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finwk99f - H. Sander Problem 1 (30 mins) Econ 136C Final...

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Unformatted text preview: H. Sander Problem 1 (30 mins) Econ 136C Final Exam Q} i i ‘ ‘ I. “of. W"@ " f V“ \- Fall 1999 J” /1 "fr-p. .% {a V l The income statement and balance sheet of Kenwood Company and a rel'aTi'eE/analysis are given below. a KENWOOD COMPANY Income Statement For the Year Ended December 31, 1992 Sales revenue . . . . . . . . . 2 . . . . . . . . . . . . . . . . . . $000,000 Expenses and losses: Cost of goods sold . . . . . . . . . , . . . . . . . . . . . . . . 560,000 Salaries and wages . . . . . . . . . . . . . . .‘ . . . . . . . 190,000 Depreciation . . ., . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Patent amortization . . . . . . . . . . . . . . . . .I . I . . . . 3,000 Loss on sale of equipment . . . . . . . . . . . . . . . . . . . 3 4,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . 8,000 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . 801,000 Income before income taxes and extraordinary item . . . . . . l99,000 Income tax expense ‘ . . , . i 90,000 Income before extraordinary item . . . . . . . . . . . . . . . . 109,000 Extraordinary item—gain on early extinguishment of long~term bonds payable (:3; f. 0 . ' income tax) . . i . . . 12,000. Net income Surrent assets: Cash- Accounts receivable (not of allowance for doubtful accounts of $10,000 and 58,000, respectively) . . . . . . Inventory . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . Plant and equipment . . . . . . . . . . . Less: Accumulated depreciation . . . . Fatents . . . . . . . . . . . . - t . . . . Total assets . . . . . . . . . . . . . . . . KENWOOD COMPANY Comparative Balance Sheets $121,000 December 31 December 31 1992 1991 1992 1991 iabillties and ‘ Stockholders’ Equity Liabilities: . . . . . . S 100,000 5 90,000 Current liabilities: Accounts payable . . . . . . . . . . . . . . . . $ 260,000 3 200,000 Salaries and wages payable . . . . . . . . . . 200,000 210.000 . . . . . . 210,000 140,000 Income tax payable. . . . . . . . . . . , . . . w ' ' ‘ ' ' .2391929 Total current liabilities. . . . . . . , . . . . 600,000 510,000 - t - - - ~ 5701000 450000 Bonds payable (due 12/15/2001) . . . . . . . . . Moi M - ‘ ' - t - 35000 200300 Total liabilties . . . . . . . . . . . . . . . . . . 739,000 690,000 . . . . . . 380.000 633.000 , _ m M _ _ _ ' _ ' (9mm) (100,000) Stockholders equtty‘: _ . . . . ' 30,000 33mm Common stock. par value 55, -——~-‘-— authorized 100,000 shares, . . . . . . 5x.415,ooo $1,215,000 - “wed and Outstanding m m 50,000 and 42’G00 shares, respectively . . . . . . . . . . . . . . . 250,000 210,000 Additional paid-in capital . . . . . . . . . . , . . 233.000 170,000 Retained earnings . . . . . . . . . . . . . . . . . 202.000 146,000 Total stockholders’ equity . . . . . . . . . . . 685,000 525300 Total liabilities and stockholders' equity . . . . . . . . . . . . . . 531,415,000 W. Analysis of selected accounts and transactions: a. On February 2, 1992, Kenwood issued a 10% stock dividend to stockholders of record on January 15, 1992. The market price per share of the common stock on February 2, 1992, was 515. b. On March 1, 1992, Kenwood issued 3,800 shares of common stock for land. The common stock had a current market value of approximately $40,000 on March 1, 1992. c. On April 15, 1992,. Kenwood repurchased its long—term bonds payable with a face value of $50,000 for cash. The gain of 5 12.000 was correctly reported as an extraordinary item on the income statement because this early extinguishment of the bonds payable occurred prior to their maturity date (12/31/2001). d. On June 30, 1992, Kenwood sold equipment that cost $53,000, with a book value of $23,000, for $19,000 cash. 6. On September 30, 1992, Kenwood declared a $2,000 cash dividend to stockholders of record on August 1, 1992. . f. On October 10, 1992. Kenwood purchased land for $85,000 cash. g. The entry for item a. is: retained earnings 63,000 common stock <21 ,000> additional paid in cap. <42,000> It. Half of the dividends were paid and half will be paid on January 1, 1993 and dividends payable are included in accounts payable. Required 1. Prepare a statement of cash flows (indirect) for 12/31/92. 2. Explain what would be different in a direct approach. Problem II (40 mins) The year 1991 was not a good one for Zealand Company accountants. The company made several financial accounting changes that year. First, the company changed the total useful life from 20 years to 13 years on an asset purchased January 1, 1988, for $350,000. The asset was originally expected to be sold for $50,000 at the end of its useful life, but that amount was also changed in 1991 to $200,000. Zealand applies the straight—line method of depreciation to this asset. Second, the company changed from FIFO to LIFO, but is unable to recreate LIFO inventory layers. The FIFO 1991 beginning and ending inventories are $30,000 and $45,000. Under LIFO, the 1991 ending inventory is $35,000 and net income for ’91 reflects the LIFO method. The company expects LIFO to render income numbers more useful for prediction, given inflation. Third, the company changed to the straight-line method from the double declining balance method on equipment purchased for $650,000 on January 1, 1987. The equipment has a $100,000 residual value and 10-year useful life. These values were not changed. The change in depreciation method was made to provide a better measure of expired equipment cost because the annual benefits derived from the asset have been relatively constant. Fourth, a change in amortizing patents was disc0vered in 1991. Patents costing $510,000 on January 1, 1989, were amortized over their legal life (17 years). The accountant neglected to obtain an estimate of the patent’s economic life, which totals only 5 years. Additional information: Zealand is a calendar fiscal year company, is subject to a 30% tax rate, and has had 10,000 shares of common stock outstanding since 1986. 