cfq02s - Henry Sander Econ l36C-1 Spring 2002 Final Exam...

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Unformatted text preview: Henry Sander Econ l36C-1 Spring 2002 Final Exam Problem I (40 mins) The differences in Beal Inc’s balance-sheet accounts at December 31, 1990, and December 31, 1989, are shown here. Increase (Decrease) ASSETS Cash and cash equivalents $120,000 Short-term investments 300,000 Accounts receivable (net of $1000 increase in the (5,000) allowance) Inventory 85,000 Long-term investments (100,000) Plant assets 700,000 Accumulated depreciation _—-_ i 1 , 100, 000 LIABILITIES and STOCKHOLDERS’ EQUITY Accounts payable & accrued liabilities $ (5,000) Dividends payable (160,000) Deferred taxes 300,000 Long—term debt 110,000 Common stock ($10 par) 80,000 Additional Paid-in capital 140,000 Retained earnings (610,000) Unrealized gain on St investments 25,000 $1,100,000 The following information relates to 1990: Net income was $(610,000). Included in net income is income tax expense of $320,000 and interest expense of $65,000. No cash dividends were declared. Building costing $600,000 and having a carrying amount of $350,000 was sold for $400,000. The rest of the change in accumulated depreciation is due to depreciation expense of $25 0,000. Equipment costing $110,000 was acquired through issuance of long-term debt of $50,000. The rest was paid in cash. A long-term investment was sold for $135,000. Another Lt investment was purchased for $60,000 for cash. 10,000 shares of common stock were issued for $28 a share and 2,000 shares of common were repurchased and retired at $3 O/share. $3 0,000 of bonds payable (under long-term debt net of its discount) were issued at a discount of $5,000. No interest was paid or amortized. Short term investments were purchased for cash of $275,000 but its carrying value was increased by $25,000 due to the stocks’ value increasing. Beal uses mark to market accounting and this investment is not a trading security. Included in accounts payable is $2,000 of interest payable at year end. None was payable at the beginning of the year. $08; 0 A capital lease was signed on January 1 which had a PV of MLP of $5 0,000. During the year $15,000 of principle and $7,000 of interest was paid on the lease. a The rest of the change in plant assets is due to acquisition of machinery for cash. 0 Bad debt write offs and recoveries for the year were $3,000 and $1,000 respectively. The estimate for bad debts this year is $2,000. Rmuired A) Present a statement of cash flows under the indirect approach. Include all supplementary disclosures. B) Describe what would be different if the direct approach was used. Problem II (40 mins) Grant Manufacturing Company has prepared its preliminary comparative income statement for its first 3 years 1990, 1991 and 1992. 1992 1991 1990 Sales $500,000 $350,000 $450,000 Cost of goods sold 1300,000! 1200,000! 1220,000! Gross profit $200,000 $150,000 $230,000 Other expenses 190,000! 180,000! 1 170,000! Income from continuing operations before income taxes $110,000 $70,000 $60,000 Income taxes 144,000! 128,000! 124,000! Net income $66,000 $42,000 $36,000 Retained earnings-beginning 398,000 396,000 400,000 Dividends 140,000! 140,000! 40 000 Retained earnings-ending 424 000 398 000 $396,000 Before issuing its financial statements for 1992, Grant needs to make the appropriate adjustments for the following changes or corrections. Assume all changes are made at year-end, no interim financials were issued, and all items are material. Grant’s effective tax rate for all three years is 40 percent and the tax return will change as well in part B only. Assume 1991’s books are closed. a) Bad debt expense. Grant had estimated the bad debts to be 2 percent of sales. At the end of 1992, Grant estimated the percentage should be increased to 4 percent. Bad debt expense under the old and new percentages are indicated below. Permanent write—offs of bad debt from the allowance were $20,000 in each year. The original % was calculated at the average bad debts % of a company that was in a different industry which has a completely different credit policy than Grant. Grant’s controller used to work for the other company and decided not to take the time to come up with a new estimating %. 1992 1991 1990 2% of sales $10,000 $7,000 $9,000 4% of sales 20,000 14,000 18,000 ...
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