Hincapie inc manufactures cycling equipment

E5-6. (Corrections of a Balance Sheet)

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2014.

GERONIMO COMPANY

Balance Sheet

As of July 31, 2014

Cash

$ 69,000

Notes and accounts payable

$ 44,000

Accounts receivable (net)

40,500

Long-term liabilities

75,000

Inventory

60,000

Stockholders' equity

155,500

Equipment (net)

84,000

$274,500

Patents

21,000

$274,500

The following additional information is provided.

1. Cash includes $1,200 in a petty cash fund and $15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable $44,000 and (b) allowance for doubtful accounts $3,500.

3. Inventory costing $5,300 was shipped out on consignment on July 31, 2014. The ending inventory balance does not include the consigned goods. Receivables in the amount of $5,300 were recognized on these consigned goods.

4. Equipment had a cost of $112,000 and an accumulated depreciation balance of $28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2014, from the available information, adjusting the account balances using the additional information.

E5-9. (Current Assets and Current Liabilities)

The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.

ALLESSANDRO SCARLATTI COMPANY

Balance Sheet (Partial)

December 31, 2014

Cash

$ 40,000

Accounts payable

$ 61,000

Accounts receivable

$89,000

Notes payable

67,000

Less: Allowance for doubtful accounts

7,000

82,000

$128,000

Inventory

171,000

Prepaid expenses

9,000

$302,000

The following errors in the corporation's accounting have been discovered:

1. January 2015 cash disbursements entered as of December 2014 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.

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2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.

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3. Sales for the first four days in January 2015 in the amount of $30,000 were entered in the sales journal as of December 31, 2014. Of these, $21,500 were sales on account and the remainder were cash sales.

4. Cash, not including cash sales, collected in January 2015 and entered as of December 31, 2014, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.

Instructions

a. Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)

b. State the net effect of your adjustments on Allessandro Scarlatti Company's retained earnings balance.

P5-5 (Balance Sheet Adjustment and Preparation)

Presented below is the balance sheet of Sargent Corporation for the current year, 2014.

SARGENT CORPORATION

Balance Sheet

December 31, 2014

Current assets

$  485,000

Current liabilities

$  380,000

Investments

640,000

Long-term liabilities

1,000,000

Property, plant, and equipment

1,720,000

Stockholders' equity

1,770,000

Intangible assets

305,000

$3,150,000

$3,150,000

The following information is presented.

1 The current assets section includes cash $150,000, accounts receivable $170,000 less $10,000 for allowance for doubtful accounts, inventories $180,000, and unearned rent revenue $5,000. Inventoy is stated on the lower-of-FIFO-cost-or-market.

2. The investments section includes the cash surrender value of a life insurance contract $40,000; investments in common stock, short-term (trading) $80,000 and long-term (available-for-sale) $270,000; and bond sinking fund $250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings $1,040,000 less accumulated depreciation $360,000; equipment $450,000 less accumulated depreciation $180,000; land $500,000; and land held for future use $270,000.

4. Intangible assets include a franchise $165,000; goodwill $100,000; and discount on bonds payable $40,000.

5. Current liabilities include accounts payable $140,000; notes payable—short-term $80,000 and long-term $120,000; and income taxes payable $40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2022.

7. Stockholders' equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for $450,000; and common stock, $1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of $10. In addition, the corporation has retained earnings of $320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.

P5-7 (Preparation of a Statement of Cash Flows and Balance Sheet)

Aero Inc. had the following balance sheet at December 31, 2013.

AERO INC.

Balance Sheet

December 31, 2013

Cash

$ 20,000

Accounts payable

$ 30,000

Accounts receivable

21,200

Bonds payable

41,000

Investments

32,000

Common stock

100,000

Plant assets (net)

81,000

Retained earnings

23,200

Land

40,000

$194,200

$194,200

During 2014, the following occurred.