1990 (previously published) 1991 Beginning retained earnings $319,000 ? Income after tax 220,000 $325,000 Dividends declared 50,000 70,000 Required 1 . Record the entries in 1991 necessary to make the accounting changes, and desoribe the method used for each change and why that method is appropriate. 2. Indicate the accounts and direction that would change on your 1990 & 1991 comparative income statements and balance sheet. 3. Prepare a retained earnings statement and describe the proforma footnote disclosures for the accounting changes for 1991. 4, RI ,S'i’ . ML, - Eff/b g/O l“/ Yb” .0 313 Problem HI (20 mins) You have been contacted by the Executive Vice President of Finance of a client whose Audited Financial Statements are about to be finalized. Your accounting firm is requiring the company to change its Income Tax Journal entries to receive an unqualified audit report attached to their Financial Statement Package. The VP of Finance has expressed the following concerns at a meeting with you to discuss this matter. The company has a rather large deferred tax liability balance that is growing each year. A. She cannot understand Why income tax expense is not equal to the amount of income taxes owed to the government. 7 B. She cannot understand why deferred tax liabilities appear on the balance sheet when this amount is not owed to the government at this time. . No deferred tax assets even seem to appear on their balance sheets but they do have them. She doesn‘t understand why Con gress’s increase in the Federal Income Tax rate for next year has increased this year’s Income Tax Expense. .00 R...e_c_1_uir_§d . Respond to the VP of Financial Concerns and theoretically justify your response to each concern. Problem IV (20 mins) L EN) Q "5' You have been contacted by your longtime client and friend Antonio to advise him as majority owner and Executive Vice President of Finance of Helistrand, Inc. The company manufactures wire and is considering expanding its operations into a second manufacturing facility. The new facility will help the company meet increased demand and pick up some new products which cannot be produced in their current facility. Upon approaching banks and other lenders the company has met resistance. The lending institution indicated that the company does not have the financial ratios necessary for borrowing greater than $30,000. The terms of this borrowing would be€@ for‘iyears. However, Antonio’s personal swam}; outstanding and he is considered an excellént credit risk personally. To accommodate the expansion the companywould need equipment which cost $100,000. The equipment could also be leased for payments of/$26.590 on J an. 1 of eac ar. The lease also includes an unguaranteed residual value and buyout option of SW year lease term. The equipment has an economic life of 10 years and is estimated to have a fair market value of $40,000 at the end of 3 years and $0 at the end of 10 years. Assume the incremental borrowing rate at the bank would be 10% for equipment loans of this sort. Also assume the implicit rate in this lease is 12%. MiAinother alternative leasing choice would be a 10 year lease with no residual value calling for beginning of the year payments of $16850 for 10 years. The company will also need a new plant facility. A suitable plant has been found near their other facility for a purchase price of $900,000. They have not found a facility near their other plant available for lease. Antonio feels that if the plants are close to one another it will result in reduced operating costs of substantial amount. The company also expects that it will take $50,000 of start up costs to get the facility operating. The company’s financial statements contain the following assets which you should consider in your analysis. Carrying.r Value Fair Market Value Manufacturing building (owned outright with no debt) $100,000 Sl,000.000 Inventories 10,000 l 1,000 Required 1‘) Should they lease or should they buy the equipment? If lease, which lease? why? 2‘) How might they acquire the building they desire without using standard financing that the lending institutions won’t allow? Explain how to execute your plan. Problem V (20 mins) r; 1/ {<1 it On January 1, 1985, the Vasby Software Company adopted a healthcare plan for its retired employees. To determine eligibility for benefits, the company retroactively gives credit to the date of hire for each employee. The service cost for 1995 is $8,000. The lan is not funded and the discount rate is 10%. All 5W employees were hired at age 28 and become eligible for full benefits at age 58. EW was paid $7,000 postretirement healthcare benefits in 1995. Additional informatWS is as follows: .