9.

Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

The 20Y7 net income was $24,350, and the 20Y6 net income was $13,570. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.

a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. Round percentages to one decimal place.

On January 1, 20X8, Liv Ltd. (LL), a Canadian company, acquired 90% of Marcus Co. (MC), a foreign company for FC 623,200. At the acquisition date, the carrying value of MC’s net assets equaled their fair value except for the equipment, which had a carrying value of FC 800,000 and a fair value of FC 880,000. At the acquisition date, MC’s equipment had a remaining useful life of 10 years. There was an FC 4,000 impairment of the goodwill which occurred evenly throughout 20X8.

Selected financial statements for LL and MC are presented below.

Liv Ltd.

Statement of Financial Position
As of December 31, 20X8

(in $ CDN)

Assets:
Noncurrent assets:
Plant and equipment, net 2,752,000
Investment in Marcus Co. 1,371,040
4,123,040

Current assets:

Inventory   1,376,000
Accounts receivable 700,000
Cash and cash equivalents 562,080

2,638,080
Total assets 6,761,120

Shareholders’ Equity:

Share capital 1,376,000
Retained earnings 2,601,520
3,977,520
Liabilities:
Noncurrent liabilities:

Notes payable 1,860,000

Current liabilities:

Accounts payable and accrued liabilities    923,600
Total liabilities 2,783,600
Total shareholders’ equity and liabilities 6,761,120

Liv Ltd.

Statement of Income

For the year ended December 31, 20X8

(in $ CDN)

Sales 16,472,000

Dividend income   180,080

= 16,652,080

Cost of sales 8,256,000
Other expenses* 7,124,000 (15,380,000)

Net income 1,272,080

*includes depreciation

LL declared and paid dividends of $928,000 CDN on December 31, 20X8.

Marcus Co.

Statement of Financial Position

(in FC)

Dec. 31, Jan. 1
20X8 20X8

Assets:

Noncurrent assets:

Equipment, net 720,000 800,000

Current assets:

Inventory    484,000 364,000

Accounts receivable 408,000 280,000

Cash 360,000 164,000

1,252,000 808,000   

Total assets 1,972,000 1,608,000

Shareholders’ equity:

Share capital 400,000. 400,000
Retained earnings 390,000 146,000

= 790,000 = 546,000

Liabilities:

Noncurrent liabilities:

Notes payable 640,000 640,000

Current liabilities:

Accounts payable 542,000 422,000

Total liabilities 1,182,000. 1,062,000

Total shareholders’ equity and liabilities 1,972,000 1,608,000

Marcus Co.

Statement of Income

For the year ended December 31, 20X8

(in FC)

Sales 8,400,000
Cost of sales 5,304,000
Other expenses* 2,688,000 (7,992,000)

408,000

*includes depreciation

Marcus Co.

Statement of Changes in Equity – Retained Earnings Section

For the year ended December 31, 20X8

(in FC)

Retained earnings, January 1, 20X8 146,000
Net income 408,000

Dividends declared (164,000)

Retained earnings, December 31, 20X8 = 390,000

MC declared and paid FC164,000 in dividends on December 31, 20X8.

Selected Exchange Rates

January 1, 20X8 FC1 = $2.20 CDN
December 31, 20X8 FC1 = $2.44 CDN

Date when ending inventory was purchased FC1 = $2.38 CDN

Average rate for 20X8 FC1 = $2.32 CDN

Required:

1. Prepare consolidated financial statements at December 31, 20X8 under each of the following assumption
   1. The function current is the FC

10.

1. Six Measures of Solvency or Profitability

   The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

   Property, plant, and equipment (net)						$2,127,400
   Liabilities:
   	Current liabilities			$194,000
   	Note payable, 6%, due in 15 years			967,000
   	Total liabilities					$1,161,000
   Stockholders' equity:
   	Preferred $4 stock, $100 par (no change during year)					$1,161,000
   	Common stock, $10 par (no change during year)					1,161,000
   Retained earnings:
   	Balance, beginning of year	$1,238,000
   	Net income	451,000		$1,689,000
   	Preferred dividends	$46,440
   	Common dividends	94,560		141,000
   	Balance, end of year					1,548,000
   Total stockholders' equity						$3,870,000
   Sales						$23,053,500
   Interest expense						$58,020

   Assuming that total assets were $4,779,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

   a. Ratio of fixed assets to long-term liabilities
   b. Ratio of liabilities to stockholders' equity
   c. Asset turnover
   d. Return on total assets	%
   e. Return on stockholders’ equity	%
   f. Return on common stockholders' equity	%

On January 1, 20X8, Liv Ltd. (LL), a Canadian company, acquired 90% of Marcus Co. (MC), a foreign company for FC 623,200. At the acquisition date, the carrying value of MC’s net assets equaled their fair value except for the equipment, which had a carrying value of FC 800,000 and a fair value of FC 880,000. At the acquisition date, MC’s equipment had a remaining useful life of 10 years. There was an FC 4,000 impairment of the goodwill which occurred evenly throughout 20X8.

