Question 6
1. The market value ofFarmington Corp.'s common shares was quoted at $54 per share atDecember 31, 2018, and 2017. Planetarium 's balance sheet atDecember 31, 2018, and 2017, and statement of income and retainedearnings for the years then ended are presented below:
Farmington Corp.
Balance Sheet
December31
2018 2017
Assets:
Current assets:
Cash $ 9,000,000 $ 5,200,000
Short-terminvestments 17,200,000 15,400,000
Accountsreceivable(net) 109,000,000 111,000,000
Inventories,lower of cost ormarket 122,000,000 140,000,000
Prepaidexpenses 4,000,000 2,800,000
Total currentassets $261,200,000 $274,400,000
Property, plant, and equipment(net) 350,000,000 315,000,000
Investments, atequity 2,800,000 3,500,000
Long-termreceivables 15,000,000 20,000,000
Copyrights and patents(net) 6,000,000 7,000,000
Otherassets 8,000,000 9,100,000
Totalassets $643,000,000 $629,000,000
Liabilities and Stockholders' Equity:
Current liabilities:
Notespayable $ 7,000,000 $17,000,000
Accountspayable 55,000,000 52,000,000
Accruedexpenses 27,500,000 30,000,000
Income taxespayable 1,500,000 2,000,000
Current portionof long-termdebt 10,000,000 9,500,000
Total currentliabilities 101,000,000 110,500,000
Long-termdebt 180,000,000 190,000,000
Deferred incometaxes 69,000,000 65,000,000
Otherliabilities 15,000,000 9,500,000
Totalliabilities 365,000,000 375,000,000
Stockholders' equity:
Common stock,par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000shares 12,000,000 12,000,000
10% cumulativepreferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares 6,000,000 6,000,000
Additionalpaid-incapital 119,000,000 119,000,000
Retainedearnings 141,000,000 117,000,000
Total stockholders'equity 278,000,000 254,000,000
Total liabilities and stockholders'equity $643,000,000 $629,000,000
Farmington Corp.
Statement of Income and Retained Earnings
Year ended December31
2018 2017
Netsales $540,000,000 $500,000,000
Cost and expenses:
Cost of goodssold 390,900,000 400,000,000
Selling, general, andadministrativeexpenses 70,000,000 65,000,000
Other,net 9,100,000 6,000,000
Total costs andexpenses 470,000,000 471,000,000
Income before incometaxes 70,000,000 29,000,000
Incometaxes 21,000,000 11,600,000
Netincome 49,000,000 17,400,000
Retained earnings at beginning ofperiod 117,000,000 113,100,000
Dividends on commonstock (24,400,000) (12,900,000)
Dividends on preferredstock (600,000) (600,000)
Retained earnings at end ofperiod $141,000,000 $117,000,000
Instructions
Based on the above information, compute the following (for theyear 2018 only): (Show supporting computations in good form.)
(a) Current ratio.
(b) Acid-test (quick) ratio.
(c) Accounts receivableturnover.
(d) Inventory turnover.
(e) Book value per share of common stock.
(f) Earnings per share.
(g) Price-earnings ratio.
(h) Payout ratio on common stock.
Question 7
1. Molina Companyâs reportednet incomes for 2018 and the previous two years are presented
below.
2018 2017 2016
$105,000 $95,000 $70,000
2018âs net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2016 and 2017 donot take these items into account and are stated at theamounts determined in those years. Ignore income taxes.
Instructions
(a) For each ofthe six accounting changes, errors, or prior period adjustmentsituations described below, prepare the journal entry or entriesMolina Company should record during 2018. If no entry is required,write ânone.â
(b) Afterrecording the situation in part (a) above, prepare the year-endadjusting entry for December 31, 2018. If no entry, writeânone.â
1. Early in 2018, Molina determined that equipment purchased inJanuary, 2016 at a cost of $1,290,000, with an estimated life of 5years and salvage value of $90,000 is now estimated to continue inuse until December 31, 2022 and will have a $30,000 salvage value.Molina recorded its 2018 depreciation at the end of 2018.
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
Question 8
1. On January 1, 2018, FoleyCompany (as lessor) entered into a noncancelable lease agreementwith Pinkley Company for machinery which was carried on theaccounting records of Foley at $9,060,000 and had a fair value of$9,600,000. Minimum lease payments under the lease agreement whichexpires on December 31, 2027, total $14,200,000. Payments of$1,420,000 are due each January 1. The first payment was made onJanuary 1, 2018 when the lease agreement was finalized. Theinterest rate of 10% which was stipulated in the lease agreement isthe implicit rate set by the lessor. The effective interest methodof amortization is being used. Pinkley expects the machine to havea ten-year life with no salvage value, and be depreciated on astraight-line basis. Collectibility of the payments is reasonablypredictable, and there are no important uncertainties surroundingthe costs yet to be incurred by the lessor.