1. Aero liquidated its available-for-sale investment portfolio at a loss of $5,000.

2. A tract of land was purchased for $38,000.

3. An additional $30,000 in common stock was issued at par.

4. Dividends totaling $10,000 were declared and paid to stockholders.

5. Net income for 2014 was $35,000, including $12,000 in depreciation expense.

6. Land was purchased through the issuance of $30,000 in additional bonds.

7. At December 31, 2014, Cash was $70,200, Accounts Receivable was $42,000, and Accounts Payable was $40,000.

Instructions

a Prepare a statement of cash flows for the year 2014 for Aero.

b. Prepare the unclassified balance sheet as it would appear at December 31, 2014.

c. Compute Aero's free cash flow and current cash debt coverage for 2014.

d. Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements.

CA5-1. (Reporting the Financial Effects of Varied Transactions)

In an examination of Arenes Corporation as of December 31, 2014, you have learned that the following situations exist. No entries have been made in the accounting records for these items

1. The corporation erected its present factory building in 1999. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2014, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2014.

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2. An additional assessment of 2013 income taxes was levied and paid in 2014.

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3. When calculating the accrual for officers' salaries at December 31, 2014, it was discovered that the accrual for officers' salaries for December 31, 2013, had been overstated.

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4. On December 15, 2014, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2015, to the common stockholders of record December 31, 2014.

Instructions

Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2014.

CA5-3. (Critique of Balance Sheet Format and Content)

Presented below is the balance sheet of Sameed Brothers Corporation (000s omitted).

SAMEED BROTHERS CORPORATION

Balance Sheet

December 31, 2014

Assets

Current assets

Cash $26,000

Marketable securities 18,000

Accounts receivable 25,000

Inventory 20,000

Supplies 4,000

Stock investment in subsidiary company 20,000 $113,000

Investments

Treasury stock 25,000

Property, plant, and equipment

Buildings and land 91,000

Less: Reserve for depreciation 31,000 60,000

Other assets

Cash surrender value of life insurance 19,000

Total assets $217,000

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable $22,000

Reserve for income taxes 15,000

Customers' accounts with credit balances 1 $ 37,001

Deferred credits

Unamortized premium on bonds payable 2,000

Long-term liabilities

Bonds payable 60,000

Total liabilities 99,001

Common stock

Common stock, par $5 85,000

Earned surplus 24,999

Cash dividends declared 8,000 117,999

Total liabilities and stockholders' equity $217,000

Instructions

Evaluate the balance sheet presented. State briefly the proper treatment of any item criticized.

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense.

(b) property, plant, and equipment.

(c) an intangible asset.

(d) a long-term investment.

E6-4 (Computation of Future Values and Present Values)

Using the appropriate interest table, answer the following questions. (Each case is independent of the others).

a. What is the future value of 20 periodic payments of $4,000 each made at the beginning of each period and compounded at 8%?

b. What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted at 10% compound interest?

c. What is the future value of 15 deposits of $2,000 each made at the beginning of each period and compounded at 10%? (Future value as of the end of the fifteenth period.)

d. What is the present value of six receipts of $1,000 each received at the beginning of each period, discounted at 9% compounded interest?

E6-7 (Computation of Bond Prices)

What would you pay for a $50,000 debenture bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a yield of:

8%? 10%? 12%?

E6-12. (Analysis of Alternatives)

The Black Knights Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, Black Knights has decided to locate a new factory in the Panama City area. Black Knights will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following three buildings.

Building A:

Purchase for a cash price of $600,000, useful life 25 years.

Building B:

Lease for 25 years with annual lease payments of $69,000 being made at the beginning of the year.

Building C:

Purchase for $650,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $7,000. Rental payments will be received at the end of each year. The Black Knights Inc. has no aversion to being a landlord.

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Instructions

In which building would you recommend that The Black Knights Inc. locate, assuming a 12% cost of funds?

E6-13. (Computation of Bond Liability)

George Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2014, due on March 1, 2029, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%.

