In: Accounting
By 2009, Mr. Cardell decided to acquire another office furniture company. On July 1, 2009, the Holton-Central bankruptcy judge accepted Belmont’s $4,765,000 offer for Holton-Central’s assets and accounts payable. The $4,765,000 purchase price equaled the market value of the tangible assets, minus $875,000 of accounts payable, plus $265,000, which Mr. Cardell considered goodwill:
Raw material inventory $175,000
Work-in-process inventory $220,000
Finished goods inventory $115,000
Equipment (5-year life) $450,000
Building (20-year life) $3,600,000
Land $815,000
Total tangible assets $5,375,000
Less: Accounts payable $875,000
Net tangible assets $4,500,000
Goodwill $265,000
Total purchase price $4,765,000
July 1, 2009, the acquisition was completed as follows:
1. Belmont Office Furniture formed Holton-Central Holdings and paid $3.9 million for all 3,900,000 shares of Holton-Central Holdings’ $.01 par value common stock.
2. Holton-Central Holdings borrowed $6,000,000 to help Holton-Central exit from bankruptcy; the principal would be repaid in six $1 million payments each July 1, beginning July 1,2010. Also, due each July 1, beginning July 1,2010, was 10% interest on the unpaid balance as of the previous July 1.
3. Holton-Central Holdings paid $4,765,000 cash for the assets of Holton-Central Inc., ans assumed the firm’s $875,000 of accounts payable.
July 2, 2009–December 31, 2009
Mr. Cardell’s first action was to close four furniture showrooms in Chicago, Los Angeles, New York and Atlanta, because the leases had been cancelled in bankruptcy. These closures would save $950,000 annually; Mr. Cardell believed sales would decline only marginally. He also negotiated a more favorable labor contract with former employees, which would save another $750,000 annually. On July 2, 2009, the firm reopened for business. The following is a summary of Holton-Central’s activity for the second half of 2009:
1. Paid the $875,000 of accounts payable.
2. Paid $154,500 for utilities, professional services and other administrative expenses.
3. Paid $1,408,000 for office wages and related payroll taxes and benefits.
4. Paid $2,785,000 for selling and marketing expenses.
5. Paid $900,000 for production machinery. The machinery was purchased October 1, 2009. The machinery had a useful life of five years with no salvage value.
6. Paid $228,000 for various one-year insurance policies.
7. Purchased $5,345,000 of raw material; $835,000 was unpaid as of December 31, 1998.
8. Manufacturing records showed $4,935,000 of raw material transferred to work in process.
9. Paid $7,878,000 in cash for production wages and charged the costs to work-in- process inventory.
10. Charged $6,662,000 to work-in-process inventory for manufacturing overhead items, including $6,400,000 paid in cash and $262,000 for depreciation on manufacturing facilities.
11. Manufacturing records showed $19,123,000 of work-in-process inventory transferred to finished goods inventory.
12. Sold chairs for $25,563,000. Of that, $4,587,000 had not been paid as of December 31, 2008.
13. Manufacturing records showed cost of goods sold of $18,593,000.
14. Recorded depreciation expense of $86,000.
15. Recorded accrued interest expense.
16. Recorded insurance expense of $95,000.
17. In late December, Mr. Cardell received a call from Holton-Central’s largest customer. To cut costs, previous management had substituted a low-grade fabric on 1,800 chairs that the customer purchased in 2008 and 2009. Repairing those chairs would cost $360,000. Mr. Cardell estimated that customers would request repairs to another several thousand chairs, which would cost another $560,000. Although that liability was discharged in bankruptcy, Mr. Cardell believed failure to repair the chairs would irreparably damage the firm’s reputation. He notified customers that Holton-Central would repair the chairs at no cost.
18. Computed income tax expenses of $365,000 for 2009, payable in 2010.
Required
Prepare and record journal entries for Holton-Central’s sale of stock, incurrence of debt, and the 18 activities listed above.
Prepare a balance sheet as of December 31, 2009, and an income statement and statement of cash flows for the period July 1, 2009, through December 31, 2009.
Evaluate Holton-Central’s performance during its first six months of operations.
