Twenty metrics of liquidity, Solvency, and Profitability

The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $64 on December 31, 20Y8.

Instructions:

Determine the following measures for 20Y8. Round ratio values to one decimal place and dollar amounts to the nearest cent. For number of days' sales in receivables and number of days' sales in inventory, round intermediate calculations to the nearest whole dollar and final amounts to one decimal place. Assume there are 365 days in the year.

Depreciation for Partial Periods

Bar Delivery Company purchased a new delivery truck for $36,000 on April 1, 2019. The truck is expected to have a service life of 10 years or 180,000 miles and a residual value of $3,000. The truck was driven 12,000 miles in 2019 and 16,000 miles in 2020. Bar computes depreciation expense to the nearest whole month.

Required:

1. Compute depreciation expense for 2019 and 2020 using the following methods: (Round your answers to the nearest dollar.)
   1. Straight-line method

      2019	$ fill in the blank 1
      2020	$ fill in the blank 2

   2. Sum-of-the-years'-digits method

      2019	$ fill in the blank 3
      2020	$ fill in the blank 4

   3. Double-declining-balance method

      2019	$ fill in the blank 5
      2020	$ fill in the blank 6

   4. Activity method

      2019	$ fill in the blank 7
      2020	$ fill in the blank 8

2. For each method, what is the book value of the machine at the end of 2019? At the end of 2020? (Round your answers to the nearest dollar.)
   1. Straight-line method

      2019	$ fill in the blank 9
      2020	$ fill in the blank 10

   2. Sum-of-the-years'-digits method

      2019	$ fill in the blank 11
      2020	$ fill in the blank 12

   3. Double-declining-balance method

      2019	$ fill in the blank 13
      2020	$ fill in the blank 14

   4. Activity method

      2019	$ fill in the blank 15
      2020	$ fill in the blank 16

On January 1, 2017, Abbey acquires 90 percent of Benjamin's outstanding shares. Financial information for these two companies for the years of 2017 and 2018 follows:

Abbey Company:

   2017 2018

Benjamin Company:

Assume that a tax rate of 40 percent is applicable to both companies :

1. On consolidated financial statements for 2018, what are the income tax expense and the income tax currently payable if Abbey and Benjamin file a consolidated tax return as an affiliated group?
2. On consolidated financial statements for 2018, what are the income tax expense and income tax currently payable if they choose to file separate returns?

a. Income tax expense

   Income tax payable

b. Income tax expense

   Income tax payable

(6) Treasury Stock Analysis

Ray Holt Corporation has retained you as a consultant on accounting policies and procedures. During 2016, the company engaged in a number of treasury stock transactions, having foreseen an opportunity to report its treasury stock as an asset and to recognize a profit in trading its own stock. The transactions were as follows:

Required:

Prepare an analysis of treasury stock accounting for Mr. Robert Richter, the controller. This analysis should contain proper journal entries for each of the treasury stock transactions occurring during 2016, prepared using the cost method discussed in the chapter. Additional Instructions

PAGE 1

GENERAL JOURNAL

Which of the following is correct regarding treasury stock?

(A) A corporation may not recognize a gain or loss from trading in its own securities.

(B) All of the choices are correct regarding treasury stock.

(C) Reacquisition and reissuance are treated as a contraction and expansion of shareholders' equity.

(D) Treasury Stock is not asset, a corporation cannot own itself.

How are "gains" on treasury stock reported?

(A) As a gain.

(B) As an increase in additional paid-in capital.

(C) As a loss.

(D) As a decrease in additional paid-in capital.

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.

1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.

   Ratio	Barry	Industry Average
   Current	x	1.62x
   Quick	x	0.84x
   Days sales outstandinga	days	32.59 days
   Inventory turnover	x	4.58x
   Total assets turnover	x	1.47x
   Profit margin	%	1.62%
   ROA	%	2.39%
   ROE	%	6.71%
   ROIC	%	7.80%
   TIE	x	2.41x
   Debt/Total capital	%	47.23%
   M/B	%	5.30%
   P/E	%	23.35%
   EV/EBITDA	%	7.63%

   
   ^aCalculation is based on a 365-day year.
   
2. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	1.62%
   Total assets turnover	x	1.47x
   Equity multiplier	x	x

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   -Select-IIIIIIIVVItem 19
   1. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
   2. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
   3. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   4. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   5. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)
   -Select-IIIIIIIVVItem 20
   1. If 2018 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2018 ratios will be misled, and a return to normal conditions in 2019 could hurt the firm's stock price.
   2. If 2018 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2018 ratios to be well informed, and a return to normal conditions in 2019 could help the firm's stock price.
   3. If 2018 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2018 ratios will be misled, and a continuation of normal conditions in 2019 could hurt the firm's stock price.
   4. If 2018 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2018 ratios will be misled, and a return to supernormal conditions in 2019 could hurt the firm's stock price.
   5. If 2018 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2018 ratios will be well informed, and a return to normal conditions in 2019 could hurt the firm's stock price.

