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Week Four Exercise Assignment

 

Liability
 

1. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing
 

• Social Security taxes: 4% on the first $55,000 earned per employee
• Medicare taxes: 1.5% on the first $130,000 earned per employee
• Federal income taxes withheld from wages: $7,500
• State income taxes: 4% of gross earnings
• Insurance withholdings: 1% of gross earnings
• State unemployment taxes: 5.4% on the first $7,000 earned per employee
• Federal unemployment taxes: 0.8% on the first $7,000 earned per employee
 

The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end and no wages have been paid during the month.
 

a. Prepare the necessary entry to record Brookhaven’s February payroll. The entry will include deductions for the following
 

• Social Security taxes
• Medicare taxes
• Federal income taxes withheld
• State income taxes
• Insurance withholdings

 

b. Prepare the journal entry to record Brookhaven’s payroll tax expense. The entry will include the following
 

• Matching Social Security taxes
• Matching Medicare taxes
• State unemployment taxes
• Federal unemployment taxes
 

2. Current liabilities: entries and disclosure. A review of selected financial activities of Visconti’s during 20XX disclosed the following

 

1-Dec: Borrowed $10,000 from the First City Bank by signing a 3-month, 15% note payable.
Interest and principal are due at maturity.
10-Dec: Established a warranty liability for the XY-80, a new product. Sales are expected to
total 1,000 units during the month. Past experience with similar products indicates
that 3% of the units will require repair, with warranty costs averaging $27 per unit (parts only).
22-Dec: Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10, n/30.
26-Dec: Borrowed $5,000 from First City Bank; signed a 15% note payable due in 60 days. (Assume 360 day year for interest)
31-Dec: Repaired six XY-80s during the month at a total cost of $162
31-Dec: Accrued three days of salaries at a total cost of $1,400.
 

Instructions
 

a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on December 31 to record accrued interest for each of the notes payable.

 

3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31
 

2-Aug: Borrowed $55,000 from the Bank of Kingsville by signing a 90-day, 12% note.
20-Aug: Issued a $50,000 note to Harris Motors for the purchase of a $50,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.
 

10-Sep: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.
 

11-Sep: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.
 

10-Oct: The note to Pans Enterprises was paid in full.

11-Oct: The note to Datatex Equipment was paid in full.
 

30-Oct: Paid note to Bank of Kingsville.
 
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Instructions
 

a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on December 31 to record accrued interest. (Daily interest is calculated utilizing the 360 day method).
c. Prepare the Current Liability section of Red Bank’s balance sheet as of December 31. Assume that the Accounts Payable account totals $203,600 on this date.
 

Week Five Exercise Assignment
Financial Ratios
 

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10
 

Edison Stagg Thornton
Cash $6,000 $5,000 $4,000
Short-term investments 3,000 2,500 2,000
Accounts receivable 2,000 2,500 3,000
Inventory 1,000 2,500 4,000
Prepaid expenses 800 800 800
Accounts payable 200 200 200
Notes payable: short-term 3,100 3,100 3,100
Accrued payables 300 300 300
Long-term liabilities 3,800 3,800 3,800

 

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
 

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc
 

20X5 20X4
Net credit sales $832,000 $760,000
Cost of goods sold 530,000 400,000
Cash, Dec. 31 125,000 110,000
Average Accounts receivable 205,000 156,000
Average Inventory 70,000 50,000
Accounts payable, Dec. 31 115,000 108,000
 

Instructions
 

a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

 

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com¬pany reported the following information for 20X7

 

Net sales $1,750,000
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,200,000
Average common stockholders’ equity 500,000

 

a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly ex¬plain.
 

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
 

20X2 20X1
Current Assets $86,000 $80,000
Property, Plant, and Equipment (net) 99,000 90,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 160,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000

 

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.
 

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.
 

20X2 20X1
Current Assets $86,000 $80,000
Property, Plant, and Equipment (net) 99,000 80,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 150,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000
 

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.
 

6. Ratio computation. The financial statements of the Lone Pine Company follow.
 

LONE PINE COMPANY
 

Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2 20X1
Assets
Current Assets
Cash and Short-Term Investments $400 $600
Accounts Receivable (net) 3,000 2,400
Inventories 3,000 2,300
Total Current Assets $6,400 $5,300
Property, Plant, and Equipment
Land $1,700 $500
Buildings and Equipment (net) 1,500 1,000
Total Property, Plant, and Equipment $3,200 $1,500
Total Assets $9,600 $6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable $2,800 $1,700
Notes Payable 1,100 1,900
Total Current Liabilities $3,900 $3,600
Long-Term Liabilities
Bonds Payable 4,100 2,100
Total Liabilities $8,000 $5,700
Stockholders’ Equity
Common Stock $200 $200
Retained Earnings 1,400 900
Total Stockholders’ Equity $1,600 $1,100
Total Liabilities and Stockholders’ Equity $9,600 $6,800
 

LONE PINE COMPANY
 

Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales* $36,000
Less: Cost of Goods Sold $20,000
Selling Expense 6,000
Administrative Expense 4,000
Interest Expense 400
Income Tax Expense 2,000 32,400
Net Income $3,600
Retained Earnings, Jan. 1 900
Ending Retained Earnings $4,500
Cash Dividends Declared and Paid 3,100
Retained Earnings, Dec. 31 $1,400
*All sales are on account.
 

Instructions
 

Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary
 

a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
 

e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders’ equity
h. Debt-to-total assets
i. Number of times that interest is earned
 
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