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.