Date | Account Title | Debit | Credit |
2009 | |||
1-Jul | Cash | 3900000 | |
Common stock(3900000*0.01) | 39000 | ||
APIC-Common stock | 3861000 | ||
Cash | 6000000 | ||
Debt | 6000000 | ||
Raw materials inventory | 175000 | ||
WIP Inventory | 220000 | ||
Finished goods inventory | 115000 | ||
Equipment | 450000 | ||
Building | 3600000 | ||
Land | 815000 | ||
Goodwill | 265000 | ||
Accounts payable | 875000 | ||
Cash | 4765000 | ||
1 | Accounts payable | 875000 | |
Cash | 875000 | ||
2 | Utilities ,etc. | 154500 | |
Cash | 154500 | ||
3 | Wages expense | 1408000 | |
Cash | 1408000 | ||
4 | Selling expense | 2785000 | |
Cash | 2785000 | ||
5 | Production machinery | 900000 | |
Cash | 900000 | ||
6 | Insurance expense | 228000 | |
Cash | 228000 | ||
7 | Raw materials inventory | 5345000 | |
Cash | 4510000 | ||
Accounts payable | 835000 | ||
8 | WIP inventory | 4935000 | |
Raw materials inventory | 4935000 | ||
9 | WIP inventory | 7878000 | |
Cash | 7878000 | ||
10 | WIP Inventory | 6662000 | |
Cash | 6400000 | ||
Accumulated depreciation | 262000 | ||
11 | Finished goods inventory | 19123000 | |
WIP Inventory | 19123000 | ||
12 | Cash | 20976000 | |
Accounts receivables | 4587000 | ||
Sales Revenue | 25563000 | ||
13 | COGS | 18593000 | |
Finished goods inventory | 18593000 | ||
14 | Depreciation expense | 86000 | |
Accumulated depreciation | 86000 | ||
15 | Interest expense | 300000 | |
Interest payable | 300000 | ||
(6000000*10%/2) | |||
16 | Prepaid Insurance | 133000 | |
Insurance expense | 133000 | ||
(228000-95000) | |||
17 | Repair expenses | 920000 | |
Liability for repair | 920000 | ||
(360000+560000) | |||
18 | Income tax expense | 365000 | |
Income tax payable | 365000 | ||
111793500 | 111793500 | ||
LEDGER ACCOUNTS | Net Ledger bal. | ||||
2009 | Debit | Credit | Debit | Credit | |
10 | Accumulated depreciation | 262000 | |||
14 | Accumulated depreciation | 86000 | 348000 | ||
1-Jul | Accounts payable | 875000 | |||
1 | Accounts payable | 875000 | |||
Accounts payable | 835000 | 835000 | |||
12 | Accounts receivables | 4587000 | 4587000 | ||
1-Jul | APIC-Common stock | 3861000 | 3861000 | ||
1-Jul | Building | 3600000 | 3600000 | ||
1-Jul | Cash | 3900000 | |||
1-Jul | Cash | 6000000 | |||
1-Jul | Cash | 4765000 | |||
1-Jan | Cash | 875000 | |||
2 | Cash | 154500 | |||
3 | Cash | 1408000 | |||
4 | Cash | 2785000 | |||
5 | Cash | 900000 | |||
6 | Cash | 228000 | |||
7 | Cash | 4510000 | |||
9 | Cash | 7878000 | |||
10 | Cash | 6400000 | |||
12 | Cash | 20976000 | 972500 | ||
13 | COGS | 18593000 | 18593000 | ||
1-Jul | Common stock(3900000*0.01) | 39000 | 39000 | ||
1-Jul | Debt | 6000000 | 6000000 | ||
14 | Depreciation expense | 86000 | 86000 | ||
1-Jul | Equipment | 450000 | 450000 | ||
1-Jul | Finished goods inventory | 115000 | |||
11 | Finished goods inventory | 19123000 | |||
13 | Finished goods inventory | 18593000 | 645000 | ||
1-Jul | Goodwill | 265000 | 265000 | ||
18 | Income tax expense | 365000 | 365000 | ||
18 | Income tax payable | 365000 | 365000 | ||
6 | Insurance expense | 228000 | |||
16 | Insurance expense | 133000 | 95000 | ||
15 | Interest expense | 300000 | 300000 | ||
15 | Interest payable | 300000 | 300000 | ||
1-Jul | Land | 815000 | 815000 | ||
17 | Liability for repair | 920000 | 920000 | ||
16 | Prepaid Insurance | 133000 | 133000 | ||
5 | Production machinery | 900000 | 900000 | ||
1-Jul | Raw materials inventory | 175000 | |||
7 | Raw materials inventory | 5345000 | |||
8 | Raw materials inventory | 4935000 | 585000 | ||
17 | Repair expenses | 920000 | 920000 | ||
12 | Sales Revenue | 25563000 | 25563000 | ||
4 | Selling expense | 2785000 | 2785000 | ||
2 | Utilities ,etc. | 154500 | 154500 | ||
3 | Wages expense | 1408000 | 1408000 | ||
1-Jul | WIP Inventory | 220000 | |||
8 | WIP inventory | 4935000 | |||
9 | WIP inventory | 7878000 | |||
10 | WIP Inventory | 6662000 | |||
11 | WIP Inventory | 19123000 | 572000 | ||
111793500 | 111793500 | 38231000 | 38231000 | ||
TRIAL BALANCE | |||||
Cash | 972500 | ||||
Accounts receivables | 4587000 | ||||
Prepaid Insurance | 133000 | ||||
Finished goods inventory | 645000 | ||||
WIP Inventory | 572000 | ||||
Raw materials inventory | 585000 | ||||
Land | 815000 | ||||
Building | 3600000 | ||||
Goodwill | 265000 | ||||
Equipment | 450000 | ||||
Production machinery | 900000 | ||||
Accumulated depreciation | 348000 | ||||
Accounts payable | 835000 | ||||
Income tax payable | 365000 | ||||
Interest payable | 300000 | ||||
Liability for repair | 920000 | ||||
Common stock(3900000*0.01) | 39000 | ||||
APIC-Common stock | 3861000 | ||||
Debt | 6000000 | ||||
Sales Revenue | 25563000 | ||||
COGS | 18593000 | ||||
Depreciation expense | 86000 | ||||
Insurance expense | 95000 | ||||
Repair expenses | 920000 | ||||
Selling expense | 2785000 | ||||
Utilities ,etc. | 154500 | ||||
Wages expense | 1408000 | ||||
Interest expense | 300000 | ||||
Income tax expense | 365000 | ||||
Total | 38231000 | 38231000 | |||
Income statement (July-Dec.) | |||||
Sales Revenue | 25563000 | ||||
Less:COGS | 18593000 | ||||
Gross profit | 6970000 | ||||
Less: Operating expenses: | |||||
Depreciation expense | 86000 | ||||
Insurance expense | 95000 | ||||
Repair expenses | 920000 | ||||
Selling expense | 2785000 | ||||
Utilities ,etc. | 154500 | ||||
Wages expense | 1408000 | ||||
Interest expense | 300000 | 5748500 | |||
Income before tax | 1221500 | ||||
Less:Income tax expense | 365000 | ||||
Net income after tax | 856500 | ||||
Balance sheet as at Dec.31 | |||||
Assets | |||||
Current assets | |||||
Cash | 972500 | ||||
Accounts receivables | 4587000 | ||||
Prepaid Insurance | 133000 | ||||
Finished goods inventory | 645000 | ||||
WIP Inventory | 572000 | ||||
Raw materials inventory | 585000 | ||||
Total current assets | 7494500 | ||||
Fixed assets | |||||
Land | 815000 | ||||
Building | 3600000 | ||||
Goodwill | 265000 | ||||
Equipment | 450000 | ||||
Production machinery | 900000 | ||||
Accumulated depreciation | -348000 | ||||
Total fixed assets | 5682000 | ||||
Total assets | 13176500 | ||||
Liabilities & Equity | |||||
Liabilities | |||||
Current Liabilities | |||||
Accounts payable | 835000 | ||||
Income tax payable | 365000 | ||||
Interest payable | 300000 | ||||
Liability for repair | 920000 | ||||
Total Current Liabilities | 2420000 | ||||
Long-term liabilities | |||||
Debt | 6000000 | ||||
Total Liabilities | 8420000 | ||||
Equity | |||||
Common stock(3900000*0.01) | 39000 | ||||
APIC-Common stock | 3861000 | ||||
Retained Earnings | 856500 | ||||
Total Equity | 4756500 | ||||
Total Liabilities & Equity | 13176500 | ||||
Cash flow statement for July-Dec. | ||
Operating activities | ||
Net income after tax | 856500 | |
Add back depn.(86000+262000) | 348000 | |
Adj. net income | 1204500 | |
Changes to working capital: | ||
Increase in a/cs. Receivables | -4587000 | |
Increase in prepaid insurance | -133000 | |
Increase in fin.gds.inv.(115000-645000) | -530000 | |
Increase in WIP inv.(220000-572000) | -352000 | |
Increase in Raw mat.inv.(175000-585000) | -410000 | |
Decrease in a/cs.payables(875000-835000) | -40000 | |
Inc.in Income tax payable | 365000 | |
Inc.in Interest payable | 300000 | |
Inc.in Liability for repair | 920000 | |
Net change in working capital | -4467000 | |
Cash used in operations | -3262500 | |
Investing activities | ||
Purchase of Production machinery | -900000 | |
Business acquisition | -4765000 | |
Cash used in Investing activities | -5665000 | |
Financing activities | ||
Issue of common stock | 3900000 | |
Issue of debt | 6000000 | |
Cash generated from financing activities | 9900000 | |
Net cash generated | 972500 | |
Ending balance of cash | 972500 | |
Evaluation: | ||
The company has generated positive net income & | ||
overall positive cash flow due to the financing by equity & debt | ||
Collection of receivables will improve the operating cash position | ||
Figures for Ratios: | ||
Total current assets | 7494500 | |
Total Current Liabilities | 2420000 | |
Total assets | 13176500 | |
Debt | 6000000 | |
Total Liabilities | 8420000 | |
Total Equity | 4756500 | |
Cash +receivables | 5559500 | |
Current ratio= Total Current assets/Tot.Current laibilities | 3.10 | Above normal --Mainly because of excess reveivables |
Quick ratio=(cash+rec)/C.liab. | 2.30 | Above normal --Mainly because of excess reveivables |
Debt ratio= Tot.liab./Tot.assets | 0.64 | indicates more debt funding of assets than equity |
Debt/equity= | 1.26 | Confirms the above |