4. Innovation Incorporated had operating income before interest and taxes in 2018 of $350 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $25 million that same year. Capital spending totaled $40 million during 2018. At the end of 2017 and 2018, working capital totaled $90 and $70 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 30% and its debt outstanding had a market value of $0.50 billion. The 10-year Treasury bond rate is 3% and the borrowing rate for companies exhibiting levels of creditworthiness similar to Innovation, Inc. is 8%. The historical risk premium for stocks over the risk-free rate of return is 4.5%. No Growth’s beta was estimated to be 1.2. The firm had 3 million common shares outstanding at the end of 2018. Innovation’s target debt to total capital ratio is 40%.

1. Estimate free cash flow to the firm in 2018.
2. Estimate the firm’s cost of capital.
3. Estimate the value of the firm (i.e., includes the value of equity and debt) at the end of 2018, assuming that it will generate the value of free cash flow estimated in (a) indefinitely.
4. Estimate the value of the equity of the firm at the end of 2018.

Estimate the value per share at the end of 2018.                                                                  

An aging analysis of Yamoto Limited’s accounts receivable at December 31, 2018 and 2017, showed the following:

Additional information:

1. At December 31, 2017, the unadjusted balance in Allowance for Doubtful Accounts was a credit of $9,000.

2. In 2018, $42,000 of accounts were written off as uncollectible and $3,000 of accounts previously written off were recovered.

Required:

a. Prepare an aging schedule to calculate the estimated uncollectible accounts at December 31, 2017 and 2018. Note that the estimated percentage uncollectible are the same for both years.

b. Record the adjusting entry relating to bad debts on December 31,2017.

c. Record the write off of uncollectible accounts in 2018.

d. Record the collection of accounts previously written off in 2018.

e. Prepare the adjusting entry relating to bad debts on December 31, 2018.

f. Calculate the carrying amount (net realizable value) of Yamoto’s accounts receivable at December 31, 2017 and 2018.

An aging analysis of Yamoto Limited’s accounts receivable at December 31, 2018 and 2017, showed the following:

Additional information:

1. At December 31, 2017, the unadjusted balance in Allowance for Doubtful Accounts was a credit of $9,000.

2. In 2018, $42,000 of accounts were written off as uncollectible and $3,000 of accounts previously written off were recovered.

Required:

a. Prepare an aging schedule to calculate the estimated uncollectible accounts at December 31, 2017 and 2018. Note that the estimated percentage uncollectible are the same for both years.

b. Record the adjusting entry relating to bad debts on December 31,2017.

c. Record the write off of uncollectible accounts in 2018.

d. Record the collection of accounts previously written off in 2018.

e. Prepare the adjusting entry relating to bad debts on December 31, 2018.

f. Calculate the carrying amount (net realizable value) of Yamoto’s accounts receivable at December 31, 2017 and 2018.

On December 31, 2017, Ainsworth, Inc., had 800 million shares of common stock outstanding. Twenty five million shares of 6%, $100 par value cumulative, nonconvertible preferred stock were sold on January 2, 2018. On April 30, 2018, Ainsworth purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Ainsworth issued a 5% common stock dividend on June 12, 2018. No cash dividends were declared in 2018. For the year ended December 31, 2018, Ainsworth reported a net loss of $165 million, including an after-tax loss from discontinued operations of $450 million. Required: 1. Compute Ainsworth's net loss per share for the year ended December 31, 2018. 2. Compute the per share amount of income or loss from continuing operations for the year ended December 31, 2018. 3. Prepare an EPS presentation that would be appropriate to appear on Ainsworth's 2018 and 2017 comparative income statements. Assume EPS was reported in 2017 as $0.65, based on net income (no discontinued operations) of $520 million and a weighted-average number of common shares of 800 million.

On December 31, 2017, Ainsworth, Inc., had 800 million shares of common stock outstanding. Twenty five million shares of 6%, $100 par value cumulative, nonconvertible preferred stock were sold on January 2, 2018. On April 30, 2018, Ainsworth purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Ainsworth issued a 5% common stock dividend on June 12, 2018. No cash dividends were declared in 2018. For the year ended December 31, 2018, Ainsworth reported a net loss of $165 million, including an after-tax loss from discontinued operations of $450 million. Required: 1. Compute Ainsworth's net loss per share for the year ended December 31, 2018. 2. Compute the per share amount of income or loss from continuing operations for the year ended December 31, 2018. 3. Prepare an EPS presentation that would be appropriate to appear on Ainsworth's 2018 and 2017 comparative income statements. Assume EPS was reported in 2017 as $0.65, based on net income (no discontinued operations) of $520 million and a weighted-average number of common shares of 800 million.

On December 31, 2017, Ainsworth, Inc., had 820 million shares of common stock outstanding. Thirty three million shares of 6%, $100 par value cumulative, nonconvertible preferred stock were sold on January 2, 2018. On April 30, 2018, Ainsworth purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Ainsworth issued a 5% common stock dividend on June 12, 2018. No cash dividends were declared in 2018. For the year ended December 31, 2018, Ainsworth reported a net loss of $205 million, including an after-tax loss from discontinued operations of $530 million. Required: 1. Compute Ainsworth's net loss per share for the year ended December 31, 2018. 2. Compute the per share amount of income or loss from continuing operations for the year ended December 31, 2018. 3. Prepare an EPS presentation that would be appropriate to appear on Ainsworth's 2018 and 2017 comparative income statements. Assume EPS was reported in 2017 as $0.75, based on net income (no discontinued operations) of $615 million and a weighted-average number of common shares of 820 million.

