Question

Question 6

1.       The market value of Farmington Corp.'s common shares was quoted at $54 per share at December 31, 2018, and 2017. Planetarium 's balance sheet at December 31, 2018, and 2017, and statement of income and retained earnings for the years then ended are presented below:

Farmington Corp.

Balance Sheet

                                                                                                                       December 31               

                                                                                                               2018                     2017

Assets:

Current assets:

         Cash                                                                                       $    9,000,000        $    5,200,000

         Short-term investments                                                      17,200,000            15,400,000

         Accounts receivable (net)                                                109,000,000          111,000,000

         Inventories, lower of cost or market                            122,000,000          140,000,000

         Prepaid expenses                                                                      4,000,000              2,800,000

                  Total current assets                                                $261,200,000        $274,400,000

Property, plant, and equipment (net)                                    350,000,000          315,000,000

Investments, at equity                                                                     2,800,000              3,500,000

Long-term receivables                                                                   15,000,000            20,000,000

Copyrights and patents (net)                                                          6,000,000              7,000,000

Other assets                                                                                          8,000,000              9,100,000

                  Total assets                                                                 $643,000,000        $629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:

         Notes payable                                                                        $    7,000,000        $ 17,000,000

         Accounts payable                                                                      55,000,000            52,000,000

         Accrued expenses                                                                     27,500,000            30,000,000

         Income taxes payable                                                                 1,500,000              2,000,000

         Current portion of long-term debt                                       10,000,000              9,500,000

                  Total current liabilities                                                 101,000,000          110,500,000

Long-term debt                                                                                  180,000,000          190,000,000

Deferred income taxes                                                                       69,000,000            65,000,000

Other liabilities                                                                                     15,000,000              9,500,000

                  Total liabilities                                                                365,000,000        375,000,000

Stockholders' equity:

         Common stock, par value $1; authorized 20,000,000

                  shares; issued and outstanding 12,000,000 shares          12,000,000            12,000,000

         10% cumulative preferred shares, par value $100;

                  $100 liquidating value; authorized 100,000 shares;

                  issued and outstanding 60,000 shares                                   6,000,000              6,000,000

         Additional paid-in capital                                                               119,000,000          119,000,000

         Retained earnings                                                                           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 December 31                                                                  

                                                                                                                2018                      2017      

Net sales                                                                                         $540,000,000        $500,000,000

Cost and expenses:

      Cost of goods sold                                                                       390,900,000          400,000,000

      Selling, general, and administrative expenses                      70,000,000            65,000,000

      Other, net                                                                                            9,100,000              6,000,000

            Total costs and expenses                                                   470,000,000        471,000,000

Income before income taxes                                                             70,000,000            29,000,000

Income taxes                                                                                          21,000,000            11,600,000

Net income                                                                                             49,000,000            17,400,000

Retained earnings at beginning of period                                    117,000,000          113,100,000

Dividends on common stock                                                            (24,400,000)          (12,900,000)

Dividends on preferred stock                                                                 (600,000)               (600,000)

Retained earnings at end of period                                                $141,000,000        $117,000,000

Instructions

Based on the above information, compute the following (for the year 2018 only): (Show supporting computations in good form.)

(a)   Current ratio.

(b)   Acid-test (quick) ratio.

(c)   Accounts receivable turnover.

(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 Company’s reported net incomes for 2018 and the previous two years are presented

below.

                           2018                            2017                             2016  

                        $105,000                     $95,000                       $70,000

2018’s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2016 and 2017 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes.

Instructions

(a)    For each of the six accounting changes, errors, or prior period adjustment situations described below, prepare the journal entry or entries Molina Company should record during 2018. If no entry is required, write “none.”

(b)    After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2018. If no entry, write “none.”

1.      Early in 2018, Molina determined that equipment purchased in January, 2016 at a cost of $1,290,000, with an estimated life of 5 years and salvage value of $90,000 is now estimated to continue in use 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 not get recorded.

(a)

(b)

3.      Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-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 not get recorded.

(a)

(b)

3.      Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-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 not get recorded.

(a)

(b)

3.      Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-line depreciation for its trucks.

(a)

(b)

Question 8

1.       On January 1, 2018, Foley Company (as lessor) entered into a noncancelable lease agreement with Pinkley Company for machinery which was carried on the accounting records of Foley at $9,060,000 and had a fair value of $9,600,000. Minimum lease payments under the lease agreement which expires on December 31, 2027, total $14,200,000. Payments of $1,420,000 are due each January 1. The first payment was made on January 1, 2018 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Pinkley expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions

(a)     From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement?

(b)     What should be the income before income taxes derived by Foley from the lease for the year ended December 31, 2018?

(c)     Ignoring income taxes, what should be the expenses incurred by Pinkley from this lease for the year ended December 31, 2018?

(d)    What journal entries 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 in 2018                                                               325,000

                  Payments made in 2018                                                                                  (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-Term Debt"                                                  500,000

                  Payments made in 2018                                                                              (1,225,000)

                  Balance at December 31, 2018                                                                    $   900,000

            Long-term debt:

                  Balance at December 31, 2017                                                                   $9,000,000

                  Proceeds from borrowings in 2018                                                            2,250,000

                  Transfers to caption "Current Portion of Long-Term Debt"                   (500,000)

                  Payments made in 2018                                                                                 (1,500,000)

                  Balance at December 31, 2018                                                                     $9,250,000

            In preparing a statement of cash flows for the year ended December 31, 2018, for Cole Company, cash flows from financing activities would reflect

		$2,000,000
		$2,250,000
		$2,575,000
		$3,175,000

Question 10

1.       Edwards Company contracted on 4/1/17 to construct a building for $4,800,000. The project was completed in 2019. Additional data follow:

                                                                                         2017                  2018                 2019     

            Costs incurred to date                                     $1,120,000        $2,700,000        $3,800,000

            Estimated cost to complete                              2,080,000             900,000                —

            Billings to date                                                   1,000,000          3,800,000          4,800,000

            Collections to date                                               800,000          2,600,000          4,400,000

Instructions

(a)    Calculate the income recognized by Edwards under the percentage-of-completion method of accounting in each of the years 2017, 2018, and 2019.

(b)    Prepare all necessary entries for the year 2018.

(c)    Present the balance sheet disclosures at December 31, 2018. Proper headings or subheadings must be indicated.

Answer 1

Answer to Question 6.

Part a.

Current Ratio = Current Assets / Current Liabilities
Current Ratio = 261,200,000 / 101,000,000
Current Ratio = 2.59: 1

Part b.

Acid Test (Quick) Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
Acid Test (Quick) Ratio = (261,200,000 – 122,000,000 – 4,000,000) / 101,000,000
Acid Test (Quick) Ratio = 135,200,000 / 101,000,000
Current Ratio = 1.34: 1

Part c.

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Average Accounts Receivable = (109,000,000 + 111,000,000) / 2
Average Accounts Receivable = $110,000,000

Accounts Receivable Turnover = 540,000,000 / 110,000,000
Accounts Receivable Turnover = 4.91 times

Part d.

Inventory Turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (122,000,000 + 140,000,000) / 2
Average Inventory = $131,000,000

Inventory Turnover = 390,900,000 / 131,000,000
Inventory Turnover = 2.98 times