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cashflow01w - Problem II 61 Bad“'fkseIA 1ch,5(30 mins 7...

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Unformatted text preview: ' Problem II 61 Bad“- 'fkseIA 1ch,5 (30 mins) 7 at W Berclay Tile Co. reported net income of $6,160 for 1993 but has been showing an overdraft 1n its bank account in recent months. The manager has contacted you as the auditor for an explanation. The information that follows was given to you for examination. Berclay Tile Co. Comparative Balance Sheet December 31, 1993 and 1992 84s —___——______————_-———-————— Assets Current assets: Cash Accounts receivable (net of $500 allowance) Inventory Prepaid pension cost Total current assets Land, buildings, & equipment: Land Buildings Equipment Accumulated depreciation Total land, buildings, & equipment Total assets Liabilities & Stockholders' Equity Current liabilities: Accounts payable Deferred taxes Dividends payable Notes payable - current portion Total current liabilities Long-term liabilities: Notes payable Bonds payable Stockholders' equity: Capital stock Retained earnings Total stockholders‘ equity Total liabilities & stockholders‘ equity You also determine the following: Accumulated depreciation 1993 1992 $ (960) 4,000 2,350 19 $5,460 $12,500 $25,000 $25,000 (15,000) 10,000 {14,0002 $37,250 $30,850 92,500) 14,750 98,400) $37,250 $42,710 $4, 250 1,400 750 1,500 $7,900 5,500 5,000 $17,500 $15,000 6,810 5,150 24,310 $42,710 $4,780 1,000 750 25 $6,725 $12,500 11,000 12,450 $35,950 $42,675 (a) Equipment was sold for $1,500, its costs was $2,500 and its book value was $500. The gain was reported as Other Revenue. Other equipment purchased was $5, 000 with cash and the rest with long term 013“" “5%? “‘W notes payable All other longterm 917% short Wlfimlflflte payable changes are due to payoffs. ”35$”; (b) Cash dividends of $4, 500 were declared. W W W ' WWWWW W "W‘WW “WWW“ WW” W (c) Stock of $1,000 Was used to acquire land and a parcel of land was sold for its book value resulting 1n no gain or less The rest of the change 1n capital stock 1s due to stock sold for cash. Mmemhw ’Wmu %m*y_mb.flw 9:) #(d) Bad debts of $3,000 were written off during the year. The allowance balance was the same each 4"}:- “ 3-” year. .xig’jgw (e) Bonds payable were issued for $5,500 this year. The $1,000 premium at issuance was includable in BM» rk /the bond payable balance above. ‘/2 of the original premium was amortized this year. . ,fi’gé.“ ’(flssume depreciation expense is the only other change in accumulated depreciation accounts besides Daffy ~ -i em (a) above. (g)”vPrepaid pension cost is due to prior service costs which have been funded but not expensed yet due to LA . . . 9/ additional years of expected employee serv1ce. up; Problem III (20 mins) You have been contacted by your long time client and friend Michael Jordan of MJ. Enterprises who is confused by the new accounting rules regarding his company's policy of covering retirees for medical costs and life insurance after their retirement. In his letter he states the following facts: Assume M.J. Enterprises has just adopted FAS 106. (1) He never showed a liability or expenses regarding this area before and is blaming you for overlooking it in the past. (2) If the company chooses to it can abandon the policy without major tax consequences thus he feels liabilities and expenses are unwarranted. (He does intend to keep the policy.) (3) He is distraught over the huge expected post-retirement benefit obligation that he thinks must be recognized on his financial statement. (4) He can't understand why he must show any expenses regarding this company policy when virtually none of his employees are receiving benefits at this time. (5) He wants a clear cut explanation of how he determines his expenses on his income statement. Also on a related matter Michael is confused as to why his new contract with the Bulls has had no effect on his