Exercise 10-14 Sunland Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Sunland issues a(n) $880,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 11%. The company will pay off the note in five $176,000 installments due at the end of each year over the life of the note.

1.Prepare the journal entry at the date of purchase.

2.Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.

3.Prepare the journal entry at the end of the second year to record the payment and interest.

4.Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

The trial balance and additional information were extracted from the accounting records of Princess Traders on 28 February 2019, the end of the financial year

PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2019

Statement of Financial Position accounts section

Adjustments and additional information

1 The following items were on hand at the financial year end according to physical count:

     Trade inventory $ 37 055

     Stationery $ 260

2. Rent has been received for the period 01 March 2018 to 31 March 2019.

3. Provide for outstanding interest on fixed deposit. The investment in fixed deposit was made on 01 December 2015 and it matures on 30 November 2019.

4. An amount of $ 5 250 is owing for interest on loan.

5. Write off the account of debtor , B. Lee who owed $400.

6. Adjust the allowance for credit losses to 5% of accounts receivable.

7. Rates and taxes account includes a payment of $12 000 made to the municipality for the period 01 July 2018 to 30 June 2019.

8. Repairs to the building , $5 000 was erroneously debited to Land and Building account.

9. The proprietor used $250 form the cash float to purchase personal items for herself. No entry was made for this transaction.

10. Provide for depreciation as follows:

10.1 On equipment at 10% p.a using the fixed instalment method. Note: Equipment cost price $20 000, was purchased on 01 September 2018. The purchase has been recorded. on vehicles at 20% p.a on the diminishing balance.

10.2 On vehicles at 20% p.a on the diminishing balance.

Required

Use the trial balance and additional information to prepare:

Question 1

The Statement of profit and loss account for the year ended 28 February 2019

Question 2

Extract of statement of financial position on 28 February 2019

Great Adventures Problem AP9-1 (GL) Tony’s favorite memories of his childhood were the times he spent with his dad at camp. Tony was daydreaming of those days a bit as he and Suzie jogged along a nature trail and came across a wonderful piece of property for sale. He turned to Suzie and said, “I’ve always wanted to start a camp where families could get away and spend some quality time together. If we just had the money, I know this would be the perfect place.” On November 1, 2022, Great Adventures purchased the land by issuing a $780,000, 6%, 10-year installment note to the seller. Payments of $8,660 are required at the end of each month over the life of the 10-year loan. Each monthly payment of $8,660 includes both interest expense and principal payments (i.e., reduction of the loan amount). Late that night Tony exclaimed, “We now have land for our new camp; this has to be the best news ever!” Suzie said, “There’s something else I need to tell you. I’m expecting!” They decided right then, if it was a boy, they would name him Venture.

1. Record each of the transactions listed above in the 'General Journal' tab. Review the 'General Ledger' and the 'Trial Balance' tabs to see the effect of the transactions on the account balances.
2. Prepare an income statement for the period ended December 31, 2022, in the 'Income Statement' tab.
3. Prepare a classified balance sheet as of December 31, 2022 in the 'Balance Sheet' tab.
4. Record the closing entries in the 'General Journal' tab.

1.) Record the issuance of the long-term note payable for the purchase of land on November 1, 2022.

Journal entry worksheet

2.) Record the first monthly payment on the long-term note payable, made on November 30, 2022.

3.) Record the second monthly payment on the long-term note payable, made on December 31, 2022.

4.) The 12 monthly payments in 2023 (following year) will reduce the note's balance by an additional $59,301. Record the reclassification of this amount from long-term notes payable to current notes payable.

5.) Prepare the closing entry for revenue accounts.

6.) Prepare the closing entry for expense and loss accounts.

The Accounting Equation Ginger Enterprises began the year with total assets of $505,000 and total liabilities of $227,000. Using this information and the accounting equation, answer each of the following independent questions. 1. What was the amount of Ginger's owners' equity at the beginning of the year? $ 2. If Ginger's total assets increased by $101,000 and its total liabilities increased by $71,000 during the year, what was the amount of Ginger's owners' equity at the end of the year? $ 3. If Ginger's total liabilities decreased by $30,000 and its owners' equity increased by $64,000 during the year, what was the amount of its total assets at the end of the year? $ 4. If Ginger's total assets doubled to $1,010,000 and its owners' equity remained the same during the year, what was the amount of its total liabilities at the end of the year?

As the CFO of GES Corporation, which is a fashion design firm, you need to find $5 million to expand the company's production. Research and discuss how the process of raising the $5 million would be different with the assistance of a financial institution versus raising the money directly from the financial markets?

Knowledge Check 01

The data provided here is of Stevenson Company. The tax rate is 30%. From this data, compute the gross margin percentage for the year 2016.

