Problem 13-2B (60 minutes)
Part 1
Current ratio: December 31, 2015: $54,860 / $22,370 = 2.5 to 1
December 31, 2014: $32,660 / $19,180 = 1.7 to 1
December 31, 2013: $36,300 / $16,500 = 2.2 to 1
Part 2
BLUEGRASS CORPORATION
Common-Size Comparative Income Statements
For Years Ended December 31, 2015, 2014, and 2013
2015
2014
2013
Sales ……………………………………………………
100.00%
100.00%
100.00%
Cost of goods sold …………………………..
54.77
51.91
Gross profit …………………………………………
45.23
48.09
Selling expenses …………………………….……
11.41
11.92
Administrative expenses………………………
8.43
8.80
Total expenses ……………………………….……
19.84
20.72
Income before taxes ……………………….….
25.39
27.36
Income taxes ………………………………….……
3.04
3.56
Net income …………………………………….……
22.34%
23.80%
* Some totals do not reconcile due to rounding.
Problem 13-2B (Concluded)
Part 3
BLUEGRASS CORPORATION
Balance Sheet Data in Trend Percents
December 31, 2015, 2014, and 2013
2015
2014
2013
Assets
Current assets ………………………………..……
151.13%
89.97%
100.00%
Long-term investments …………………..……
0.00
16.04
100.00
Plant assets …………………………………………
142.80
143.87
100.00
Total assets …………………………………………
133.18
117.57
100.00
Liabilities and Equity
Current liabilities …………………………….……
135.58%
116.24%
100.00%
Common stock ……………………………….……
125.68
125.68
100.00
Other paid in capital ……………………….….
122.57
122.57
100.00
Retained earnings …………………………..
139.03
112.09
100.00
Total liabilities and equity ……………….……
133.18
117.57
100.00
Part 4
Significant relations revealed
Bluegrass’s cost of goods sold took a larger percent of sales each year.
Selling and administrative expenses and income taxes took a somewhat
smaller portion each year, but not enough to offset the effect of cost of
goods sold. As a result, income became a smaller percent of sales each
year.
The large expansion of plant assets in 2014 was financed by a reduction in
current assets, an increase in current liabilities, a large reduction in long–
term investments, and apparently by a stock sale. One effect of this plan
was to reduce the current ratio. However, the current ratio recovered in
2015. This apparently resulted from profits, limiting the amount of
Problem 13-3B (60 minutes)
Trans-
action
Current
Assets
Quick
Assets
Current
Liabilities
Current
Ratio
Acid-Test
Ratio
Working
Capital
Beginning*
$300,000
$168,000
$120,000
2.50
1.40
$180,000
June 1
+120,000
+120,000
– 75,000
_______
________
____
____
_______
Bal.
345,000
288,000
120,000
2.88
2.40
225,000
June 3
+ 88,000
+ 88,000
– 88,000
– 88,000
________
____
____
_______
Bal.
345,000
288,000
120,000
2.88
2.40
225,000
June 5
+150,000
________
+150,000
____
____
_______
Bal.
495,000
288,000
270,000
1.83
1.07
225,000
June 7
+100,000
+100,000
+100,000
____
____
_______
Bal.
595,000
388,000
370,000
1.61
1.05
225,000
June 10
+120,000
+120,000
_______
____
____
_______
Bal.
715,000
508,000
370,000
1.93
1.37
345,000
June 12
– 275,000
– 275,000
________
____
____
_______
Bal.
440,000
233,000
370,000
1.19
0.63
70,000
June 15
________
________
+ 80,000
____
____
_______
Bal.
440,000
233,000
450,000
0.98
0.52
(10,000)
June 19
+0
+0
________
____
____
_______
Bal.
440,000
233,000
450,000
0.98
0.52
(10,000)
June 22
– 12,000
– 12,000
– 12,000
____
____
_______
Bal.
428,000
221,000
438,000
0.98
0.50
(10,000)
June 30
– 80,000
– 80,000
– 80,000
____
____
_______
Bal.
$348,000
$141,000
$358,000
0.97
0.39
(10,000)
*Beginning balances
Current assets (given) …………………………..
$300,000
Current liabilities ($300,000 / 2.50) ………..…………..
