Accounting 529 Week 3 Problems Jerry Kennedy

Transcription

1 Accounting 529 Week 3 Problems Jerry Kennedy P4.18 A) Based on your answers to Problem 4.17,prepare an income statement (ignoring income taxes) for Kissick Co. s first year of operations and a balance sheet as of the end of the year. (Hint:You may find it helpful to prepare T-accounts for each account affected by the transactions.) Kissick Co. Income Statement For the Year Ended, December 31, 2005 Net sales $ 910,000 Cost of goods sold (580,000) Gross profit $ 330,000 Selling, general, and administrative expenses (526,000) Income from operations $ (194,000) Interest expense (60,000) Net income $ (256,000) Net income per share of common stock outstanding $ (1.28) Kissick Co. Balance Sheet December 31, 2005 Assets Cash and cash equivalents $ 1,029,000 Accounts receivable 85,000 Inventory 60,000 Total Current Assets $ 1,174,060 Buildings and equipment 150,000 Total Assets $ 1,324,060 Liabilities Accounts payable $ 20,000 Note payable 500,000 Interest payable 60,000 Rent payable 10,000 Total liabilities $ 590,000 Owner s Equity Common stock $ 1,000,000 Retained earnings (256,000) Total owner s equity $ 744,000 Total liabilities and owner s equity $ 1,334,000

2 B) Kissick Co. had a bad year. Wither earnings per share at ($1.28), investors are not likely to be very pleased. However, it is typical for a company to expect week earnings or even losses in the first year of operations. This is mainly due to the high start up costs such as the $150,000 for equipment. Kissick also has a high cost of production. With $580,000 in cost of goods sold and $526,000 in general costs on $910,000 sales the company operates at a loss. But they may have handled their cash position poorly by paying cash for things like equipment rather than amortizing off such costs. E 7.9 Bonds payable record issuance and premium amortization. Kaye Co. issued $1 million face amount of 11% 20-year bonds on April 1, The bonds pay interest on an annual basis on March 31 each year. Required: A) Assume that market interest rates were slightly lower than 11% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain. The proceeds would be slightly higher. Since the bond rate is greater than market rates, the interest payment on the bond issue is a more attractive investment. To compensate for this disparity, the purchaser has to pay a premium (above par) amount that considers the present value to be higher than the true bond issue face amount. B) Independent of your answer to part a, assume that the proceeds were $1,080,000. Use the horizontal model (or write the journal entry) to show the effect of issuing the bonds. Balance Sheet Income Statement Cash Flows Assets = Liabilities + Owner s Equity Net Income = Revenues - Expenses Cash $1,080,000 Bonds payable $1,000,000 +1, FA Premium on bonds $80,000 C) Calculate the interest expense that Kaye Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2004, assuming that the premium of $80,000 is amortized on a straight-line basis. Interest expense (September 30, 2004) = ($1,000,000 * 0.11) ($80,000/20) = ($110,000) ($4,000) = $106,000.

3 P9.18 Using the information below, prepare an Income Statement in good form. SPENSER, CO. Income Statement For the Year Ended, December 31, 2004 Net sales. $ 579,000 Cost of goods sold.. 272,000 Selling, general, and administrative expenses... 51,000 Research and development expenses... 37,000 Operating expenses 360,000 Operating income.... $ 219,000 Interest expense. 64,000 Income from continuing operations before taxes... $ 155,000 Provision for income taxes. 74,000 Income from continuing operations $ 81,000 Discontinued operations, net of income taxes: Loss from discontinued operations, net 16,000 Earnings before extraordinary item $ 65,000 Extraordinary item: Gain from early retirement of bonds, net of tax expense. 104,000 Net income $ 169,000

4 P9.28 Prepare statement of cash flows (indirect method) using balance sheet data. Presented below are comparative balance sheets for Millco, Inc., at January 31 and February 28,2004.

5 Required: Prepare a statement of cash flows that explains the change that occurred in cash during the month. You may assume that the change in each balance sheet amount is due to a single event (e.g., the change in the amount of production equipment is not the result of both a purchase and sale of equipment). (Hints: What is the purpose of the statement of cash flows? How is this purpose accomplished?) Use the space to the right of the January 31 data to enter the difference between the February 28 and January 31 amounts of each balance sheet item; these are the amounts that will be in your solution. Below is the copy of a working document indicating the differences in position between periods: 28-Feb 31-Jan Assets Cash Flow Cash Accounts receivable Merchandise inventory (13000) Total current assets Plant and equipment: Production equipment Less:Accumulated depreciation (24000) (21000) (3000) Total assets Liabilities Short-term debt Accounts payable (4000) Other accrued liabilities (3000) Total current liabilities (7000) Long-term debt (13000) Total liabilities (20000) Owners Equity Common stock,no par value,40,000 shares authorized, 30,000 and 28,000 shares issued,respectively Retained earnings: Beginning balance Net income for month (10000) (8000) (2000) Dividends Ending balance Total owners equity Total liabilities and owners equity

6 MILLCO, INC. Consolidated Statements of Cash Flows For the Month Ended February 28, 2004 Cash Flows from Operating Activities: Net Income $ 7,000 Add (Deduct) items not affecting cash Depreciation expense ( 3,000) Increase in accounts receivable 11,000 Increase in current assets 3,000 Decrease in inventories ( 13,000) Increase in plant and equipment 14,000 Decrease in current liabilities ( 7,000) Net cash provided by operating activities $ 5,000 Cash Flows from Investing Activities: Purchase of equipment ( 14,000) Net cash used for investing activities $ ( 14,000) Cash Flows from Financing Activities: Cash used for retirement of long-term debt ( 13,000) Payment of dividends ( 2,000) Sale of common stock of common stock 8,000 Net cash provided by financing activities $ ( 7,000) Net increase (decrease) in cash $ ( 16,000)