Reciprocal Method of Support Department Cost Allocation Valron Company has two support departments, Human Resources and General Factory, and two producing departments, Fabricating and Assembly. Support Departments Producing Departments Human Resources General Factory Fabricating Assembly Direct costs $160,000 $330,000 $114,800 $94,000 Normal activity: Number of employees — 60 80 170 Square footage 1,000 — 5,700 13,300 The costs of the Human Resources Department are allocated on the basis of number of employees, and the costs of General Factory are allocated on the basis of square footage. Now assume that Valron Company uses the reciprocal method to allocate support department costs. Required: 1. Calculate the allocation ratios (rounded to four significant digits) for the four departments using the reciprocal method. If an amount is zero, enter "0". Use the rounded values for subsequent calculations. Proportion of Driver Used by Human Resources General Factory Fabricating Assembly Human Resources General Factory 2. Develop a simultaneous equations system of total costs for the support departments. If required, round your answers to four decimal places. Use these numbers for subsequent calculations. If required, round all other intermediate calculations to six decimal places, except the answers computed in requirement 1. Human Resources (HR) = $ + (GF) General Factory (GF) = $ + (HR) Solve for the total reciprocated costs of each support department. (Round reciprocated total costs to the nearest dollar.) Human Resources (HR) $ General Factory (GF) $ 3. Using the reciprocal method, allocate the costs of the Human Resources and General Factory departments to the Fabricating and Assembly departments. Round all allocated costs to the nearest dollar. If an amount is zero, enter "0". Note: There may be a "$1" difference due to intermediate rounding. Support Departments Producing Departments Human Resources General Factory Fabricating Assembly Direct costs $ $ $ $ Allocate: Human Resources General Factory Total after allocation $ $ $ $

Briefly explain the impact (increase or decrease) these transactions would have on specific accounts in the income statement and balance sheet.

Gary Farmer had the following sales of business property during the 2018 tax year:

1. Sold land acquired on December 3, 2007, at a cost of $24,000, for $37,000 on January 5, 2018. The cost of selling the land was $500, and there was no depreciation allowable or capital improvements made to the asset over the life of the asset.
2. Sold a business computer with an adjusted basis of $20,700 that was acquired on April 5, 2015. The original cost was $25,875, and accumulated depreciation was $5,175. The computer was sold on May 2, 2018, for $14,000, resulting in a $6,700 loss.
3. Sold equipment on July 22, 2018 for gross proceeds of $16,000. The equipment was acquired on October 21, 2017 at a cost of $25,000 and accumulated depreciation was $4,300 at the time of the sale. Gary used an equipment broker on this sale and paid a sales commission of $1,600.

Calculate Gary’s net gain or loss and determine the character as either capital or ordinary (ignore any depreciation recapture).

The land and computer  are Section 1231 properties, resulting in a net Section 1231 gain  of $. This is treated as a net long-term capital gain . The equipment  is treated as an ordinary asset . As such it results in an ordinary loss  of $._______________

Statement of Cash Flows—Indirect Method

The comparative balance sheet of Olson-Jones Industries Inc. for December 31, 20Y2 and 20Y1, is as follows:

The following additional information is taken from the records:

1. Land was sold for $43.
2. Equipment was acquired for cash.
3. There were no disposals of equipment during the year.
4. The common stock was issued for cash.
5. There was a $120 credit to Retained Earnings for net income.
6. There was a $37 debit to Retained Earnings for cash dividends declared.

a. Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

b. Was Olson-Jones Industries Inc.’s net cash flow from operations more or less than net income?
More

1. Statement of Cash Flows—Indirect Method

   The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows:

   		Dec. 31, 20Y9		Dec. 31, 20Y8
   Assets
   Cash		$263,410		$246,720
   Accounts receivable (net)		95,420		88,610
   Inventories		269,380		262,370
   Investments		0		101,640
   Land		138,160		0
   Equipment		297,200		231,960
   Accumulated depreciation—equipment		(69,580)		(62,550)
   	Total assets	$993,990		$868,750
   Liabilities and Stockholders' Equity
   Accounts payable		$179,910		$171,140
   Accrued expenses payable		17,890		22,590
   Dividends payable		9,940		7,820
   Common stock, $10 par		53,680		42,570
   Paid-in capital: Excess of issue price over par-common stock		201,780		118,150
   Retained earnings		530,790		506,480
   	Total liabilities and stockholders’ equity	$993,990		$868,750

   Additional data obtained from an examination of the accounts in the ledger for 20Y9 are as follows:

   1. Equipment and land were acquired for cash.
   2. There were no disposals of equipment during the year.
   3. The investments were sold for $91,480 cash.
   4. The common stock was issued for cash.
   5. There was a $65,140 credit to Retained Earnings for net income.
   6. There was a $40,830 debit to Retained Earnings for cash dividends declared.

