WHC, SRG and MRR are three different companies but follow similar business models. Analyse the liquidity risk exposure and solvency risk exposure for these three firms between 2018 and 2019.

Common and preferred stock-issuances and dividends

Permabilt Corp. Was incorporated on January 1, 2016, and issued the following stock for cash:

4,000,000 shares of no-par common stock were authorized; 1,750,000 shares were issued on January 1, 2016, at $45 per share.

1,800,000 shares of $100 par value, 7.5% cumulative, preferred stock were authorized, and 840,000 shares were issued on January 1, 2016, at $105 per share.

Net income for the years ended December 31, 2016, 2017,and 2018 was $38,000,000, $46,000,000, and $57,000,000, respectively.

No dividends were declared or paid during 2016 or 2017. However, on December 17, 2018, the board of directors of Permabilt Corp. declared dividends of $64,000,000, payable on February 9, 2019, to holders of record as of January 4, 2019.

Required:

a. Use the horizontal model (or write the entry) to show the effects of

1. The issuance of common stock and preferred stock on January 1, 2016.

2. The declaration of dividends on December 17, 2018.

3. The payment of dividends on February 9, 2019.

b. Of the total amount of dividends declared during 2018, how much will be received by preferred shareholders?

Accorsi & Sons specializes in selling upscale home theater systems. As a package deal, Accorsi sells a premium home theater package that includes a projector and a one year subscription to premium cable channels for $2,100. Accorsi sells individual projectors for $2,000 and sells individual one-year subscriptions to premium cable channels for $500.

On March 1, 2018, Accorsi delivers a premium home theater package to Valley Hills Nursing Home, which includes the projector and the one-year subscription to the premium cable channels at a price of $2,100. On April 15, 2018, Accorsi receives $2,100 from Valley Hills Nursing Home.

Required:

1. Identify the performance obligation(s) in the premium home theater package?

2. How much revenue will be allocated to each performance obligation?

3. What journal entry (if any) will Accorsi record on March 1, 2018 to record the revenue from the sale of the premium home theater package?

4. What journal entry (if any) will Accorsi record on March 31, 2018?

5. What journal entry will Accorsi record when they receive payment from Valley Hills Nursing Home?

Sheridan Inc. issued $3,240,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $57,600, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Sheridan Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2018, $324,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) (a) August 1, 2018. (Assume the book value method is used.) (b) August 31, 2018. (c) December 31, 2018, including closing entries for end-of-year.

On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.

Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows:

Prepare the journal entries for:

(a) 6/30/2018

(b) 12/31/2018

TL Company bought a $1,000,000 bond at par which trades actively on January 1, 2018. This bond’s market value was $900,000 on December 31, 2018 when TL closed its books. The CFO however expected the bond to recover its value before it matured. TL’s 2018 income was $5,000,000 before any adjustments for changes in the market value of this bond. It sold the bond on February 1, 2019 for $1,200,000.

What value would TL show the bond on its Dec 31 balance sheet and what would its 2018 income be after including the change in the bond’s value under each of the following assumptions?

Assume TL bought the bond intending to sell it at a profit during the year.

            Net book value of the bond?____   

            Net income $____                 

Assume TL bought the bond intending to hold it to maturity but would be willing to sell it.

            Net book value of the bond?____     

            Net income $____                             

Assume TL bought the bond for its interest payments and decided to hold the bond until it matured.

            Net book value of the bond?____     

            Net income $____                             

How much gain on sale would TL report under each of the assumptions above?

1. $____      
2. $ ____      
3. $____

Herbert, Inc. acquired all of Rambis Company’s outstanding stock on January 1, 2017 for $ 574,000 in cash. Annual excess amortization of $ 12,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $ 400,000, and Rambis reported a $ 200,000 balance. Herbert reported internal income of $ 40,000 in 2017 and $ 50,000 in 2018 and paid $ 10,000 in dividends each year. Rambis reported net income of $ 20,000 in 2017 and $ 30,000 in 2018 and paid $ 5,000 in dividends each year.

Assume that Herbert’s internal income figures above do not include any income from the subsidiary. The parent uses the equity method.

A. What is the amount reported as consolidated Retained Earnings on December 31, 2017?

B. What is the amount reported as consolidated Retained Earnings on December 31, 2018?

C. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2017 when the parent uses the equity method?

D. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2018 when the parent uses the equity method?

            SHOW YOUR WORK IN COMPUTING THE ABOVE

At year-end 2018, total assets for Arrington Inc. were $1.5 million and accounts payable were $430,000. Sales, which in 2018 were $2.50 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $400,000 in 2018, and retained earnings were $415,000. Arrington plans to sell new common stock in the amount of $60,000. The firm's profit margin on sales is 5%; 40% of earnings will be retained.

1. What were Arrington's total liabilities in 2018? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
   $  
2. 
   
3. How much new long-term debt financing will be needed in 2019? (Hint: AFN - New stock = New long-term debt.) Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.
   $  

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $430 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time.
3. Suppose the estimated costs to complete at the end of 2019 are $210 million instead of $140 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.