Instructions

As the controller of the company, determine the selling price of the bonds.

E6-16 (Retirement of Debt)

Jesper Parnevik borrowed $70,000 on March 1, 2012. This amount plus accrued interest at 12% compounded semiannually is to be repaid March 1, 2022. To retire this debt, Jesper plans to contribute to a debt retirement fund five equal amounts starting on March 1, 2017, and for the next 4 years. The fund is expected to earn 10% per annum.

Instructions

How much must be contributed each year by Jesper Parnevik to provide a fund sufficient to retire the debt on March 1, 2022

P6-1 (Various Time Value Situations)

Answer each of these unrelated questions.

a. On January 1, 2014, Fishbone Corporation sold a building that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Fishbone received as consideration a $240,000 non-interest-bearing note due on January 1, 2017. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2014, was 9%. At what amount should the gain from the sale of the building be reported?

b. On January 1, 2014, Fishbone Corporation purchased 300 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2024, and pay interest annually beginning January 1, 2015. Fishbone purchased the bonds to yield 11%. How much did Fishbone pay for the bonds?

c. Fishbone Corporation bought a new machine and agreed to pay for it in equal annual installments of $4,000 at the end of each of the next 10 years. Assuming that a prevailing interest rate of 8% applies to this contract, how much should Fishbone record as the cost of the machine?

d. Fishbone Corporation purchased a special tractor on December 31, 2014. The purchase agreement stipulated that Fishbone should pay $20,000 at the time of purchase and $5,000 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2014, at what amount, assuming an appropriate interest rate of 12%?

e. Fishbone Corporation wants to withdraw $120,000 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the fund earns 11%?

P6-5. (Analysis of Alternatives)

Julia Baker died, leaving to her husband Brent an insurance policy contract that provides that the beneficiary (Brent) can choose any one of the following four options.

(a) $55,000 immediate cash.

(b) $4,000 every 3 months payable at the end of each quarter for 5 years.

(c) $18,000 immediate cash and $1,800 every 3 months for 10 years, payable at the beginning of each 3-month period.

(d) $4,000 every 3 months for 3 years and $1,500 each quarter for the following 25 quarters, all payments payable at the end of each quarter.

Instructions

If money is worth 2½% per quarter, compounded quarterly, which option would you recommend that Brent exercise?

P6-6. (Purchase Price of a Business)

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.

The vineyard will bear no grapes for the first 5 years (1-5). In the next 5 years (6-10), Stacy estimates that the vines will bear grapes that can be sold for $60,000 each year. For the next 20 years (11-30), she expects the harvest will provide annual revenues of $110,000. But during the last 10 years (31-40) of the vineyard's life, she estimates that revenues will decline to $80,000 per year.

During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6-40, these costs will rise to $12,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year.

Instructions

Dick Button has offered to buy Stacy's vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

P6-12 (Pension Funding)

Craig Brokaw, newly appointed controller of STL, is considering ways to reduce his company's expenditures on annual pension costs. One way to do this is to switch STL's pension fund assets from First Security to NET Life. STL is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial Problems, STL still is committed to providing its employees with good pension and postretirement health benefits.

Under its present plan with First Security, STL is obligated to pay $43 million to meet the expected value of future pension benefits that are payable to employees as an annuity upon their retirement from the company. On the other hand, NET Life requires STL to pay only $35 million for identical future pension benefits. First Security is one of the oldest and most reputable insurance companies in North America. NET Life has a much weaker reputation in the insurance industry. In pondering the significant difference in annual pension costs, Brokaw asks himself, “Is this too good to be true?”

Instructions

Answer the following questions.

a. Why might NET Life's pension cost requirement be $8 million less than First Security's requirement for the same future value?

b. What ethical issues should Craig Brokaw consider before switching STL's pension fund assets?

c. Who are the stakeholders that could be affected by Brokaw's decision?