Selected financial statements for LL and MC are presented below.

Liv Ltd.

Statement of Financial Position
As of December 31, 20X8

(in $ CDN)

Assets:
Noncurrent assets:
Plant and equipment, net 2,752,000
Investment in Marcus Co. 1,371,040
4,123,040

Current assets:

Inventory   1,376,000
Accounts receivable 700,000
Cash and cash equivalents 562,080

2,638,080
Total assets 6,761,120

Shareholders’ Equity:

Share capital 1,376,000
Retained earnings 2,601,520
3,977,520
Liabilities:
Noncurrent liabilities:

Notes payable 1,860,000

Current liabilities:

Accounts payable and accrued liabilities    923,600
Total liabilities 2,783,600
Total shareholders’ equity and liabilities 6,761,120

Liv Ltd.

Statement of Income

For the year ended December 31, 20X8

(in $ CDN)

Sales 16,472,000

Dividend income   180,080

= 16,652,080

Cost of sales 8,256,000
Other expenses* 7,124,000 (15,380,000)

Net income 1,272,080

*includes depreciation

LL declared and paid dividends of $928,000 CDN on December 31, 20X8.

Marcus Co.

Statement of Financial Position

(in FC)

Dec. 31, Jan. 1
20X8 20X8

Assets:

Noncurrent assets:

Equipment, net 720,000 800,000

Current assets:

Inventory    484,000 364,000

Accounts receivable 408,000 280,000

Cash 360,000 164,000

1,252,000 808,000   

Total assets 1,972,000 1,608,000

Shareholders’ equity:

Share capital 400,000. 400,000
Retained earnings 390,000 146,000

= 790,000 = 546,000

Liabilities:

Noncurrent liabilities:

Notes payable 640,000 640,000

Current liabilities:

Accounts payable 542,000 422,000

Total liabilities 1,182,000. 1,062,000

Total shareholders’ equity and liabilities 1,972,000 1,608,000

Marcus Co.

Statement of Income

For the year ended December 31, 20X8

(in FC)

Sales 8,400,000
Cost of sales 5,304,000
Other expenses* 2,688,000 (7,992,000)

408,000

*includes depreciation

Marcus Co.

Statement of Changes in Equity – Retained Earnings Section

For the year ended December 31, 20X8

(in FC)

Retained earnings, January 1, 20X8 146,000
Net income 408,000

Dividends declared (164,000)

Retained earnings, December 31, 20X8 = 390,000

MC declared and paid FC164,000 in dividends on December 31, 20X8.

Selected Exchange Rates

January 1, 20X8 FC1 = $2.20 CDN
December 31, 20X8 FC1 = $2.44 CDN

Date when ending inventory was purchased FC1 = $2.38 CDN

Average rate for 20X8 FC1 = $2.32 CDN

Required:

1. Assume that LL is a private company and reports under ASPE. LL uses the equity method to report its investment in MC. LL’s functional currency is $CAD. Calculate LL’s Investment in Marcus Co.’s account at December 31, 20X8. There is no need to prepare financial statements.

Allocating Joint Costs Using the Sales-Value-at-Split-Off Method Orchard Fresh, Inc., purchases apples from local orchards and sorts them into four categories. Grade A are large blemish-free apples that can be sold to gourmet fruit sellers. Grade B apples are smaller and may be slightly out of proportion. These are packed in boxes and sold to grocery stores. Apples for slices are even smaller than Grade B apples and have blemishes. Apples for applesauce are of lower grade than apples for slices, yet still suitable for canning. Information on a recent purchase of 20,000 pounds of apples is as follows: Assume that Orchard Fresh, Inc., uses the sales-value-at-split-off method of joint cost allocation and has provided the following information about the four grades of apples: Grades Pounds Price at Split-Off (per lb.) Grade A 1,800 $4.00 Grade B 5,000 1.00 Slices 8,000 0.50 Applesauce 5,200 0.10 Total 20,000 Total joint cost is $18,000. Required: 1. Allocate the joint cost to the four grades of apples using the sales-value-at-split-off method. Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar. Joint Cost Grades Allocation Grade A $ Grade B Slices Applesauce Total $ 2. What if the price at split-off of Grade B apples increased to $1.20 per pound? How would that affect the allocation of cost to Grade B apples? How would it affect the allocation of cost to the remaining grades? Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar. Joint Cost Grades Allocation Grade A $ Grade B Slices Applesauce Total $

The Matsui Lubricants plant uses the FIFO method to account for its work-in-process inventories. The accounting records show the following information for a particular day:

Beginning WIP inventory

Direct materials $ 1,000

Conversion costs 437

Current period costs

Direct materials 15,995

Conversion costs 13,992

Quantity information is obtained from the manufacturing records and includes the following:

Beginning inventory 400 units (70% complete as to materials, 55% complete as to conversion)

Current period units started 5,100 units

Ending inventory 1,300 units (50% complete as to materials, 20% complete as to conversion)

Compute the cost of goods transferred out and the ending inventory using the FIFO method. (Do not round intermediate calculations.)