• 66.0%

• 64.7%

• 35.3%

• 34.0%

Knowledge Check 02

The data provided here is of Stevenson Company. The tax rate is 30%. From this data, compute the net profit margin percentage for the year 2016.

• 8.0%

• 10.8%

• 9.7%

• 9.0%

Knowledge Check 03

The data provided here is of Stevenson Company. The tax rate is 30%. From this data, compute the return on total assets for the year 2016.

• 38.5%

• 39.7%

• 41.9%

• 40.9%

Knowledge Check 04

The data provided here is of Stevenson Company. The tax rate is 30%. From this data, compute the return on equity for the year 2016.

• 37.6%

• 44.1%

• 38.9%

• 45.5%

At the beginning of 2018, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. What is the effective rate of interest implicit in the agreement?
2-4. Prepare the lessee’s journal entries at the beginning of the lease, the first lease payment at December 31, 2018 and the second lease payment at December 31, 2019.
5. Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease, but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee’s entry at the beginning of the lease.

Apple reported the following pre tax income (loss) during 2010-2017

There are no temporary or permanent differences between taxable income and EBIT for ALL years

Assume Apple will elect to carryback losses to the extent possible

Also assume that at 12/31/15 Apple is reasonably confident that they will have $30,000 of taxable income in 2016

Required:

A) prepare journal entries for 2010-2017 for income tax expenses/benefit.

B) Draft the lower portion of the 2015 income statement starting with EBIT

C) Draft the lower portion of 2016 Income statement starting with EBIT

Problem 22-8AA Merchandising: Preparation of a complete master budget LO P4 Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017. DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017 Assets Cash $ 36,500 Accounts receivable 520,000 Inventory 105,000 Total current assets $ 661,500 Equipment 552,000 Less: accumulated depreciation 69,000 Equipment, net 483,000 Total assets $ 1,144,500 Liabilities and Equity Accounts payable $ 345,000 Bank loan payable 13,000 Taxes payable (due 3/15/2018) 89,000 Total liabilities $ 447,000 Common stock 470,500 Retained earnings 227,000 Total stockholders’ equity 697,500 Total liabilities and equity $ 1,144,500 To prepare a master budget for January, February, and March of 2018, management gathers the following information. The company’s single product is purchased for $20 per unit and resold for $59 per unit. The expected inventory level of 5,250 units on December 31, 2017, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,250 units; February, 8,750 units; March, 11,500 units; and April, 11,000 units. Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 65% is collected in the first month after the month of sale and 35% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2017, accounts payable balance, $70,000 is paid in January and the remaining $275,000 is paid in February. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $54,000 per year. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,100 per month and is paid in cash. Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $38,400; February, $100,800; and March, $28,800. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased. The company plans to buy land at the end of March at a cost of $145,000, which will be paid with cash on the last day of the month. The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $16,000 at the end of each month. The income tax rate for the company is 35%. Income taxes on the first quarter’s income will not be paid until April 15. Required: Prepare a master budget for each of the first three months of 2018; include the following component budgets: 1. Monthly sales budgets. 2. Monthly merchandise purchases budgets. 3. Monthly selling expense budgets. 4. Monthly general and administrative expense budgets. 5. Monthly capital expenditures budgets. 6. Monthly cash budgets. 7. Budgeted income statement for the entire first quarter (not for each month). 8. Budgeted balance sheet as of March 31, 2018.

Below is a table for the present value of $1 at compound interest.

Below is a table for the present value of an annuity of $1 at compound interest.

Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%?

Use the following comparative Balance Sheets, Income Statement, and additional information to prepare the 2018 Statement of Cash Flows for United Brands Corporation.

Required:

Prepare an entire Statement of Cash Flows (all three sections) using the indirect method for the Operating Activities section.

Prepare the Operating Activities section using the direct method.

United Brands Corporation

Balance Sheets

December 31, 2018 and 2017

($ in millions)

2018 2017 Incr (Decr)

ASSETS

Current Assets:

Cash $41 $20 $21

Accounts receivable 32 30 2

Inventory 46 50 (4)

Prepaid insurance 3 6 (3)

Property, Plant, & Equipment:

Land 80 60 20

Equipment 81 75 6

Less: Accumulated depreciation (16) (20) (4)

Total Assets $267 $221

LIABILITIES

Current Liabilities:

Accounts payable $26 $20 $6

Salaries payable 3 1 2

Income tax payable 6 8 (2)

Notes payable, current 34 47 (13)

Long-term Liabilities:

Notes payable, long-term 20 0 20

EQUITY

Common stock, $10 par, 50 million

shares authorized, 13 million issued in 2018,

10 million issued in 2017 $130 $100 $30

Paid-in capital in excess of par-common stock 29 20 9

Retained Earnings 19 25 (6)

Total Liabilities and Equity $267 $221

United Brands Corporation

Income Statement

for the year ended December 31, 2018

($ in millions)

Sales revenue $100

Cost of goods sold (60)

Gross profit $40

Operating expenses:

Salaries expense (13)

Depreciation expense (3)

Insurance expense (7)

Income from operations $17

Other income and expenses:

Interest expense (2)

Gain on sale of land 8

Loss on sale of equipment (2)

Income before income tax $21

Income tax expense (9)

Net income $12

Additional information for 2018 transactions:

All inventory is purchased on account, and the Accounts Payable account is used exclusively for inventory purchases.

A portion of the company land was sold for $18 million in cash. This land was originally purchased in a previous year for $10 million.

Land was purchased for $30 million cash for use as a parking lot.

Equipment was sold in 2018 that had an Accumulated Depreciation balance of $7 million on the date of sale. The equipment originally cost $14 million and was sold at a loss for cash. (HINT: You must determine the amount of cash received.)

In 2018, new equipment was acquired by issuing a 12%, five-year, $20 million note payable to the seller.

During 2018, $55 million of short-term (current) notes payable were paid in cash and $42 million of cash was borrowed in the form of short-term debt (current notes payable).

The increase in the common stock account is attributed to two transactions:

Issuance of a 10% stock dividend (1 million shares) when the market price was $13 per share.

Issuance of 2 million shares for cash when the market price was $13 per share.

Cash dividends were declared and paid to shareholders. (HINT: You must determine the amount of cash dividends paid.)

Overhead is budgeted and applied using direct-labor hours in a standard costing system. Standard cost and annual budget information are as follows:

Required:

Compute the following cost variances from the available data. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations.)

The following list includes selected permanent accounts and all of the temporary accounts from the December 31, 2017, unadjusted trial balance of Emiko Co.. Emiko Co. uses a perpetual inventory system. Debit Credit Merchandise inventory $ 39,500 Prepaid selling expenses 7,500 Dividends 52,000 Sales $ 605,000 Sales returns and allowances 21,300 Sales discounts 6,900 Cost of goods sold 250,000 Sales salaries expense 67,000 Utilities expense 24,500 Selling expenses 45,500 Administrative expenses 124,000 Additional Information Accrued sales salaries amount to $1,700. Prepaid selling expenses of $2,800 have expired. A physical count of year-end merchandise inventory shows $34,400 of goods still available. (a) Use the above account balances along with the additional information, prepare the adjusting entries. (b) Use the above account balances along with the additional information, prepare the closing entries.

Johnsn and Hill formed a company, and 2018 was their first year of operation.

a) To establish Johnson & Hill each contributed a total of $55,000 in exchange for common stock.

b) Johnson & Hillt specializes in high-end parties. The first year they conducted 96 events and revenue for the first year amounted to $480,000, of which 95% was to be paid by the date of the event and the remainder due within 30 days of the event

c) Clients owe $16,000 at the end of the year from the services provided in December.

d) At the beginning of the year, a storage building was rented, signing a two-year lease for $15,000 per year and making a $4,000 refundable security deposit. The first year’s lease payment and the security deposit were paid at the beginning of the year.

e) At the beginning of the year, the company purchased a computerized stage and lighting for $120,000 expected to be useful for twelve years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder (with 10% interest-only to be paid annually until maturity). They also purchased a flatbed trailer to haul it with, for $8,000, also with an expected 15 year life. Johnson & Hill must lease a large truck to haul the trailer for each event, which costs $1,000 per day.

f) Other operating expenses, including wages, deprecation on other equipment, utilities, and rent on the storage building noted in (d) and (e) above, totaled $136,000 for the first year. No expenses were accrued or unpaid at the end of the year.

g) Johson & Hill purchased other equipment (tables & carts, ice machine, food heating trays and bags, helium tanks, music system, etc) for $10000 with an estimated life of 10 years and no salvage value. Salaries and wages for the year total $109467 including payroll taxes.

h) The company declared and paid a $50,000 cash dividend at the end of the first year.

i) Johnson & Hill is in the 35% corporate tax bracket.

1. Prepare a balance sheet as of the end of the first year.

2. Prepare a statement of retained earnings as of the end of the first year.

3. Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.

4. Complete a vertical analysis of the Income statement.

5. Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is a difference.

6. Compute, explain & analyze the following ratios:

a) Gross Profit

b) Operating Leverage ratio

c) Return on common equity

d) Current ratio

e) Operating Cash flow to current liabilities

f) Long-term debt to assets

g) Interest coverage