CHAPTER 18
SOLUTIONS TO PROBLEMS: SET B
PROBLEM 18-1B
(a) Condensed Income Statement
For the Year Ended December 31, 2017
Laker Company
McGee Company
Percent
Dollars
Percent
Net sales
Cost of goods sold
100.0%
68.8%
$340,000
238,000
100.0%
70.0%
$117,935
$829,848
(b) Laker Company appears to be more profitable. It has higher relative
gross profit, income from operations, income before taxes, and net income.
stockholders’ equity of 17.9%
$117,935
$659,528
c is higher than McGee’s return on
PROBLEM 18-1B (Continued)
a$117,935 is Laker’s 2017 net income. $829,848 is Laker’s 2017 average
assets:
2017
2016
Current assets
$325,975
$312,410
2017
2016
Current assets
$ 83,336
$ 79,467
b$14,098 is McGee’s 2017 net income. $214,172 is McGee’s 2017 average
assets:
c$117,935 is Laker’s 2017 net income. $659,528 is Laker’s 2017 average
stockholders’ equity:
2017
2016
Common stock
$500,000
$500,000
2
d$14,098 is McGee’s 2017 net income. $154,047 is McGee’s 2017 average
stockholders’ equity:
2017
2016
Common stock
$120,000
$120,000
PROBLEM 18-2B
(a) Earnings per share =
$210,000
62,500
= $3.36.
(b) Return on common stockholders’ equity =



$210,000
$465,400+$556,700
2
$210,000
$511,050
(c) Return on assets =



$210,000
$852,800+$970,200
2
=
$210,000
$911,500
= 23.0%.
(f) Accounts receivable turnover =
$1,828,500
($102,800+ $122,800 )
2
PROBLEM 18-2B (Continued)
(g) Inventory turnover =
$1,010,500
$115,500+ $118,000
2
=
$1,010,500
$116,750
= 8.7 times.
(h) Times interest earned =
$302,000
$17,000
= 17.8 times.
PROBLEM 18-3B
(a)
2016
2017
(1)
Profit margin.
$30,000
$650,000
= 4.6%
$45,000
$700,000
= 6.4%
(2)
Asset turnover.
(3)
Earnings per share.
$30,000
32,000
= $0.94
$45,000
35,000
= $1.29
(4)
Price-earnings ratio.
(5)
Payout ratio.
$18,000
$30,000
*
*($113,000 + $30,000 – $125,000)
**($125,000 + $45,000 – $145,000)
(6)
= 60.0%
$25,000
$45,000
**
= 55.6%
PROBLEM 18-3B (Continued)
(b) The underlying profitability of the corporation appears to have improved. For
example, profit margin and earnings per share have both increased. In
addition, the corporation’s price-earnings ratio has increased, which
PROBLEM 18-4B
(a) LIQUIDITY
2016
2017
Change
Current
$65,000 + $40,000 + $90,000 + $125,000 + $20,000 = 1.9:1
$100,000 + $42,000 + $40,000
$364,000 = 2.0:1
$185,000
Increase
Acid-test
$65,000 + $40,000 + $90,000 = 1.1:1
$100,000 + $42,000 + $40,000
$209,000 = 1.1:1
$185,000
No change
Inventory
An overall increase in short-term liquidity has occurred.
PROFITABILITY
Profit
margin
$30,000 = 3.8%
$780,000*
$35,000 = 4.2%
$840,000
Increase
Asset
assets
Increase
Earnings
per share
Increase
PROBLEM 18-4B (Continued)
(b)
2017
2018
Change
1.
Return on
common
stockholders’
equity
$35,000 = 10.4%
$336,000 (a)
$40,000 = 8.5%
$469,000 (b)
Decrease
3.
Price-earnings
ratio
$9.00 = 5.1 times
$1.75
$12.60 = 6.3 times
$2.00 (c)
Increase
PROBLEM 18-5B
(a)
Ratio
Target
Wal-Mart
(All Dollars Are in Millions)
Times interest earned
5.1 ($4,402g ÷ $866)
11.5 ($21,502h÷ $1,863)
(1)
(2)
(3)
(4)
Current
Accounts receivable turnover
Average collection
period
Inventory turnover
1.7:1 ($17,488 ÷ $10,512)
7.8 ($62,884 ÷ $8,069)
46.8 (365 ÷ 7.8)
7.1 ($44,157 ÷ $6,243)
.8:1 ($47,585 ÷ $58,454)
115.3 ($374,526 ÷ $3,247)
3.2 (365 ÷ 115.3)
8.3 ($286,515 ÷ $34,433)
a($44,106 + $44,560) ÷ 2 e($10,512 + $19,882)
(b) The comparison of the two companies shows the following:
Liquidity—Target’s current ratio of 1.7:1 is significantly better than Wal-
Mart’s .8:1. However, Wal-Mart has a better inventory turnover ratio than
Target and its account receivable turnover is substantially better than
Target’s.
PROBLEM 18-6B
(a) Current ratio =
$235,000
$145,000
= 1.6:1.
(b) Acid-test ratio =
$41,000+ $18,000+ $90,000
$145,000
= 1.0:1.
(d) Inventory turnover =
$410,000
$86,000 +$69,000
2
= 5.3 times.
(f) Asset turnover =
$640,000
$638,000+ $560,000
2
$638,000+ $560,000
2
= 1.1 times.
(h) Return on common stockholders’ equity =


$54,500
$403,000+$350,000
PROBLEM 18-6B (Continued)
(i) Earnings per share =
$54,500
30,000 (1)
= $1.82.
(k) Payout ratio =
$1,500 (2)
$54,500
= 2.8%.
(2) $200,000 + $54,500 – $253,000
PROBLEM 18-7B
Accounts receivable turnover = 10 =
$11,000,000
Average receivables
Average accounts receivable =
$11,000,000
10
= $1,100,000
Profit margin = 15% = .15 =
Netincome
$11,000,000
Net income = $11,000,000 X .15 = $1,650,000
Income before income taxes = $1,650,000 + $580,000 = $2,230,000
Assets (12/31/17) = $6,750,000
Total current assets = $6,750,000 – $4,550,000 = $2,200,000
Inventory = $2,200,000 – $1,250,000 – $440,000 = $510,000
PROBLEM 18-7B (Continued)
Current ratio = 2.5 =
$2,200,000
Currentliabilities
Inventory turnover = 5.3 =
Cost of goods sold
$1,720,000+ $510,000
2
Cost of goods sold = $1,115,000 X 5.3 = $5,909,500
PROBLEM 18-8B
LARAMIE CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Operating revenues
($12,700,000 – $3,000,000) …………………… $9,700,000
Operating expenses
($8,700,000 – $4,000,000) …………………….. 4,700,000
Income from operations …………………………. 5,000,000
Other revenues and gains ………………………. 200,000
Loss from operations of hotel
chain*, net of $300,000 income
tax savings ………………………………….. $700,000
PROBLEM 18-9B
STARSHIP CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2017
Net sales …………………………………………………… $1,700,000
Cost of goods sold …………………………………….. 900,000
Gross profit……………………………………………….. 800,000
Selling and administrative expenses
($100,000 + $200,000) …………………………….. 300,000
Income tax expense ($490,000 X 30%) …………. 147,000
Income from continuing operations ……………. 343,000
Discontinued operations
Income from operations of discontinued
division, net of $21,000 income taxes ….. 49,000