Comprehensive Problem, cont.
Requirement 8
Liquidity Ratios:
Current ratio = Total current assets / Total current liabilities
= $1,255,355 / $295,000
= 4.26
Analysis:
Top Quality Appliance—Long Beach has substantially high liquidity ratios indicating the company has
the means to pay its current debts, even if they became due immediately.
Comprehensive Problem, cont.
Requirement 8, cont.
Efficiency Ratios:
Accounts receivable turnover = Net credit sales* / Average net accounts receivable
= $1,615,000 / [($0 + $256,500) / 2]
= $1,615,000 / $128,250
= 12.59
Critical Thinking
Tying It All Together Case 9-1
Before you begin this assignment, review the Tying It All Together feature in the chapter. It will
McDonald’s Corporation is the world’s leading global food service retailer with more than 36,000
locations worldwide in more than 100 countries. The corporation operates and franchises McDonald’s
restaurants, which serve menu items such as the Big Mac, Chicken McNuggets, and McFlurry desserts.
In addition, McDonald’s also serves McCafe beverages and pastries.
Requirements
1. Where would McDonald’s Corporation report plant assets on its financial statements? How are plant
assets reported and what is the value as of December 31, 2015?
2. Does McDonald’s Corporation depreciate its plant assets? How do you know? What is the
depreciation method used and the useful lives?
3. How is the book value of plant assets calculated? What is the net book value of McDonald’s plant
assets as of December 31, 2015?
4. What type of intangibles would be included on McDonald’s financial statements and where?
5. What is goodwill? Does McDonald’s Corporation report goodwill? If so, how much goodwill is
reported as of December 31, 2015? What does McDonald’s goodwill primarily result from?
SOLUTION
Requirement 1
Ethical Issue 9-1
Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the
maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to
the land. A more realistic allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
SOLUTION
Fraud Case 9-1
Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30
years, and he knows where the angles are. He makes sure that when new trucks are purchased, the
residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by
the county at residual value. Jim makes sure his buddies in the construction business are first in line for
the bargain sales, and they make sure he gets a little something back. Recently, a new county
commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this
man has a business degree, and he is coming to visit Jim tomorrow.
Requirements
1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?
2. How do businesses determine what residual values to use for their various assets? Are there “hard and
fast” rules for residual values?
3. How would an organization prevent the kind of fraud depicted here?
SOLUTION
Financial Statement Case 9-1
View a link to Target Corporation’s Fiscal 2015 annual report at http://www.pearsonhighered.com/Horngren.
Refer to the Target Corporation financial statements, including Notes 14 and 15. Answer the following questions.
Requirements
1. Which depreciation method does Target Corporation use for reporting in the financial statements? What type
of depreciation method does the company probably use for income tax purposes?
2. What was the amount of depreciation and amortization expense for the year ending January 30, 2016?
3. The statement of cash flows reports the cash purchases of property, plant, and equipment. How much were
Target’s additions to property, plant, and equipment during the year ending January 30, 2016? Did Target
record any proceeds from the sale of property, plant, and equipment?
4. What was the amount of accumulated depreciation at January 30, 2016? What was the net book value of
property, plant, and equipment for Target as of January 31, 2016?
5. Compute Target’s asset turnover ratio for year ending January 30, 2016. Round to two decimal places. How
does Target’s ratio compare with that of Kohl’s Corporation?
SOLUTION
Requirement 1
Communication Activity 9-1
In 150 words or fewer, explain the different methods that can be used to calculate depreciation. Your explanation
should include how to calculate depreciation expense using each method.
SOLUTION