Ch.5 finance Quiz

Question
Exercise 5-1

On June 1, 2011, the Luttman and Dowd Company sold inventory to the Ushman Corporation for $400,000. Terms of the sale called for a down payment of $100,000 and four annual installments of $75,000 due on each June 1, beginning June 1, 2012. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $150,000. The company uses the perpetual inventory system.

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Required:

1. Compute the amount of gross profit to be recognized from the installment sale in 2011, 2012, 2013, 2014, and 2015 using point of delivery revenue recognition. Ignore interest charges.

2. Repeat requirement 1 applying the installment sales method.

3. Repeat requirement 1 applying the cost recovery method.

Exercise 5-2

The Ugenti Construction Company contracted to construct a warehouse building for $2,600,000. Construction began in 2011 and was completed in 2012. Data relating to the contract are summarized below:

2011 2012

Costs incurred during the year…………………………… $ 360,000 $1,650,000

Estimated costs to complete as of 12/31…………… 1,560,000 –

Billings during the year ……………………………………… 430,000 2,170,000

Cash collections during the year………………………… 320,000 2,280,000

Required:

1. Compute the amount of gross profit or loss to be recognized in 2011 and 2012 using the percentage-of-completion method.

2. Compute the amount of gross profit or loss to be recognized in 2011 and 2012 using the completed contract method.

3. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2011 using the percentage-of completion method.

4. Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2011 using the completed contract method.

Exercise 5-3

On April 13, 2011, the Pagano Construction Company entered into a three-year construction contract to build a mall for a price of $12,000,000. During 2011, costs of $3,000,000 were incurred with estimated costs of $6,000,000 yet to be incurred. Billings of $3,800,000 were sent and cash collected was $3,250,000.

In 2012, costs incurred were $4,000,000 with remaining costs estimated to be $5,600,000. 2012 billings were $3,500,000 and $3,600,000 cash was collected. The project was completed in 2013 after additional costs of $5,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow uses the percentage-of-completion method.

Required:

1. Calculate the amount of gross profit or loss to be recognized in each of the three years.

2. Prepare journal entries for 2011 and 2012 to record the transactions described (credit “Various accounts” for construction costs incurred).

3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2011 and 2012.

Exercise 5-4

On November 15, 2011, the Coldstone Ice Cream Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $25,000, Coldstone will provide initial services to the franchisee to include assistance in design and construction of the building, help in training employees, help in obtaining financing, and management advice over the first five years of the ten-year franchise agreement.

50% of the initial franchise fee is payable on November 15, 2011, with the remaining $12,500 payable in five equal annual installments beginning on November 15, 2012. These installments will include interest at an appropriate rate. The franchise opened for business on February 15, 2012.

Required:

Assume that the initial services to be performed by Coldstone subsequent to November 15, 2011, are substantial and that collectibility of the installment receivable is reasonably certain. Substantial performance of the initial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries for the following dates (ignoring interest charges):

1. November 15, 2011, and

2. February 15, 2012.

Exercise 5-5

The year 2011 income statement of Garret & Sons Music Company reported net sales of $10 million, cost of goods sold of $6 million, and net income of $1 million. The following table shows the company’s comparative balance sheets for 2011 and 2010:

($ in 000s)

Assets: 2011 2010

Cash…………………………………………………………………………. $ 240 $ 280
Accounts receivable…………………………………………………. 800 600
Inventory…………………………………………………………………. 850 700
Property, plant, and equipment (net)……………………….. 2,600 2,520
Total assets………………………………………………………….. $4,490 $4,100
Liabilities and Shareholders’ Equity:

Current liabilities………………………………………………………. $ 720 $ 650
Notes payable………………………………………………………….. 600 1,000
Paid-in capital………………………………………………………….. 2,000 2,000
Retained earnings…………………………………………………….. 1,170 450
Total liabilities and shareholders equity……………….. $4,490 $4,100

Some industry averages for the company’s line of business are:

_______________________________________

inventory turnover 6 times

average collection period 28 days

asset turnover 2 times

_______________________________________

Required:

Assess Garret & Son’s asset management relative to its industry.

Exercise 5-6

The following condensed information was reported by Sanders Manufacturing, Inc. for 2011 and 2010:

($ in 000s)

2011 2010
Income statement information:

Net sales $7,200 $6,800
Net income 360 408

Balance Sheet information:

Current assets…………………………………………………….. $ 800 $ 750
Property, plant, and equipment (net)…………………. 2,100 1,950
Total assets……………………………………………………… $2,900 $2,700

Current liabilities………………………………………………… $ 250 $ 400
Long-term liabilities…………………………………………… 950 750
Paid-in capital……………………………………………………. 1,000 1,000
Retained earnings………………………………………………. 700 550
Liabilities and shareholders’ equity………………… $2,900 $2,700

Required:

1. Determine the following ratios for 2011:

a. profit margin on sales

b. return on assets

c. return on shareholders’ equity

2. Calculate the DuPont framework for Sanders for 2011.

3. Determine the amount of dividends paid to shareholders during 2011.

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