360,000


680,000

 

 

      Equipment

450,000

 

 

 

            Less accum. depreciation—
               equipment


  180,000


  270,000


1,450,000

 

 

 

 

 

 

Intangible assets

 

 

 

 

      Franchise

 

165,000

 

 

      Goodwill

 

  100,000

    265,000

 

            Total assets

 

 

$3,079,000

 

Liabilities and Stockholders’ Equity

 

Current liabilities

 

 

 

 

      Accounts payable

 

 

$  90,000

 

      Notes payable

 

 

80,000

 

      Bank overdraft

 

 

14,000

 

      Taxes payable

 

 

40,000

 

      Unearned revenue

 

 

        5,000

 

            Total current liabilities

 

 

$  229,000

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

      Notes payable

 

$ 120,000

 

 

       10% bonds payable, due 2010

$1,000,000

 

 

 

            Less discount on bonds payable

    40,000

   960,000

  1,080,000

 

            Total liabilities

 

 

1,309,000

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

      Capital stock

 

 

 

 

            Preferred stock, no par value;
               200,000 shares authorized,
               70,000 issued



450,000

 

 

 

      Common stock, $1 par value;
         400,000 shares authorized,
         100,000 issued



100,000

 

 

 

      Paid-in capital in excess of par on
         common stock (100,000 X
         [$10.00 – $1.00)]



  900,000



1,450,000

 

 

      Retained earnings

 

   320,000

 

 

            Total stockholders’ equity

 

 

  1,770,000

 

            Total liabilities and
               stockholders’ equity

 

 


$3,079,000

 

 

 

 

 

 

 

PROBLEM 5-6

 

 

(a)                                                                 Alistair Cooke, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2004

Cash flows from operating activities

 

 

      Net income

 

$32,000

      Adjustments to reconcile net income to

      net cash provided by operating activities

 

 

            Depreciation expense

12,000

 

            Gain on sale of investments

(3,400)

 

 

            Increase in Acct. Receivable
               ($41,600 – $21,200)


(20,400)


  (11,800
)

Net cash provided by operating activities

 

20,200

 

 

 

Cash flows from investing activities

 

 

      Sale of investments

17,000

 

      Purchase of land

(18,000)

 

      Net cash used in investing

 

(1,000)

 

 

 

Cash flows from financing activities

 

 

      Issuance of capital stock

24,000

 

      Retirement of notes payable

(16,000)

 

 

      Payment of cash dividends

   (8,200)

 

 

      Net cash used by financing activities

 

      (200)

 

 

 

Net increase in cash

 

19,000

Cash at beginning of year

 

  20,000

Cash at end of year

 

$39,000

 

The purchase of land through the issuance of $30,000 of bonds is a significant noncash financing transaction that would be disclosed in notes accompanying the financial statements.

 

(b)

Alistair Cooke Inc.

Balance Sheet

December 31, 2004

Assets

 

Liabilities and Stockholders’ Equity

Cash

$39,000

 

 

Accounts payable

$30,000

 

Accounts
  receivable


41,600

 

 

Long-term notes

  payable


25,000


(4)

Investments

18,400

(1)

 

Bonds payable

30,000

(5)

Plant assets (net)

69,000

(2)

 

Capital stock

124,000

(6)

Land

    88,000

(3)

 

Retained earnings

    47,000

(7)

 

$256,000

 

 

 

$256,000

 

 

(1) $32,000 – ($17,000 – $3,400)

(2) $81,000 – $12,000

(3) $40,000 + $18,000 + $30,000

(4) $41,000 – $16,000

(5) $0 + $30,000

(6) $100,000 + $24,000

(7) $23,200 + $32,000 – $8,200

 

(c)        This type of information is useful for assessing the amount, timing, and uncertainty of future cash flows. For example, by showing the specific inflows and outflows from operating activities, investing activities, and financing activities, the user has a better understand­ing of the liquidity and financial flexibility of the enterprise. Similarly, these reports are useful in providing feedback about the flow of enterprise resources. This information should help users make more accurate predictions of future cash flow. In addition, some individuals have expressed concern about the quality of the earnings because the measurement of the income depends on a number of accruals and estimates which may be somewhat subjective. As a result, the higher the ratio of cash provided by operating activities to net income, the more comfort some users have in the reliability of the earnings. In this problem the ratio of cash provided by operating activities to net income is 63% ($20,200 ¸ $32,000).

 

 

An analysis of Cooke’s free cash flow indicates it is negative as shown below:

 

Free Cash Flow Analysis

 

 

 

Net cash provided by operating activities

 

$20,200

Less:   Purchase of land

 

(18,000)

             Dividends

 

   (8,200)

Free cash flow

 

$ (6,000)

 

Its current cash debt coverage is .67 to 1  and its cash debt coverage ratio is .26 to 1 , which are reasonable. Overall, it appears that its liquidity position is average and overall financial flexibility should be improved.