Problem 13-6 Various contingencies [LO13-5, 13-6]

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2018 financial statements are issued on March 15, 2019.

1. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2019, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
2. In November 2017, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2019, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
3. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
4. At March 15, 2019, Eastern knows a competitor has threatened litigation due to patent infringement. The competitor has not yet filed a lawsuit. Management believes a lawsuit is reasonably possible, and if a lawsuit is filed, management believes damages of up to $33 million are reasonably possible.

   
Required:
1. Determine the appropriate means of reporting each situation.
2. Prepare the appropriate journal entries for these situations.
  

Allocating Joint Costs Using the Net Realizable Value Method A company manufactures three products, L-Ten, Triol, and Pioze, from a joint process. Each production run costs $12,600. None of the products can be sold at split-off, but must be processed further. Information on one batch of the three products is as follows: Product Gallons Further Processing Cost per Gallon Eventual Market Price per Gallon L-Ten 3,500 $0.60 $2.60 Triol 4,000 0.90 5.10 Pioze 2,000 1.40 6.00 Required: 1. Allocate the joint cost to L-Ten, Triol, and Pioze using the net realizable value method. Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar. Joint Cost Grades Allocation L-Ten $ Triol Pioze Total $ 2. What if it cost $1.90 to process each gallon of Triol beyond the split-off point? How would that affect the allocation of joint cost to the three products? Round your allocation percentages to four decimal places and round the allocated costs to the nearest dollar. Joint Cost Grades Allocation L-Ten $ Triol Pioze Total $

Problem 13-1 Bank loan; accrued interest [LO13-2]

Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 12% promissory note to L&T Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm’s fiscal period is the calendar year.
   
Required:
1. Prepare the journal entries to record (a) the issuance of the note by Blanton Plastics and (b) L&T Bank’s receivable on October 1, 2018.
2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019.
3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 12% is the bank’s stated discount rate. (a) Prepare the journal entries to record the issuance of the noninterest-bearing note by Blanton Plastics on October 1, 2018, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?

Your client, Gwendolyn R. Nichols, SSN: 113-33-3333, DOB: 05-01-1941, attends her annual appointment with you to discuss the filing of her 2018 Federal Income Tax return. Gwendolyn is a widow, her husband, Harold T. Nichols, SSN: 144-44-4444, DOB: 05-13-1939, died on December 11, 2017 of natural causes. She tells you that she paid $11,000 in funeral expenses in January of 2018. Gwendolyn cares for two of her great-grandchildren, Jordan A. Lancaster, SSN: 115-55-5555, DOB: 12-15-2009 and Rose G. Lancaster, SSN: 116-66-6666, DOB: 08-03-2013. Her great-grandchildren live with her full-time. Gwendolyn’s grand-daughter, Therese Lancaster, SSN: 117-77-7777, DOB 03-15-1990, the mother of Gwendolyn’s great-grandchildren, lived with Gwendolyn from May of 2017 through January of 2019. She had a few off and on jobs, Gwendolyn isn’t sure how much she made from work, but says that it wasn’t very much because she wasn’t employed most of the time she lived with her. Gwendolyn tells you that she decreased her hours as a clerk at the library this year and that now she only works about 10 hours each week. She has a W-2 from the library reporting $12,500 in wages. She receives social security benefits of $1,000 per month and she still receives about $10,000 each year in tax-exempt interest. She also receives $750.00 per month from her late husband’s pension. She has provided you with all of the supporting tax documents for these items of income. She owns the residence at 123 West Kansas Street, Pittsburg, Kansas 66762 and has a small mortgage on the property which she took out several years ago to pay for a new roof. She paid real estate property tax on her home of $750. She also owns a 2010 Buick LeSabre and she provides you with a copy of the property tax statement. Gwendolyn is on Medicare and most of her medical expenses are paid. However, she advises you that she paid a total of $1,000 in medical services for various doctor’s appointments, eye glasses and prescriptions for herself. Jordan and Rose have Kansas HealthWave insurance which costs Gwendolyn $100 dollars a month. She also had $500 in additional health care costs for her great-grandchildren. Gwendolyn is an active member of her local Christian church and she donated $500 to the church in the form of cash charitable contributions and she made them a quilt which she donated for a fund-raising raffle. The quilt cost her about $200 for materials and she estimates its value at $600. Gwendolyn provides you the following documents related to her 2018 tax return: W-2 from the Pittsburg Community Library 1099 SSA Social Security Statement 1099-INT from Security Investments, Inc. 1099-R from the Fireman’s Pension fund 2018 Real Estate Property Tax Receipt 2018 Personal Property Tax Receipt Charitable contributions statements 1099-G regarding State of Kansas Tax Refund for 2017 1098 Mortgage Interest Statement Tax Bill for preparation of 2017 taxes, paid Gwendolyn requests that you complete her 2018 federal income tax return. For purposes of this assignment you may assume that all persons are covered by insurance for the entire year. You do not need to complete a state income tax return. You also do not need to concern yourself with any child tax credits. Please complete all attached forms and show how you calculated tax. In addition to completing his tax return, please also answer the following questions:

3. Should she file with a standard or itemized deductions, why?

A15-11 Convertible Debt; Investor Option versus Conversion Mandatory (LO 15-3, 15-4)

AMC Ltd. issued five-year, 5% bonds for their par value of $900,000 on 1 January 20X1. Interest is paid annually. The bonds are convertible to common shares at a rate of 50 common shares for every $1,000 bond.

(PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:
1. Assume that the bonds were convertible at the investor’s option and that the conversion option was valued at $73,800.

a. Provide the journal entry on issuance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Calculate interest expense for each year of the bond’s five-year life. Use an interest rate of 7% for this requirement. (Round your intermediate calculations and final answers to the nearest whole dollar.)

c. Provide the journal entry to record maturity of the bond assuming shareholders convert their bonds to common shares. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

d. Assume instead that the bonds were repaid for $940,000 after interest was paid in Year 3. Provide the journal entry for retirement, assuming $68,000 of the payment related to the option and the rest related to the bond. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to the nearest whole dollar.)

2. Assume that the bonds were mandatorily convertible at maturity.

a. Calculate the portion of the original proceeds relating to interest and the equity portion. Use a discount rate of 6%. (Round your final answers to the nearest whole dollar. Round time value factor to 5 decimal places.)

b. Provide the journal entry on issuance. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to the nearest whole dollar. Round time value factor to 5 decimal places.)

On January 1, 2017, Pharoah Company purchased 12% bonds, having a maturity value of $320,000, for $344,260.74. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Pharoah Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows. 2017 $342,000 2020 $330,700 2018 $329,700 2021 $320,000 2019 $328,700 (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017. (c) Prepare the journal entry to record the recognition of fair value for 2018.

Ethics of Selling

1. For each step of the personal selling process, explain unethical or illegal practices that a marketer must avoid.
2. Describe a situation when you have worked with a salesperson that you thought was either very ethical or very unethical. What things did this salesperson do make you feel this way?
3. The personal selling process can be used in many everyday scenarios. Think about selling your car (you personally, not a car dealer). Go through each step of the personal selling process and explain what you would do.

Walnut Systems produces two different products, Product A, which sells for $135 per unit, and Product B, which sells for $192 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows:    

Walnut manufactures 10,500 units of Product A and 6,900 units of Product B per month. Each unit of Product A uses $45 of direct materials and $17 of direct labor, while each unit of Product B uses $70 of direct materials and $31 of direct labor.

Required:

a. Calculate the activity rate for design.



b. Calculate the activity rate for machining.



c. Calculate the activity rate for inspection.

           

d. Determine the indirect costs assigned to Product A.



e. Determine the indirect costs assigned to Product B.



f. Determine the manufacturing cost per unit for Product A. (Round your answer to 2 decimal places.)



g. Determine the manufacturing cost per unit for Product B. (Round your answer to 2 decimal places.)



h. Determine the gross profit per unit for Product A. (Round your intermediate calculation to 2 decimal places. Round your answer to 2 decimal places.)



i. Determine the gross profit per unit for Product B. (Round your intermediate calculation to 2 decimal places. Round your answer to 2 decimal places.)

The city of Miami has received a proposal to build a new multipurpose outdoor sports stadium. The expected life of the stadium is 20 years. It will be financed by a 20-year industrial development bond that will require a payment of 8 percent interest annually. The stadium’s primary tenant will be the city’s Triple-A baseball team, the Mudhawks.

The plan’s backers anticipate that the new facility will also be used for rock concerts and college and high school sports events. The city does not pay any taxes. The city’s cost of capital is 8 percent. The costs and estimated revenues generated from the facility are presented as follows:

Required: