Question :
16.On December 31, 2015, Carlson Incorporated had total liabilities of : 1241698
16.On December 31, 2015, Carlson Incorporated had total liabilities of $60,000 and total shareholders’ equity of $100,000, resulting in a debt/equity ratio of 0.60 before warranty expense is recognized. On December 31, 2015, Carlson estimated warranty expense to be 5% of sales of $100,000. What is Carlson’s debt/equity ratio after the warranty expense and related liability is recognized?
17.On March 2, 2015, KnightCompany’s CFO, Bob Martin, will receive a bonus equal to 6% of net income before income taxes as reported for the year ended December 31, 2014. The current 2014 income statement shows net income before income taxes as $600,000.
Required:
(1)What journal entry should be made on December 31, 2014?
(2)What journal entry should be made on March 2, 2015?
(3)If Bob decides to postpone $50,000 of 2014 research and development expenditures until 2015, what impact would this have on his bonus? Explain and show your calculations.
18.On December 31, 2015, Stanley Co. had current assets of $20,000 (all cash) and current liabilities of $9,000 in accounts payable, resulting in a current ratio of 2.22. On December 31, 2015, Stanley purchases $6,000 of inventory on account. Calculate Stanley’s current ratio after the inventory has been purchased.
19.Vista Corporation, producer of computer software packages, began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. At the beginning of business operations, Vista produced the following projected income statement and balance sheet for the first year. All amounts are in thousands.
Vista Corporation
Projected Income Statement
First Year of Operations
Sales
$100,000
Expenses:
Warranty
$10,000
Depreciation
40,000
Research
20,000
70,000
Operating income before bonus
$ 30,000
Bonus
3,000
Operating income
$ 27,000
Interest expense
7,000
Income before taxes
$ 20,000
Income taxes (40%)
8,000
Net income
$ 12,000
Vista Corporation
Projected Balance Sheet
December 31 of First Year
Assets:
Cash
$ 30,000
Accounts receivable
24,000
Net computers
158,000
Total assets
$212,000
Liabilities &Shareholders’ Equity:
Accounts payable
$ 50,000
Warranty payable
10,000
Long-term debt
80,000
Common stock
60,000
Retained earnings
12,000
Total liabilities and shareholders’ equity
$212,000
The new president is rather disappointed with these projected results having just quit a job of which his compensation package was $4,000,000. After examining the forecasts of a bonus of only $3,000,000, the president decides to use his knowledge of financial statements to modify his bonus. He meets with the company’s CFO the next day to see what could be done. He suggested the following possibilities that would boost the first year’s income:
1.Slash research and development expenditures, which are paid in cash, from $20 million to $10 million.
2.Double the estimated life of the computers, which will decrease depreciation expense from $40 million to $20 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated. Taxes require immediate payment.
3.Reduce estimated warranty expense from 10% of sales to 7% of sales.
4.Any resultant change in the bonus of 10% of operating income before the bonus will be paid to the president in cash.
A.Adjacent to the income statement for Year 1, create a new statement using the alternative accounting procedures and operating decisions.
B.Compare the president’s compensation if the changes in part A are enacted with his current compensation. What are the ramifications of these changes on the future?
20.On December 31, 2015, Cocoa Incorporated had total liabilities of $80,000 and total shareholders’ equity of $100,000, resulting in a debt/equity ratio of 0.80 before executive bonus expense is recognized. During 2015, Cocoa’s CEO earned a 5% bonus on net income before bonus of $100,000. If Cocoa pays the bonus due its CEO on December 31, 2015, what is Cocoa’s debt/equity ratio after the bonus expense and what related liability is recognized?
21.Howell Incorporated current income statement and December 31 balance sheet follow:
Income Statement
Revenue
$180,000
Expenses and losses
130,000
Net income
$ 50,000
Balance Sheet
Current assets
$ 10,000
Long-lived assets
200,000
Total assets
$210,000
Current liabilities
$ 5,000
Long-term liabilities
95,000
Shareholders’ equity
110,000
Total liabilities and shareholders’ equity
$210,000
During an audit of Howell’s current financial statements, its auditor discovered that Howell is a defendant in a $20,000 lawsuit for infringement of patent rights. Howell’s management, under the advice of its legal counsel, decided that it was only reasonably probable that they would lose the suit and have to pay $20,000. However, its auditor disagreed with the treatment of the contingent loss and effectively argued that it is probable that the lawsuit will require Howell to pay $20,000 in the forthcoming year. The management of Howell decided to “take a bath” and treat the $20,000 lawsuit consistent with GAAP on probable conditional liabilities.
A.Reconstruct Howell current income statement and 12/31 balance sheet under the auditor’s judgment concerning the $20,000 lawsuit
B.Calculate and compare current, debt/equity, and debt/asset ratios resulting from Howell’s initial and reconstructed financial statements. Comment on Howell’s solvency.
