EXCESS CAPACITY

Krogh Lumber's 2016 financial statements are shown here.

1. Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 69% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
   %
2. Now suppose 2017 sales increase by 25% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 83% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

   Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars)
   	2016		2017
   Sales	$36,000		$
   Operating costs (includes depreciation)	30,783
   EBIT	$5,217		$
   Interest expense	1,017
   EBT	$4,200		$
   Taxes (40%)	1,680
   Net Income	$2,520		$
   Dividends	$1,512		$
   Addition to RE	$1,008		$

   Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)
   	2016		2017
   Assets
   Cash	$1,800		$
   Accounts receivable	10,800
   Inventories	12,600
   Fixed assets	21,600
   Total assets	$46,800		$
   Liabilities and Equity
   Payables + accruals	$9,720		$
   Short-term bank loans	3,472
   Total current liabilities	$13,192		$
   Long-term bonds	5,000
   Total liabilities	$18,192		$
   Common stock	2,000
   Retained earnings	26,608
   Total common equity	$28,608		$
   Total liab. and equity	$46,800		$

ABC Limited (ABC) is a private company producing lunch packages. It mainly sells products to supermarkets and grocery stores. ABC has a loan from a local bank, which is secured by its accounts receivable and inventory. The loan is not to exceed 70% of accounts receivable and 40% of inventory as at the accounting year end (December 31, 2016). ABC uses perpetual inventory system. ABC must provide the bank with the reviewed financial statements within 60 days of its year end. It is now in early January 2017, you are a CPA from a local accounting firm and will conduct a review of the ABC’s financial statements. You received a memo from the ABC’s management including the following accounting issues:

1. Super Software Co. (SSC), an ABC’s neighbour, is a software development company with high growth in recent years. On August 15, 2016, SSC signed a contract with ABC that SSC’s employees can pick up a lunch package every working day for one year beginning on September 1, 2016 for a yearly fee of $120,000, with 50% payable upfront. The fee is non-refundable, non-cancellable, and not dependent on the number of lunch packages picked up. When the contract was signed, ABC credited revenue for $120,000 and debited both cash and accounts receivable for $60,000 each.

2. During November 2016, ABC paid $10,000 to purchase frozen chicken meat from Fresh Meat Butcher (FMB), a small meat supplier in financial difficulty. ABC has not begun to use the FMB’s frozen chicken meat in producing lunch packages so far. In December 2016, there was an allegation that FMB’s chicken meat could be polluted in the production process. The Canadian Food Inspection Agency is now investigating this allegation, and the outcome is uncertain.

3. In December 2016, ABC just began to sell frozen lunch packages. To promote this new product, ABC signed contracts with stores, which specify that the actual number of packages sold to stores depends on the number of packages bought by consumers before the expiry date of packages. ABC has delivered 10,000 frozen lunch packages to stores by the end of 2016, with a price of $3.50 per package. ABC’s suggested retail price of this lunch package is $6.00 per package.

4. In October 2016, ABC launched a loyalty program. According to the program, consumers can earn one point for buying an ordinary lunch package (excluding frozen lunch packages), and can redeem 20 points for an ordinary lunch package in stores. ABC first uses packages purchased by stores for the redemption and then deducts them from its sales. On December 31, 2016, stores reported that they had sold 50,000 ordinary lunch packages to consumers at $7 per package since the beginning of the loyalty program, and that consumers had redeemed 6,000 points. Ordinary lunch packages are sold to stores at $4.00 per package. The cost of ordinary lunch packages is $1.80 per package.

Required

You are asked to provide a report to the ABC’s management to analyze these accounting issues and their implications for the bank loan.

(Please do not give me an answer that already exists !!)

In November 2005, Ms. Williamson obtained a loan in the amount of $750,000 from Investors Savings and Loan secured by her personal residence. The remaining principal amount of $476.171.49 became due and payable on November 1, 2015.

Williamson missed three payments on August, September, and October 2015 and did not pay off the loan when it came due. Commencing in June 2016, Investors Savings and Loan began foreclosure proceedings. On July 19, 2016, a notice of default and 90-day notice of foreclosure were served on Williamson.

In August 2016, Williamson applied to a branch of Investors Savings and Loan for a loan to refinance the loan. The loan application was sent to the loan department of Investors Savings and Loan on September 13, 2016. The loan application was rejected. Over the course of the next two months, Williamson attempted to allay the credit concerns, which had led to the rejection of her loan application.

On November 7, 2016, a 30-day notice of sale under foreclosure was recorded scheduling a sale of the property for December 7, 2016; the notice indicated $476.171.49 was still due on the loan, plus unpaid loan payments, accrued interest and late fees. On December 6, 2016, Williamson's loan application was approved subject to a confirming appraisal.

On December 2, 2016, Williamson was informed that she was required by federal regulations to post a $2,400 deposit for the bank appraisal. Instead of posting the appraisal deposit, which she believed was excessive, Williamson had already obtained her own appraisal of the property. Williamson's appraiser valued the property at between $650,000 and $700,000. This appraisal was submitted to Investors Savings and Loan on December 4, 2016.