Instructions
(a) From thelessee's viewpoint, what kind of lease is the above agreement? Fromthe lessor's viewpoint, what kind of lease is the aboveagreement?
(b) Whatshould be the income before income taxes derived by Foley from thelease for the year ended December 31, 2018?
(c) Ignoringincome taxes, what should be the expenses incurred by Pinkley fromthis lease for the year ended December 31, 2018?
(d) What journalentries should be recorded by Pinkley Company on January 1,2018?
Question 9
1. Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31,2017 $525,000
Proceeds from borrowings in2018 325,000
Payments made in2018 (450,000)
Balance at December 31,2018 $400,000
Current portion of long-term debt:
Balance at December 31,2017 $1,625,000
Transfers from caption "Long-TermDebt" 500,000
Payments made in2018 (1,225,000)
Balance at December 31,2018 $ 900,000
Long-term debt:
Balance at December 31,2017 $9,000,000
Proceeds from borrowings in2018 2,250,000
Transfers to caption "Current Portion of Long-TermDebt" (500,000)
Payments made in2018 (1,500,000)
Balance at December 31,2018 $9,250,000
In preparing a statement of cash flows for the year ended December31, 2018, for Cole Company, cash flows from financing activitieswould reflect
$2,000,000
$2,250,000
$2,575,000
$3,175,000
Question 10
1. Edwards Companycontracted on 4/1/17 to construct a building for $4,800,000. Theproject was completed in 2019. Additional data follow:
2017 2018 2019
Costs incurred todate $1,120,000 $2,700,000 $3,800,000
Estimated cost tocomplete 2,080,000 900,000 â
Billings todate 1,000,000 3,800,000 4,800,000
Collections todate 800,000 2,600,000 4,400,000
Instructions
(a) Calculate theincome recognized by Edwards under the percentage-of-completionmethod of accounting in each of the years 2017, 2018, and 2019.
(b) Prepare allnecessary entries for the year 2018.
(c) Present thebalance sheet disclosures at December 31, 2018. Proper headings orsubheadings must be indicated.
Question 6
1. The market value ofFarmington Corp.'s common shares was quoted at $54 per share atDecember 31, 2018, and 2017. Planetarium 's balance sheet atDecember 31, 2018, and 2017, and statement of income and retainedearnings for the years then ended are presented below:
Farmington Corp.
Balance Sheet
December31
2018 2017
Assets:
Current assets:
Cash $ 9,000,000 $ 5,200,000
Short-terminvestments 17,200,000 15,400,000
Accountsreceivable(net) 109,000,000 111,000,000
Inventories,lower of cost ormarket 122,000,000 140,000,000
Prepaidexpenses 4,000,000 2,800,000
Total currentassets $261,200,000 $274,400,000
Property, plant, and equipment(net) 350,000,000 315,000,000
Investments, atequity 2,800,000 3,500,000
Long-termreceivables 15,000,000 20,000,000
Copyrights and patents(net) 6,000,000 7,000,000
Otherassets 8,000,000 9,100,000
Totalassets $643,000,000 $629,000,000
Liabilities and Stockholders' Equity:
Current liabilities:
Notespayable $ 7,000,000 $17,000,000
Accountspayable 55,000,000 52,000,000
Accruedexpenses 27,500,000 30,000,000
Income taxespayable 1,500,000 2,000,000
Current portionof long-termdebt 10,000,000 9,500,000
Total currentliabilities 101,000,000 110,500,000
Long-termdebt 180,000,000 190,000,000
Deferred incometaxes 69,000,000 65,000,000
Otherliabilities 15,000,000 9,500,000
Totalliabilities 365,000,000 375,000,000
Stockholders' equity:
Common stock,par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000shares 12,000,000 12,000,000
10% cumulativepreferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares 6,000,000 6,000,000
Additionalpaid-incapital 119,000,000 119,000,000
Retainedearnings 141,000,000 117,000,000
Total stockholders'equity 278,000,000 254,000,000
Total liabilities and stockholders'equity $643,000,000 $629,000,000
Farmington Corp.