regular pension expense as well as his other post—retirement expense for this year. Since he plans to score 50 points per game in the playoffs he feels he will have a huge increase in salary over the next few years and thus his regular retirement benefits under his company‘s pension plan should increase dramatically. Your pension expense number for this year has shown increase from last year and he thinks you‘re blowmg it again. Required Comment on Michael's letter and address all his concerns. Remember that Michael hates having liabilities on his financial statements and his cash flow is good. Problem IV (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. Assume the company is profitable and has been very aggressive on its tax return in the past. A. She cannot understand why income tax expense is not equal to the amount of income taxes owed to the goverMent. 3. F/S Disclosures I/ S B/S Previous Current Previous Current a.) B.D. exp 5500 down 1400 up allow ED. 5500 up 6900 up Inc. tax exp 2200 down 560 down deff. Tax 2200 down 2760 down b.) Depr. Exp N/A 60,983 down A/D N/A 60,983 down Inc. Tax exp N/A 24,393 up ‘ Def. Tax N/A 24,393 up c.) CGS N/A --- Inventory 25,000 up Inc. Tax Exp N/A --- Inc. Tax Pay. 10,000 up R/E Previous Current Prior Per. Adj 3300 up Proforma Data Indicate that the previous years COS would be 25,000 lower if FIFO was used and that Inc. Tax Expense would have been 10,000 higher. Problem 2 Statement of Cash Flows For Period Ending 12/31/93 Operating Net Income after tax on US $114,600 Adjustments for items effecting cash diff. Than NI Increase in AIR (5400) Decrease in Inventory 4400+ Increase in Prepaid insurance (1600) Decrease in A/D, net of div. Payable (3200) Gain on Sale of Investment (2200) Loss on Sale of Equipment 1000+ Depreciation Expense 7000+ Increase in Deferred Tax Payable 3800+ Net Adjustments $3,800 Cash Flow From Operations $118,400 Investing Proceeds of Sale of Investment 13,000+ Proceeds of Sale of Equipment 3,000+ Purchase of Equipment w/ cash 112,000! Cash Flow From Investing Activity $4,000 Financing Purchase of Treasury Stock 7,000+ Dividends Paid (2,000) Notes Payable Borrowed-LT 20,000+ Note Payable Borrowed-ST 6,000+ Payoff of N/P-LT (28,000) Payoff of NIP-ST g 7,000) Cash Flow From Financing Activity ($4,000) Net Change in Cash $118,400 Non-Cash Significant Events Purchase of Equipment with Common Stock (12,000) **If direct approach were used, all sections would be the same except the format of the Operating Section. This section is a cash basis Income Statement format under the direct approach. Problem 3 1.) He’s Right! GAAP didn’t require predicting these costs and expensing them, which allowed the expenses to be recorded in years, which gave the company no benefits. Thus, poor matching. v 2.) He’s Right! Again, no tax deduction for this exists until paid out. But financial accounting must look at his intent to keep the policy, thus requiring expense and liabilities to appear. He will have to pay and the benefits he receives are now. 3.) He has a choice of phasing in this liability over 20 years so as to not have a total immediate effect and he only has to show his accumulated other post retirement liability; not his expected liability! 4.) It is not when his employees get the benefits, but when the company gets the benefits of the employees’ service under the matching principle. Since they work now and not when retired, the expenses and liabilities must be shown now. 5.) There are 7 components that add to pension expense: 0 Service costs (this year’s allocation of cost of this year’s services) Interest Cost on APBO Less: Interest offset for expected return of assetsset aside Amortization of actuarial gains and losses Amortization of amount owed to plan at adoption (APBO) Amortization of any amendments to the plan Amortization of Trans. Amt. to 106 if any existed / Problem [I (30 mins) The following data show the account