Williamson was informed that her appraisal did not comply with federal regulations and, again, she was required to deposit $2,400 for a bank appraisal. Williamson requested the amount necessary to pay off the loan and was informed the amount owing was $215,451.02. Williamson believed this amount was excessive. Williamson asked for the amount to be provided to her in writing; an unnamed Investors Savings and Loan employee told Williamson she would do this and told Williamson not to worry about the foreclosure sale. Williamson neither deposited the $2,400 appraisal sum nor paid off the loan.

After confirming that neither amount had been received, Investors Savings and Loan authorized the foreclosure sale to go forward. Ms. Jordan, a speculator, bought the property at the foreclosure sale for $476.171.49, the principal balance of the debt. She was the sole bidder.

Williamson learned of the sale later that same day. Williamson obtained a cashier's check for the amount of the debt $476.171.49 and sent the check to the bank.

All the while, Williamson had available cash deposits at the Investors Savings and Loan of $600,000. She thought Investors Savings and Loan could deduct the loan payments from her other accounts, but Investors Savings and Loan did not do so even though she called them on the phone in December and said it would be OK with her. The cashiers check was returned to Williamson.

Q. Provide 3 reasons why Investor Savings and Loan declined to deduct the money Williamson owed from her other accounts when she called them on the phone in December and said it would be OK with her?

Oregano Inc. was formed on July 1, 2014. It was authorized to issue an unlimited number of common shares and 100,000 shares of cumulative and non-participating preferred shares carrying a $2 dividend. The company has a July 1 to June 30 fiscal year. The following information relates to the company's shareholders' equity account.

Common Shares
Before the 2016-17 fiscal year, the company had 110,000 outstanding common shares issued as follows:
1. 95,000 shares issued for cash on July 1, 2014, at $31 per share
2. 5,000 shares exchanged on July 24, 2014, for a plot of land that cost the seller $70,000 in 2004 and had an estimated fair value of $220,000 on July 24, 2014
3. 10,000 shares issued on March 1, 2015; the shares had been subscribed for $42 per share on October 31, 2014

Oct. 1, 2016

Subscriptions were received for 10,000 shares at $46 per share. Cash of $92,000 was received in full payment for 2,000 shares and share certificates were issued. The remaining subscription for 8,000 shares was to be paid in full by September 30, 2017, and the certificates would then be issued on that date.

Nov. 30, 2016

The company purchased 2,000 of its own common shares on the open market at $39 per share. These shares were restored to the status of authorized but unissued shares.

Dec. 15, 2016

The company declared a 5% stock dividend for shareholders of record on January 15, 2017, to be issued on January 31, 2017. The company was having a liquidity problem and could not afford a cash dividend at the time. The company's common shares were selling at $52 per share on December 15, 2016.

June 20, 2017
The company sold 500 of its own common shares for $21,000.

Preferred Shares

"The company issued 50,000 preferred shares at $44 per share on July 1, 2014.

Cash Dividends
The company has followed a schedule of declaring cash dividends each year in December and June and making the pay- ment to shareholders of record in the following month. The cash dividend declarations have been as follows since the company's first year and up until June 30, 2017:

Declaration Date Common Shares Preferred Shares

Dec. 15, 2015 $0.30 per share $3.00 per share*

June 6, 2016 $0.30 per share $1.00 per share

Dec. 15, 2016 - $1.00 per share

* Includes dividends arrears of $2 from 2014-2015 fiscal year

No cash dividends were declared during June 2017 due to the company's liquidity problems.

Retained Earnings
As at June 30, 2016, the company's Retained Earnings account had a balance of $690,000. For the fiscal year ending June 30, 2017, the company reported net income of $40,000.
In

Instructions
(a) Prepare the shareholders' equity section of the company's statement of financial position, including appropriate notes, as at June 30, 2017, as it should appear in its annual report to the shareholders.
(b) Prepare the journal entries for the 2016-17 fiscal year.
(c) Discuss why the common shareholders might be willing to accept a stock dividend during the year rather than a cash dividend."

EXCESS CAPACITY

Krogh Lumber's 2016 financial statements are shown here.

1. Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 63% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
   %
2. 
   
3. Now suppose 2017 sales increase by 30% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 85% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11.5%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.
   

   Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars)
   	2016		2017
   Sales	$36,000		$
   Operating costs (includes depreciation)	30,783
   EBIT	$5,217		$
   Interest expense	1,017
   EBT	$4,200		$
   Taxes (40%)	1,680
   Net Income	$2,520		$
   Dividends	$1,512		$
   Addition to RE	$1,008		$

   Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)
   	2016		2017
   Assets
   Cash	$1,800		$
   Accounts receivable	10,800
   Inventories	12,600
   Fixed assets	21,600
   Total assets	$46,800		$
   Liabilities and Equity
   Payables + accruals	$9,720		$
   Short-term bank loans	3,472
   Total current liabilities	$13,192		$
   Long-term bonds	5,000
   Total liabilities	$18,192		$
   Common stock	2,000
   Retained earnings	26,608
   Total common equity	$28,608		$
   Total liab. and equity	$46,800		$

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