   Required:

   Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

   Merrick Equipment Co.
   Statement of Cash Flows
   For the Year Ended December 31, 20Y9
   Cash flows from operating activities:
   	$
   Adjustments to reconcile net income to net cash flow from operating activities:
   Changes in current operating assets and liabilities:
   Net cash flow from operating activities		$
   Cash flows from (used for) investing activities:
   	$
   Net cash flow used for investing activities
   Cash flows from (used for) financing activities:
   Net cash flow from financing activities
   		$
   Cash at the beginning of the year
   Cash at the end of the year		$

Email

To: Miss Elaine Jacobs

From: Jonathan Brooks

Re: Banquet for Old Employees

Date: March 12, 2016

How are you doing? I am fine.

I have been asked by the Human Resources Department to organize a banquet fro employees who have been with our firm then years or more we are considering scheduling the event for May 8, which will be a convenient time for most people. Each of the honorees have already agreed that the date will work with his schedules. Being that you have experience in setting up events for our department. We hope you will take charge of the arrangement with the caterer the florist and the printer for the program. All these cost covered by the Human Resources Department.

In the past, we give special gifts to the honorees, therefore they has something tangible as a reward for their service. Please ask somebody to look into this, coordinate with Human Resources about the amount of money we can spend on each persons’ gift. How many honoree’s we have will effect the amount we can spend on each gift.

We want to ensure that each honoree realizes how much the firm appreciate’s his service. Please let me know if you can do this. Also can you suggest names of other people who might be willing to work on a committee for this banquet. I’m too busy with more important work to spend much time on this project.

In a page, explain the similarities and differences between financial and managerial accounting.

In 2020, Martin and Rebecca formed White Corporation.  Martin transfers real estate with an adjusted basis of $260,000 and a fair market value of $350,000 to the newly formed White Corporation in exchange for 75% of the common stock of White Corporation.  The real estate was encumbered by a mortgage of $275,000 which White Corporation assumed. Rebecca contributed equipment with a fair market value of $35,000 and an adjusted basis of $15,000 in exchange for 25% of the common stock and a $10,000 bond.  

1. What is the amount of gain or loss realized and recognized by Martin on the transfer of the real estate?
2. What basis does Martin take in White Corporation stock?
3. What basis does White Corporation take in the real estate contributed by Martin?
4. What is the amount of gain or loss realized and recognized by Rebecca on the transfer of the equipment?
5. What basis does Rebecca take in White Corporation stock?
6. What basis does White Corporation take in the equipment contributed by Rebecca?

Blue Suits Consulting began business on January 1, 2017. Using an Excel spreadsheet, prepare journal entries for the following transactions that occurred during 2017.

• January 1, 2017 The Owner invested $28,000 in cash and a computer equipment valued at $15,000 in the company.
• February 3, 2017 The Company performed services for a client and immediately received cash in the amount of $6,300.
• February 28, 2017 The Company purchased office equipment on credit for $8,000.
• March 3, 2017 The Company performed services for a client and billed the client for $2,300 to be paid with terms 2/10, n/30.
• March 10, 2017 The Company received payment from the client in the March 3rd transaction to pay on their account.
• April 9, 2017 The Company paid cash for the bill for the equipment purchased on February 28th.
• December 25, 2017 The Company purchased $1,300 of supplies on account. This bill will be paid in January 2018.
• December 31, 2017 The Owner withdrew $2,500 in cash from the company.

The following selected accounts appear in the ledger of Parks Construction Inc. at the beginning of the current fiscal year: Preferred 1% Stock, $50 par (100,000 shares authorized, 79,400 shares issued) $3,970,000 Paid-In Capital in Excess of Par—Preferred Stock 150,860 Common Stock, $3 par (5,000,000 shares authorized, 2,100,000 shares issued) 6,300,000 Paid-In Capital in Excess of Par—Common Stock 1,260,000 Retained Earnings 33,959,000 During the year, the corporation completed a number of transactions affecting the stockholders’ equity. They are summarized as follows: Jan. 5 Issued 518,800 shares of common stock at $7, receiving cash. Feb. 10 Issued 9,800 shares of preferred 1% stock at $61. Mar. 19 Purchased 48,300 shares of treasury stock for $7 per share. May 16 Sold 19,500 shares of treasury stock for $9 per share. Aug. 25 Sold 5,000 shares of treasury stock for $6 per share. Dec. 6 Declared cash dividends of $0.50 per share on preferred stock and $0.08 per share on common stock. 31 Paid the cash dividends. Journalize the entries to record the transactions. Refer to the Chart of Accounts for exact wording of account titles.

Market Price of a Bond

The company intends to issue 20-year bonds with a face value of $1,000. The bonds carry a coupon rate of 9%, and interest is paid semiannually. On the issue date, the market interest rate for bonds issued by companies with similar risk is 12% compounded semiannually.

Compute the market price of one bond on the date of issue.

Click here to access the PV table and the PV of an ordinary annuity table to use with this problem. Round your answer to the nearest cent.

$