120,000
Quick assets ($120,000 x 1.40) ……………..…………..
168,000
Problem 13-4B (50 minutes)
1. Current ratio
2. Acid-test ratio
3. Days’ sales uncollected
4. Inventory turnover
5. Days’ sales in inventory
6. Debt–to-equity ratio
7. Times interest earned
8. Profit margin ratio
$6,100 + $6,900 + $12,100 + $3,000 + $13,500 + $2,000
$11,500 + $3,300 + $2,600
$6,100 + $6,900 + $12,100 + $3,000
$11,500 + $3,300 + $2,600
$12,100 + $3,000
$315,500
$236,100
($13,500 + $17,400)/2
$13,500
$236,100
$23,800
$315,500
Problem 13–4B (Concluded)
9. Total asset turnover
10. Return on total assets
11. Return on common stockholders’ equity
$315,500
($117,500 + $94,900)/2
$23,800
($117,500 + $94,900)/2
$23,800
($70,100 + $54,300)/2
Problem 13-5B (60 minutes)
Part 1
Fargo Company
Ball Company
a. Current ratio
= 2.3 to 1
= 2.1 to 1
= 1.2 to 1
= 1.2 to 1
c. Accounts (and notes) receivable turnover
= 4.9 times = 8.7 times
$393,600
($77,100 + $11,600 + $72,200)/2
$205,200
$90,500
$108,700
$90,500
$208,100
$97,000
$116,000
$97,000
$667,500
($70,500 + $9,000 + $73,300)/2
Problem 13–5B (Concluded)
Part 2
Fargo Company
Ball Company
a. Profit margin ratio
= 8.6% = 9.2%
f. Dividend yield
= 6.0% = 6.0%
Investment analysis: Ball’s profit margin, total asset turnover, return on total
$33,850
$393,600
$1.27
$1.50
$25
$61,700
$667,500
$2.19
$1.50
$25
Problem 13–6BA (60 minutes)
Part 1 Effect of income taxes (debits or losses in parentheses)
Pretax
25% Tax
Effect
After-Tax
e. Loss on hurricane damage ……………………………………………….
(64,000)
(16,000)
(48,000)
l. Loss from operating a discontinued segment …………………….
(120,000)
(30,000)
(90,000)
n. Correction of overstatement of prior year’s expense ………….
48,000
12,000
36,000
p. Loss on sale of discontinued segment’s assets ………..……….
(180,000)
(45,000)
(135,000)
Part 2 Income from continuing operations (and its components)
c.
Net sales ……………………………………………………….
$2,640,000
b.
Interest revenue …………………………………………………….
20,000
j.
Gain from settling lawsuit ……………………………..……….
68,000
Total revenues and gains ……………………………..……….
2,728,000
o.
Cost of goods sold ……………………………………….……….
$1,040,000
h.
Depreciation expense—Equipment ……………….……….
100,000
m.
Depreciation expense—Buildings ………………………….
156,000
g.
Other operating expenses …………………………....……….
328,000
k.
Loss on sale of equipment …………………………………….
24,000
i.
Loss from settling lawsuit …………………………….……….
36,000
Total expenses and losses …………………………………….
1,684,000
Income from continuing operations before taxes ..……….
1,044,000
d.
Income taxes expense (25%) …………………………..
(261,000)
Income from continuing operations after taxes …..……….
$ 783,000
Problem 13–6BA (Concluded)
Part 3 Income from discontinued segment
l.
Loss from operating a discontinued segment (after-tax) ………………
$ (90,000)
p.
Loss on sale of discontinued segment’s assets (after-tax) …..………
(135,000)
Loss from discontinued segment …………………………………………
$(225,000)
Part 4 Income before extraordinary items
Income from cont. operations after taxes (from Part 2) …….……….
$ 783,000
Loss from discontinued segment (from Part 3) ………………..……….
(225,000)
Income before extraordinary items ……………………………..……….
$ 558,000
Part 5 Net income
Income before extraordinary items ……………………………….……..
$ 558,000
Extraordinary item:
e.
Loss on hurricane damage (after-tax) …………………………………..
(48,000)
Net income ……………………………………………………….………….……..
$ 510,000