Preston Stores Inc. completed the following transactions during the current year, the company's first year of operations. Preston Stores has a December 31 year-end.

Requirements

A. Prepare the journal entries required to record the transactions listed above. Assume a perpetual inventory system is used.

B. Prepare a partial income statement for the current fiscal year.

September 2: Purchased $66,000 of merchandise inventory from Anderson Company using a trade note payable. The not is due in three months and carries an 6% annual interest rate.

September 21: Purchased $392,000 of inventory from various suppliers on account.

October 12: Sold merchandise that cost $87,000 for $137,000 on account.

Begin by journalizing the sale of the merchandise. Do not record the expense related to the sale. We will do that in a following step.

Now journalize the expense related to the October 12 sale.

October 16: Sold $4,100 of gift cards and received cash.

November 16: Paid for all the items purchased on September 21.

December 2: Paid off the trade note payable plus interest.

December 15: Redeemed gift cards totaling $3700 from customers who purchased merchandise costing $2300.

Begin by journalizing the gift card redemption. Do not record the expense related to the sale. We will do that in the following step.  

Now journalize the expense related to the December 15 sale.

December 31: Used the proportional method to account for breakage. Its estimated breakage rate is 6%.  

Requirement B.

Prepare the partial income statement for the current fiscal year.

Review the journal entries prepared in Requirement A.

1. Ocular Solutions recently (at the beginning of year 1) forecasted first year sales of $9.4 million, operating costs other than depreciation of $5.6 million, and depreciation of $0.6 million. The company has no amortization charges, it has $4.2 million of outstanding bonds that carry a 6.5% interest rate, and its income tax rate is 28%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm is required to make $1.3 million of capital expenditures on new fixed assets and to invest $0.3 million in net working capital.

a) Calculate the FCF of the firm in the first year. [5 Marks]

b) Assuming that the firm’s FCF will grow at a rate of 3% forever after Year 1, and also that its WACC is 20.0%, estimate the market value of the firm and its debt ratio (Debt/Firm Value) at the beginning of year 1. [5 Marks]

c) If the company keeps the debt level unchanged in the future, estimate its debt ratio at the beginning of year 2, and beginning of year 3. [5 Marks] d) Discuss the potential problem when using the WACC method to answer parts b) and c) above.

2. American Hardware (AH), a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware (EH). American Hardware's analysts project that the merger will result in incremental free cash flows and interest tax savings. In the first two years, the incremental FCF is $3 million each year and the value increases to $3.5 million each year after the period. The tax savings are $0.5 million annually starting from the first year. They have determined that the appropriate discount rate for valuing EH (for both FCF and interest tax savings) is 17 percent. EH has 7 million shares outstanding and AH has 56 million shares outstanding. EH's current share price is $14.25 and AH’s current share price is $28.25. a). What is the maximum price per share that AH should offer (under the condition that all of the proposed synergy value is distributed to the EH shareholders)? [6 marks] b). If the proposed synergy value is equally distributed between AH shareholders and EH shareholders (50% to all AH shareholders and 50% to all EH shareholders), what is the price per share that AH should offer? [7 marks] c). If AH has successfully purchased all of EH shares at the price of $18, what should AH share price be after the purchasing (assuming investors know the information precisely as described above)?

a). What is the maximum price per share that AH should offer (under the condition that all of the proposed synergy value is distributed to the EH shareholders)? [6 marks] b). If the proposed synergy value is equally distributed between AH shareholders and EH shareholders (50% to all AH shareholders and 50% to all EH shareholders), what is the price per share that AH should offer? [7 marks] c). If AH has successfully purchased all of EH shares at the price of $18, what should AH share price be after the purchasing (assuming investors know the information precisely as described above)?

b). If the proposed synergy value is equally distributed between AH shareholders and EH shareholders (50% to all AH shareholders and 50% to all EH shareholders), what is the price per share that AH should offer?

c). If AH has successfully purchased all of EH shares at the price of $18, what should AH share price be after the purchasing (assuming investors know the information precisely as described above)?

A 10%, 10-year bond is sold to yield 8%. One year passes, and the yield remains unchanged at 8%. Holding all other factors constant, the bond's price during this period will have:

a. Increased

b. Decreased

c. Remained constant

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,750 at the end of Year 4 if the interest rate is 5%?

Trend Analysis - The following data pertain to Company B:

Common-Size Income Statements - Company B reported the following income statements:

Using the data provided above, compute the following ratios for Company B for Years 1 and Years 2.

(a) Gross profit margin ratio

(b) Return on sales

(c) Asset turnover

(d) Return on assets

(e) Working capital

(f) Current ratio

(g) Accounts receivable turnover

(h) Inventory-on-hand period

(i) Long-term debt to assets

(j) Long-term debt to equity

(k) Times-interest-earned

(l) Return on equity

Please explain the formulas utilized to answer the financial ratios.

Volunteer Corporation reported taxable income of $435,000 from operations this year. During the year, the company made a distribution of land to its sole shareholder, Rocky Topp. The land’s fair market value was $87,000 and its tax and E&P basis to Volunteer was $62,000. Rocky assumed a mortgage attached to the land of $17,400. The company had accumulated E&P of $792,000 at the beginning of the year.

A) Compute Volunteer’s total taxable income and federal income tax.

B) Compute Volunteer's current E&P.

C) Compute Volunteer’s accumulated E&P at the beginning of next year.

D) What amount of dividend income does Rocky report as a result of the distribution?

E) What is Rocky’s income tax basis in the land received from Volunteer?

The Shirt Shop had the following transactions for T-shirts for Year 1, its first year of operations:

During the year, The Shirt Shop sold 650 T-shirts for $19 each.

Required

1. Compute the amount of ending inventory The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.
2. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

A fund will need to pay out $2 million next year, $3 million the following year, and then $5 million  in the fifth year . If the discount rate is 7%, what is the Macaulay duration of this set of payments?

A baseball player is offered a 5-year contract that pays him the following amounts:

Year 1: $1.41 million

Year 2: $1.67 million

Year 3: $2.12 million

Year 4: $2.79 million

Year 5: $3.46 million

Under the terms of the agreement all payments are made at the end of each year. Instead of accepting the contract, the baseball player asks his agent to negotiate a contract that has a present value of $1.70 million more than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5-year ANNUITY DUE. All cash flows are discounted at 11.00 percent. If the team were to agree to the player's terms, what would be the player's annual salary (in millions of dollars)? (Express answer in millions. $1,000,000 would be 1.00)