Question

In: Accounting

By 2009, Mr. Cardell decided to acquire another office furniture company. On July 1, 2009, the...

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.

Solutions

Expert Solution

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

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