Statement of Income and Retained Earnings
Year ended December31
2018 2017
Netsales $540,000,000 $500,000,000
Cost and expenses:
Cost of goodssold 390,900,000 400,000,000
Selling, general, andadministrativeexpenses 70,000,000 65,000,000
Other,net 9,100,000 6,000,000
Total costs andexpenses 470,000,000 471,000,000
Income before incometaxes 70,000,000 29,000,000
Incometaxes 21,000,000 11,600,000
Netincome 49,000,000 17,400,000
Retained earnings at beginning ofperiod 117,000,000 113,100,000
Dividends on commonstock (24,400,000) (12,900,000)
Dividends on preferredstock (600,000) (600,000)
Retained earnings at end ofperiod $141,000,000 $117,000,000
Instructions
Based on the above information, compute the following (for theyear 2018 only): (Show supporting computations in good form.)
(a) Current ratio.
(b) Acid-test (quick) ratio.
(c) Accounts receivableturnover.
(d) Inventory turnover.
(e) Book value per share of common stock.
(f) Earnings per share.
(g) Price-earnings ratio.
(h) Payout ratio on common stock.
Question 7
1. Molina Companyâs reportednet incomes for 2018 and the previous two years are presented
below.
2018 2017 2016
$105,000 $95,000 $70,000
2018âs net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2016 and 2017 donot take these items into account and are stated at theamounts determined in those years. Ignore income taxes.
Instructions
(a) For each ofthe six accounting changes, errors, or prior period adjustmentsituations described below, prepare the journal entry or entriesMolina Company should record during 2018. If no entry is required,write ânone.â
(b) Afterrecording the situation in part (a) above, prepare the year-endadjusting entry for December 31, 2018. If no entry, writeânone.â
1. Early in 2018, Molina determined that equipment purchased inJanuary, 2016 at a cost of $1,290,000, with an estimated life of 5years and salvage value of $90,000 is now estimated to continue inuse until December 31, 2022 and will have a $30,000 salvage value.Molina recorded its 2018 depreciation at the end of 2018.
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
(a)
(b)
2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.
(a)
(b)
3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.
(a)
(b)
Question 8
1. On January 1, 2018, FoleyCompany (as lessor) entered into a noncancelable lease agreementwith Pinkley Company for machinery which was carried on theaccounting records of Foley at $9,060,000 and had a fair value of$9,600,000. Minimum lease payments under the lease agreement whichexpires on December 31, 2027, total $14,200,000. Payments of$1,420,000 are due each January 1. The first payment was made onJanuary 1, 2018 when the lease agreement was finalized. Theinterest rate of 10% which was stipulated in the lease agreement isthe implicit rate set by the lessor. The effective interest methodof amortization is being used. Pinkley expects the machine to havea ten-year life with no salvage value, and be depreciated on astraight-line basis. Collectibility of the payments is reasonablypredictable, and there are no important uncertainties surroundingthe costs yet to be incurred by the lessor.
Instructions
(a) From thelessee's viewpoint, what kind of lease is the above agreement? Fromthe lessor's viewpoint, what kind of lease is the aboveagreement?
(b) Whatshould be the income before income taxes derived by Foley from thelease for the year ended December 31, 2018?
(c) Ignoringincome taxes, what should be the expenses incurred by Pinkley fromthis lease for the year ended December 31, 2018?
(d) What journalentries should be recorded by Pinkley Company on January 1,2018?
Question 9
1. Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31,2017 $525,000
Proceeds from borrowings in2018 325,000
Payments made in2018 (450,000)
Balance at December 31,2018 $400,000
Current portion of long-term debt:
Balance at December 31,2017 $1,625,000
Transfers from caption "Long-TermDebt" 500,000
Payments made in2018 (1,225,000)
Balance at December 31,2018 $ 900,000
Long-term debt:
Balance at December 31,2017 $9,000,000
Proceeds from borrowings in2018 2,250,000
Transfers to caption "Current Portion of Long-TermDebt" (500,000)
Payments made in2018 (1,500,000)
Balance at December 31,2018 $9,250,000
In preparing a statement of cash flows for the year ended December31, 2018, for Cole Company, cash flows from financing activitieswould reflect
$2,000,000 | ||
$2,250,000 | ||
$2,575,000 | ||
$3,175,000 |
Question 10
1. Edwards Companycontracted on 4/1/17 to construct a building for $4,800,000. Theproject was completed in 2019. Additional data follow:
2017 2018 2019
Costs incurred todate $1,120,000 $2,700,000 $3,800,000
Estimated cost tocomplete 2,080,000 900,000 â
Billings todate 1,000,000 3,800,000 4,800,000
Collections todate 800,000 2,600,000 4,400,000
Instructions
(a) Calculate theincome recognized by Edwards under the percentage-of-completionmethod of accounting in each of the years 2017, 2018, and 2019.
(b) Prepare allnecessary entries for the year 2018.
(c) Present thebalance sheet disclosures at December 31, 2018. Proper headings orsubheadings must be indicated.
