Exercise 15-6

Bridgeport Limited’s ledger shows the following balances on December 31, 2020:

A.) Assuming that the directors decide to declare total dividends in the amount of $477,665, determine how much each class of shares should receive if the preferred shares are cumulative and fully participating. Note that one year’s dividends are in arrears on the preferred shares, which pay a dividend of $1.35 per share.

B.) Assuming that the directors decide to declare total dividends in the amount of $477,665, determine how much each class of shares should receive if the preferred shares are non–cumulative and non–participating. Note that one year’s dividends are in arrears on the preferred shares, which pay a dividend of $1.35 per share.

C.) Assuming that the directors decide to declare total dividends in the amount of $477,665, determine how much each class of shares should receive if the preferred shares are non–cumulative and are participating in distributions in excess of a 9% dividend rate on the common shares. Note that one year’s dividends are in arrears on the preferred shares, which pay a dividend of $1.35 per share.

During the year, Wright Company sells 450 remote-control airplanes for $100 each. The company has the following inventory purchase transactions for the year.

Calculate ending inventory and cost of goods sold for the year, assuming the company uses LIFO.

Classic Automobiles of Huntsville Ltd. was formed on January 1, 2016 when Classic issued common shares for $300,000. Early in January 2016, Classic made the following cash payments:

• $150,000 for equipment
• $120,000 for inventory (four cars at $30,000 each)
• $20,000 for 2016 rent on a store building
  

In February 2016, Classic purchased six cars for inventory on account. Cost of this inventory was $260,000 ($43,333.33 each). Before year-end, Classic paid $208,000 of this debt. Classic uses the FIFO method to account for inventory.

During 2016, Classic sold eight vintage autos for a total of $500,000. Before year-end, Classic collected 80% of this amount.

The business employs three people. The combined annual payroll is $95,000, of which Classic owes $4,000 at year end. At the end of the year, Classic paid income tax of $10,000.

Late in 2016, Classic declared and paid cash dividends of $11,000.

For equipment, Classic uses the straight-line depreciation method over five years with zero residual value.

1. Prepare Classic Automobiles of Huntsville Ltd.’s income statement for the year ended December 31, 2016. Use the single-step format, with all revenues listed together and all expenses listed together.
2. Prepare Classic’s balance sheet at December 31, 2016.
3. Prepare Classic’s statement of cash flows for the year ended December 31, 2016. Format cash flows from operating activities by using the indirect method.
4. Comment on the business performance based on the statement of cash flows.

[The following information applies to the questions displayed below.]

Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is $15,000. In addition, Rubio’s share of the limited partnership loss for the year is $22,000, his share of income from a different limited partnership is $5,000, and he has $40,000 in wage income and $10,000 in long-term capital gains.

a. How much of Rubio’s $22,000 loss is allowed considering only the tax-basis loss limitations?

b. How much of the loss from part (a) is allowed under the at-risk limitations?

c. How much of Rubio’s $22,000 loss from the limited partnership can he deduct in the current year considering all limitations?

This corporation sells office products and performs accounting services.

S & B uses the Perpetual Inventory system and had the following balances:

S & B Office Supplies and Services

Trial Balance

November 1, 2018

During the month of November, the following summary transactions were completed.

Nov. 1   Paid November Rent $375

8    Paid $3,550 for salaries due employees, of which 1,850 is for November and $1,700 is for October.

        10     Received $1,900 cash from customers in payment of account.

        11     Purchased merchandise on account from dd’s Discount Supply $8,000, terms 2/10, n/30.

        12     Sold merchandise on account for $5,500, terms 2/10, n/30. The cost of the
merchandise sold was $4,000.

        15     Received credit from dd’s Discount Supply for merchandise returned $300.

        19     Received collections in full, less discounts, from customers billed
on sales of $5,500 on November 12.

        20     Paid dd’s Discount Supply in full, less discount.

        22     Received $2,300 Cash for services performed in November.

        25     Purchased equipment on account $5,000.

        27     Purchased supplies on account $1,700.

        28     Paid creditors $3,000 of accounts payable due.

        29     Paid Salaries $1,300.

        29     Performed services on account and billed customers $700.

        29     Received $675 from customers for services to be performed in the future.

Adjustment Data:

1. Supplies on hand are valued at $1,400.
2. Accrued salaries are $500.
3. Depreciation for the month is $250.
4. $750 of services related to the unearned service revenue has not been earned by month end.

Instructions:

1. Enter the November 1, balances in ledger accounts.
2. Journalize the November transactions.
3. Post to the ledger accounts. HINT: You will need to add some accounts to the beginning ones available.
4. Journalize and Post the Adjusting Entries.
5. Prepare an adjusted trial balance at November 30, 2018.
6. Journalize the Closing Entries.

You are required to evaluate two systems. The cost of a used system is $75,000. Through a new system, labor hours can be decreased by 20% as compared to the used system. The cost of a new system is $150,000. Both systems have a useful life of five years. According to estimations, the market value of the used system will be $20,000 in five years, and the market value of the new system will be $50,000 in five years. The used system has to operate 8 hours per day for 20 days per month. If labor costs $40 per hour and the MARR is 1% per month, which system should be recommended?