- . ' g] C, Employee Age Expected Expected Accumulated Status Retirement Age Postretirement Postretirement Benefit Benefit Obligation Obligation A Employee 38 65 $42,000 $14,000 B Employee 62 65 70,000 , 70,000 C Employee 67 , -— 45.000 45,000 $351000 Egg-M Required A. Determine other postretirement benefit expenses assuming Vasby elected the longest amortization ,V «21‘ period possible. Assume Vasby adopted FAS 106 on January 1, 1995. B. Indicate balance sheet results of this plan at December 31, 1995. Show all work. C. Theoretically justify why this expense is different from the $7,000 paid for healthcare benefits in 1995. D. Theoretically justify the relationship between the accumulated and expected postretirement obligation for each employee. E. What other amortization option was available to Vasby and why didn’t they choose it? Problem VI Short Answers (15 mins) 1. 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She cannot understand why deferred tax liabilities appear on the balance sheet when this amount is not owed to the government at this time. _ No deferred tax assets even seem to appear on their balance sheets but they do have them. She doesn’t understand why Congress’s increase in the Federal Income Tax rate for next year has increased this year’s Income Tax Expense. no Reguired Respond to the VP of Financial Concerns and theoretically justify your response to each concern. fl {5“ fidyfir/4,L ® MATCHWQ to? m: cm hemo’t‘u tvcm tum, PM; l) Hyman; 17+“ Timday Wm. ._.n—-v-~ WMlLL 6C (394} nu) A f‘f-fifli EJ550553“: C)“ ‘v/J Nab.» WM (5?, wrauom H, Ger let/least muggy) 1) rr 5147/ 09 “We DEF, he”) {lawman war THE Caeilbd-Mf Estonia PK; was as A M: /, :Mflmwmwmmvfl 2’" p y me“ ~ ~- J/flcsut'f L);— P‘ PM”? Tngcfiw‘ML u) N3, ‘5 ON gig $15.53“, 7244.4; evwng Liars end-«r Muriefii DA-fl Witt Miriam/Ma, w... a...,~.»,_ . - “GD C Tit}. AM, that) but?“ 01' LINE ill-WDSWCE “oven”; Maximum Maw r in? 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The new facility will help the company meet increased demand and pick up some new products which cannot be produced in their current facility. Upon approaching banks and other lenders the company has met resistance. The lending institution indicated that the company does not have the financial ratios necessary for borrowing greater _ than $30,000. The terms of this borrowing would be 10% for 5 years. However, Antonio’s personal finances are outstanding and he is considered an excellent credit risk personally. To accommodate the expansion the company would need equipment which cost $100,000. The equipment could also be leased for payments of $26,590 on Jan. 1 of each year. The lease also includes an unguaranteed residual value and buyout option of $40,000 at the end of the 3 year lease term. The equipment has an economic life of 10 years and is estimated to have a fair market value of $40,000 at the end of 3 years and $0 at the end of 10 years. Assume the incremental borrowing rate at the bank would be 10% for equipment loans of this sort. Also assume the implicit rate in this lease is 12%. Another alternative leasing choice would be a 10 year lease with no residual value calling for beginning of the year payments of 816.850 for 10 years. ii 3' I The company Wlll also need a’new plant facxlity. A suitable plant has been found near their other 1' facility for a purchase price of $900,000. They have not found a facility near their other plant available for lease. Antonio feels that if the plants are close to one another it will result in reduced operating costs of substantial amount. The company also expects that it will take $50,000 of start up costs to get the facility operating. The company’s financial statements contain the following assets which you should consider in your analysis. Carrying Value Fair Market Value Manufacturing building (owned outright with no debt) $100,000 8 l 000,000 inventories 10,000 i 1.000 Required 1) Should they lease or should they buy the equipment? lflease, which lease? why? 2) How might they acquiie the building they desire without using standard financing that the lending institutions won’t allow? 'Explain how to execute your plan. 6) it You (“my Tats Asset” rt mm. 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Determine other postretirement benefit expenses assuming Vasby elected the longest amortization period possible. Assume Vasby adopted FAS 106 on January 1, 1995. ' B. Indicate balance sheet results of this plan at December 31, 1995. Show all work. C. Theoretically justify why this expense is different from the $7,000 paid for healthcare benefits in 1995. ' D. Theoretically justify the relationship between the accumulated and expected postretirement obligation for each employee. B What other amortization option was available to Vasby and why didn’t they choose it? Problem VI Short Answers (15 mins) 1. Explain how one determines the portion of the initial franchise fee to recognize as revenue during this period related to a franchise agreement signed this year. 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This note was uploaded on 01/31/2010 for the course ECON 136C taught by Professor Anderson during the Fall '08 term at UCSB.

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finwk99f - H. Sander Problem 1 (30 mins) Econ 136C Final...

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