Compute and Interpret Altman's Z-scores Following is selected financial information for Netflix, for 2018 and 2017. $ thousands, except per share data 2018 2017 Current assets $9,694,135 $7,669,974 Current liabilities 6,487,320 5,466,312 Total assets 25,974,400 19,012,742 Total liabilities 20,735,635 15,430,786 Shares outstanding 436,598,597 433,392,686 Retained earnings 2,942,359 1,731,117 Stock price per share 267.66 191.96 Sales 15,794,341 11,692,713 Earnings before interest and taxes 1,605,226 838,679 Compute and interpret Altman Z-scores for the company for both years. (Do not round until your final answer; then round your answers to two decimal places.) 2018 z-score = Answer 2017 z-score = Answer Which of the following best describes the company's likelihood to go bankrupt given the z-score in 2017 compared to 2018. The z-score in 2018 increased. Z-scores for both years are in the gray area indicating some risk of bankruptcy. The z-score in 2018 increased, which suggests the company's risk of bankruptcy has increased. The z-score in 2018 increased. Z-scores for both years indicate low bankruptcy potential in the short term. The z-score in 2018 decreased, which suggests the company's risk of bankruptcy has decreased.

On January 4, 2018, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery's operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 15, 2018, and Lavery reported net income of $160 million for the year ended December 31, 2018. The market value of Lavery's common stock at December 31, 2018, was $31 per share. On the purchase date, the book value of Lavery's net assets was $800 million and: The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Required: 1-a. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, and accounts for the Lavery investment in a manner similar to what it would use for securities for which there is not significant influence. 1-b. Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet. 2-a. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, but uses equity method accounting to account for Lavery’s income and dividends, and then records a fair value adjustment at the end of the year that allows it to comply with GAAP. 2-b. Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet.

Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

• Net income    million Investment million

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

Arndt, Inc., reported the following for 2018 and 2019 ($ in millions):

Expenses each year include $40 million from a two-year casualty insurance policy purchased in 2018 for $80 million. The cost is tax deductible in 2018.

Expenses include $3 million insurance premiums each year for life insurance on key executives.

Arndt sells one-year subscriptions to a weekly journal. Subscription sales collected and taxable in 2018 and 2019 were $45 million and $36 million, respectively. Subscriptions included in 2018 and 2019 financial reporting revenues were $22 million ($11 million collected in 2017 but not recognized as revenue until 2018) and $30 million, respectively. Hint: View this as two temporary differences—one reversing in 2018; one originating in 2018.

2018 expenses included a $11 million unrealized loss from reducing investments (classified as trading securities) to fair value. The investments were sold in 2019.

During 2017, accounting income included an estimated loss of $4 million from having accrued a loss contingency. The loss was paid in 2018 at which time it is tax deductible.

At January 1, 2018, Arndt had a deferred tax asset of $4 million and no deferred tax liability.

A. Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2019.

B. Compute the deferred tax amounts that should be reported on the 2019 balance sheet.

C. Suppose that during 2019, tax legislation was passed that will lower Arndt’s effective tax rate to 30% beginning in 2020. Prepare a schedule that reconciles the difference between pretax accounting income and taxable income. Using the schedule, prepare the necessary journal entry to record income taxes for 2019.

When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $880,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31. (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. Determine the price of the bonds at January 1, 2018.
2. Prepare the journal entry to record their issuance by Patey on January 1, 2018.
3. Prepare an amortization schedule that determines interest at the effective rate each period.
4. Prepare the journal entry to record interest on June 30, 2018.
5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2018?
6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2018? (Ignore income taxes.)
7. Prepare the appropriate journal entries at maturity on December 31, 2021.

Req 1

Req 2

Req 3

Req 4

Req 5 and 6

Req 7

Determine the price of the bonds at January 1, 2018. (Round final answers to the nearest whole dollar.)

Prepare the journal entry to record their issuance by Patey on January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round final answers to the nearest whole dollar.)

Journal entry worksheet

Record the issuance of the bonds on January 1, 2018.

Note: Enter debits before credits.

Prepare an amortization schedule that determines interest at the effective rate each period. (Round final answers to the nearest whole dollar.)

Prepare the journal entry to record interest on June 30, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round final answers to the nearest whole dollar.)

Journal entry worksheet

Record the interest expense on June 30, 2018.

Note: Enter debits before credits.

What is the amount(s) related to the bonds that Patey will report in its balance sheet at December 31, 2018 and income statement for the year ended December 31, 2018? (Ignore income taxes.) (Round your intermediate calculation to nearest whole dollar.)

Prepare the appropriate journal entries at maturity on December 31, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round final answers to the nearest whole dollar.)

Journal entry worksheet

Record the interest expense on December 31, 2021.

Note: Enter debits before credits.

Record the retirement of the bond at maturity on December 31, 2021.

Note: Enter debits before credits.