1. On February 1, 2018, Ellison Co. issued eight-year bonds with a face value of $10,000,000 and a stated interest rate of 7%, payable semiannually on July 1 and January 1. The bonds were sold to yield 8%. The bonds are callable at 101 and convertible.

1. The issue price of the bonds is
2. Record the journal entries for February 2018 at issuance and July 1.

2. Using the information above, assume that the bonds issued by Ellison Co. are convertible with each $1,000 convertible into 25 shares of common stock.    Assume that Ellison converts $5,000,000 of bonds on July 1, 2020 into common stock. Prepare the following entries:

a. Entry at February 1, 2018 for issuance of the convertible bonds

b. Entry at July 1, 2020 for the conversion of $5,000,000 of bonds.

3. Using the information above, assume that the remaining bonds are called on December 31, 2020.

• Assess the key ratios for profitability, liquidity, and solvency used by financial analysts to evaluate the financial performance of a company. Next, indicate one (1) ratio from each of the three (3) categories (profitability, liquidity, and solvency) that you believe to be most indicative of future performance. Use actual ratios from a company of your choice to provide support for your rationale.

Activity-Based Budget

Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,350 for the Sleepeze, 12,280 for the Plushette, and 5,400 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:

1. Salaries for his office (including himself at $65,000, a marketing research assistant at $41,400, and an administrative assistant at $27,450) are budgeted for $133,850 next year.
2. Depreciation on the offices and equipment is $22,750 per year.
3. Office supplies and other expenses total $23,500 per year.
4. Advertising has been steady at $22,850 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high-end mattress. Gene believes the company should spend 15 percent of first-year Ultima sales for a print and television campaign.
5. Commissions on the Sleepeze and Plushette lines are 6 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores.
6. Last year, shipping for the Sleepeze and Plushette lines averaged $55 per unit sold. Gene expects the Ultima line to ship for $70 per unit sold since this model features a larger mattress.

Suppose that Gene is considering three sales scenarios as follows:

Suppose Gene determines that next year's Sales Division activities include the following:

Research—researching current and future conditions in the industry

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $3,000,000 of 6-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $2,867,050. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank.

2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar.

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method.

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?
Yes

5. Compute the price of $2,867,050 received for the bonds by using Table 1, Table 2, Table 3 and Table 4. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

The client has inventory at approximately 50 locations in a three-province region. The inventory is difficult to count and can be observed only by travelling by automobile. The internal controls over acquisitions, cash disbursements, and perpetual records are considered effective. This is the fifth year that you have done the audit, and audit results in past years have always been excellent. The client is in excellent financial condition.

Required

Recommend an evidence mix for the five types of tests for the audit of inventory and cost of goods sold. Justify your answer. Include in your recommendations both tests of controls and substantive tests.

Pitino acquired 90 percent of Brey's outstanding shares on January 1, 2016, in exchange for $405,000 in cash. The subsidiary's stockholders' equity accounts totaled $389,000 and the noncontrolling interest had a fair value of $45,000 on that day. However, a building (with a nine-year remaining life) in Brey's accounting records was undervalued by $27,000. Pitino assigned the rest of the excess fair value over book value to Brey's patented technology (four-year remaining life).

Brey reported net income from its own operations of $71,000 in 2016 and $87,000 in 2017. Brey declared dividends of $22,500 in 2016 and $26,500 in 2017.

At December 31, 2018, Pitino owes Brey $23,000 for inventory acquired during the period.

The following separate account balances are for these two companies for December 31, 2018, and the year then ended.

Note: Parentheses indicate a credit balance.

1. What amounts make up the $85,320 Equity Earnings of Brey account balance for 2018?

2. What is the net income attributable to the noncontrolling interest for 2018?

3. What amounts make up the $528,300 Investment in Brey account balance as of December 31, 2018?

4. Prepare the 2018 worksheet entry to eliminate the subsidiary’s beginning owners’ equity balances.

5. Without preparing a worksheet or consolidation entries, determine the consolidation balances for these two companies.

Quality Brick Company produces bricks in two processing departments—Molding and Firing. Information relating to the company’s operations in March follows:

1. Raw materials used in production: Molding Department, $26,100; and Firing Department, $4,300.
2. Direct labor costs incurred: Molding Department, $19,900; and Firing Department, $4,700.
3. Manufacturing overhead was applied: Molding Department, $23,100; and Firing Department, $36,200.
4. Unfired, molded bricks were transferred from the Molding Department to the Firing Department. According to the company’s process costing system, the cost of the unfired, molded bricks was $69,400.
5. Finished bricks were transferred from the Firing Department to the finished goods warehouse. According to the company’s process costing system, the cost of the finished bricks was $107,700.
6. Finished bricks were sold to customers. According to the company’s process costing system, the cost of the finished bricks sold was $105,000.

Required:

Prepare journal entries to record items (a) through (f) above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)