Advanced Accounting: Problem Sets

ISSUE: Accounting for Fuzzy Dice Inc. acquisition of Tiny Tots Toys LLC related to decision (1) to use purchased facility to enter another business line or (2) renovate the facility to expand the current production.

Cash Flows and Financial Statements at Sunset Boards, Inc. Income Statement 2013 2014 Net Sales $333,426 $406,427 COGS ($169,969) ($214,607) Gross Profit $163,457 $191,820 Expenses $33,425 $43,626 Depreciation ($47,980) ($54,230) EBIT $82,052 $93,964 Interest Paid ($10,442) ($11,954) Earnings Before Taxes $71,610 $82,010 Income Tax 20% ($14,322) ($16,402) NET INCOME $57,288 $65,608 Balance Sheet 2013 2014 Current Assets Cash $24,524 $26,056 Accounts receivable $17,378 $22,542 Inventory $36,570 $50,185 Total Current Assets $78,472 $98,783 Fixed Assets Net Fixed Assets $211,680 $264,021 Total Assets $290,152 $362,804 Current Liabilities Accounts Payable $43,344 $48,090 Note Payable $19,757 $21,571 Total Current Liabilities $63,101 $69,661

Date: Name: ID: Answer the following Questions: 1. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of inter-company inventory profit must be deferred by Tower? A. $6,480 B. $3,240 C. $10,800 D. $16,200 E. $6,610 2. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E.

Account W/P Common Common # Title Ref. Balance Size Balance Size Amount Percentage REVENUE 40000 Sales 246,172,918.44 102.33% 245,213,452.88 106.40% -959,465.56 -0.39% 41000 Sales Returns 4,497,583.20 1.87% 13,600,220.89 5.90% 9,102,637.69 202.39% 42000 Warranty Exp 1,100,281.48 0.46% 1,158,128.47 0.50% 57,846.99 5.26% Net Sales 240,575,053.76 100.00% 230,455,103.52 100.00% (10,119,950.24) -4.21% EXPENSES 50000 COGS 141,569,221.61 58.85% 130,246,645.26 56.52% (11,322,576.35) -8.00% Gross Margin 99,005,832.15 41.15% 100,208,458.26 43.48% 1,202,626.11 1.21% GA-7.4

BALANCE SHEET |Dec 1990 |Jan |Feb |Mar |Apr |May |June |July |Aug |Sept |Oct |Nov |Dec | |Cash |175 |556 |724 |175 |175 |175 |175 |175 |175 |175 |175 |175 |175 | |Accts receivable |2,628 |958 |234 |271 |270 |250 |250 |270 |1,603 |3,113 |3,580 |3,982 |3.063 | |Inventory |530 |948 |1,355 |1,749 |2,157 |2,564 |2,971 |3,365 |2,904 |2.314 |1,549 |697 |530 | |Net P/E |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 |1,070 | |Total Assets |4,403 |3,533 |3,383 |3,265 |3,672 |4,059 |4,466

According to the fact of this case, Parent Co. (Parent) wholly owns Poor Son Co. (Poor Son) as a legal subsidiary, and both of them all nonpublic companies. However, in January 2007 Poor Son filed a voluntary bankruptcy under Chapter 11 of the U.S. bankruptcy code because of its inability of meet obligations as they became due. Then, Parent claimed the loss of control of Poor Son and deconsolidated Poor Son from its financial statement. Through the bidding process in May 2009, Poor Son and OtherCo, the winning sponsor, filed a joint plan of reorganization to the bankruptcy court, but the plan was rescinded by OtherCo later due to significant market value shrink of Poor Son. After that, the

Subtotal Less: 2 178 000 Work in process inventory, 31 December Cost of goods manufactured 48 000 $2 130 000 2 Maximus Manufacturing Ltd Schedule of Cost of Goods Sold for the year ended 31 December Finished goods inventory, 1 January Add: Cost of goods manufactured Cost of goods available for sale Finished goods inventory, 31 December Cost of goods sold $ 42 000 2 130 000 2 172 000 48 000 $2 124 000 4 3 Maximus Manufacturing Ltd Income Statement for the year ended 31 December Sales revenue Less: Cost of goods sold $2 526 000 2 124 000 Gross margin 402 000 Selling and administrative expenses 322 800 Profit before taxes 79 200 Income tax expense 30 000

3. What was the balance of Walmart’s allowance for doubtful accounts (ADA) as of January 31, 2012?

Chapter 03: Financial Accounting Exercise 03-02: Basic Financial Accounting Process Single Company Code Version 1 Rev: 01/03/2011

Jacob’s Company has a June 30 year end. On June 28, Jacob’s provided consulting services to Jennings Company. Jacob’s billed Jennings on July 2 for $800 related to these services. On July 5, Jennings paid the invoice in full. Jacob’s only cost related to this sale was $250 in salaries expense. Jacob’s paid the salaries on July 3. Assuming Jacob’s Company has a June 30 year end, the company’s profit for the Jennings’ job on the June 30 financial statements should be

550 1 794 2 724 2 779 2 946 3 123 3 310 3 508 3 719 NA NA NA NA 3,0% 59,2x 12,2x 33,7x NA NA NA NA Capital Expenditures 2011 0 4 610 Net Working Capital Accounts Cash (=as a % of Sales Revenue) Accounts

From the above table, it is assumed that during 2010-2014 Abul Brothers cash purchase 0.0038 (Million $) and total sales 0.0032(Million $) on credit. To determine their net income/loss on the cash basis of accounting, cash paid for purchases 0.0038(Million $) has been considered for this a loss of 0.0038(Million $) has been occurred. Since there is a loss of 0.0038 (Million $) so during this year no tax, no EPS and no DPS. Nurania Store credit purchase 0.0026 (Million $) and total sales 0.0023 (Million $) on credit. To determine their net income/loss on the cash basis of accounting, No revenue and expenses has been considered. During this year no tax, no EPS and no DPS for this firm. Shatkhira Ghosh Dairy cash purchase 0.0064 (Million $) and total sales

He supports the manufacturing process but his time cannot be directly traced to each unit of finished product, therefore he would be classified as overhead.

First, analyzing the Income Statement for Marion Boats, Inc. led Darby Consulting to a gross profit of $27,400 after considering the company’s trade-in allowances, cash, account receivables, loss on sales, and cost of goods sold. The loss on sales is not meant to be a red flag, it accounts for the loss on the resale of trade-in boats which is accounted for in the sales section of the income statement because it is a cost of doing business for the company. The firm considered the accounting principle six when preparing this document because it is important to recognize revenue as it is earned rather than when it is received (Young, 2013). This would take into account the fact that sales, both used and new, are accounted for when they are delivered to customers. The Darby Consulting then subtracted the five-month salary received by Fred, the legal expenses, Fred’s sales commission, and the loan interest to determine Marion Boats, Inc.’s $13,920 profit. The Income Statement was created using the seventh generally accepted accounting principles meaning that Darby Consulting was able to determine the expenses incurred by Marion Boats during a revenue period (Young, 2013). The Income Statement prepared by Darby Consulting looked similar to that of Mr. Hurley except that Darby Consulting broke down the sales section in an effort to better represent where revenue was received from.

I have included the firm's original income statement and balance sheet without the purchase and then with the machine purchase. I have assumed that the firm would use the $218,000 to reduce the bank loans balance for each year. This reduction of the bank loan balance will lower their three restrictive financial ratios.