balancesofNovations, Inc., at the beginning and end of the company's accounting - ‘ period: The company's ‘net income after tax was $114,600 but the closing entry hasn't happened yet. Debits ' Dec. 31, 1993 ‘ Jan. 1, 1993 Cash & cash equivalents . $176,400 $58,000 « Accounts receivable (net of $3,000 allowance) ' ‘ 32,000 26,600 I ‘ Inventory ‘ » ~ » 1 - - “’ 21,000 , 25,400 Prepaid insurance " ”5,600 x ' I 4,000 Long-term investments (at cost) \ ‘ 6,000 — ,1 6,800 Equipment 80,000 66,000 Treasury stock (at cost) . ' . p 10,000 - 20,000 Cost of goods scld ' 368,000 Operating expenses 185,000 Income tax expense 37,600 Loss on sale of equipment 1,000 __ Total debits \ $922,600 , $216,800 credits _ Accumulated depreciation -equipment.- , . p u \519,009\ ‘ .. $18,000 Accounts payable 7,000 11,200 Short term notes payable - banks 1,000 2,000 Deferred tax payable ’ ‘ 1 1,8001 ' 8,000 Notes payable - long-term ‘ 16,000 24,000 Common stock * 110,000 100,000 Paid-in capital in excess of par 32,000 30,000 - Retained earnings ' . _ 19,600* a 23,600 \ \Sales ' ‘ 704,000 , .. . \r 1 Gain on sale of long-term investments 2_,2__0_0 — __ Total credits \_ $922,600 1 $216,800 * Preclosing balance ‘ The following-information was also available: (a) All purchases and sales were on account. (b) Equipment‘costing $10,000 was sold for$3,000; a loss of $1,000 was recognized on the sale. (c) Among other items, the operating expenses included depreciation eXpensé‘of $7,000; interest expense of $5,000; and insurance expense of $2,400. a, - (d) ,, Equipment was purchased during the year by issuing common stock, and by paying the balance ($12,000) in cash. Assume all other changes in common stock were due to issuances of stocks for cash. (e) Treasury stock was sold for $3,000 less than it cost; the decrease in owners' equity was recorded by reducing retained earnings. Dividends were paid during the year in the amount of $2,000 of which $1,000 was declared this year. Assume dividend payable amounts are included in accounts payable. I (t) On Oct. 1 Novations borrowed $20,000 long term and $6,000 short term from a bank. Assume any other changes inthese accounts are due to payoffs of note. ._ _ ~ . p (g) Bad debts of $4,000 were written off this year and included in operating expenses was $5,000 in estimated bad debt expenses. The allowance for bad debtswas $3,000 thisyear and was $2,000 last year. ' (h) Long term investments have been sold for'cash and no unrealized gains or losses have been recorded. Reguired "‘ 1. Prepare a statement of cash flows for the year ended December 31, 1993, using the indirect method of reporting cash flows from operating activities. . p , . . - i 2. Describe the differences that would take place if the company wishes to use the direct method. ' a 1(1)»)7 3”“ \ 3%? £709” 8‘19“ Luv“ + 5413', AnjquffA/B FM. {Th} [F eroF Cw: FLawf WCSCWY 10»wa ” F714.— //0Ltua in/O/n/é (”/W 97 M/Comé pk 14¢sz Samar (20:02)) 14> ”L é/éo _ flaw/6 A1,: DIWW cnavfi W Imam n/ 4/( mi;- /VC/U5mt /~ ,nA/F/r—_ DEL/1mg: MI (”40° (”Sui (3571’ /”C/Wdt_ w A P (no 06007 ' at + (5" moss I + flaw/J 750 + /@ 394 Fyfl< / (5% 1:: 5'” ’7/ 0+ L, 0.00 ’ Mob (also. 2mg) 0 C/ 6.4:» o» 54% 0" IEMMJ (2000)) pgmm; I41 DEF—Mm Mm; (5'50 D flJ‘LaaT/I'bfi’f’fud 07: 054/) F4“ (Jug) “((70 1 , ”Er 403”JT"'L5~ZJ 935+ 6/: FILM... OflmA'nod/J 7085 /NvéJT/v(1 3%sz OF 4440 FMCEFAI /0 0° + 30¢ 01‘ fiawm flaws/J; NUo+ ”44464:: 0" Emflmmr <52“)? LN” 4:3“ m” V (F 7’0 (Wfiar. m. @5120) gfw/wcw/ m ‘ ~15” fl/‘WOEF 0F 57 N17! ””7 (365” 4/31” CZ°°°> , as + anrflflhw Lug ”Muff Or LTA/om; 0416/5140 +9650“ VVTW) Cfl 70-0) DCCL " 1),.) [)4 . D ’ DIV/0M! ”mo 7—3“ + 91f\ (SM/15> 54% OF CA (ll—U” ~/ooc,> [5730 7L /SJMW oi; fin/0 SS7“ L CF 711‘- Fwnumve kc-r. (/1315>> @ :CA‘WC: m/ om: (57¢g7( , mo“; Cfglf 1‘6de WM ‘ ‘”‘~‘*-~-~\\.____ _ anLWE of LAMB o-uTH 0/1" /6au3 SM; (A Put/um: 0(- fizmml’ 0W UMP Bam— am 37150: $91,532:) Woo) ...
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