*EXERCISE 24.8 (15–20 minutes)
(a) 1. Retained Earnings ……………………………………… 75,000
Warranty Liability …………………………………. 75,000
TIME AND PURPOSE OF PROBLEMS
Problem 24.1 (Time 40–50 minutes)
Problem 24.2 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the rules for segment reporting. The student
*Problem 24.3 (Time 35–45 minutes)
Purpose—to provide the student with an understanding of certain key ratios. In addition, the student is
*Problem 24.4 (Time 40–60 minutes)
Purpose—to provide the student with an understanding of the conceptual merits in the presentation of
*Problem 24.5 (Time 40–50 minutes)
Purpose—to provide the student with a situation in which ratio analysis is used in a decision concerning
payment of dividends.
SOLUTIONS TO PROBLEMS
PROBLEM 24.1
ALMADEN AG
Statement of Financial Position
December 31, 2019
Assets
Non-current assets
Long-term investments
Investments in land …………….. € 185,000
Cash restricted for plant
expansion ……………………….. 300,000 €485,000
Current assets
Prepaid expenses ……………….. 62,400
Inventories …………………………. 645,100
Notes receivable …………………. 162,300
PROBLEM 24.1 (Continued)
Equity and Liabilities
Equity
Share capital—ordinary,
Non-current liabilities
Notes payable (due 2022) ……… 157,400
Current liabilities
Accounts payable …………………. 510,000
Unearned revenue ………………… 489,500
Dividends payable ………………… 200,000
*Retained earnings €2,810,600
Accrued wages omitted (225,000)
Accrued interest (40,000)
€2,545,600
PROBLEM 24.1 (Continued)
Additional comments:
1. The information related to the competitor should be disclosed because
this innovation may have a significant effect on the company. The value
2. The pledged assets should be described in the statement of financial
position as indicated or in a footnote.
6. Technically, the plant and equipment account should be separately dis-
closed and depreciation computed on each item individually. However,
the information to divide the accounts was not given in this problem.
8. Since the loss from heavy damage was caused by a fire after the financial
statement date, this event does not reflect conditions existing at that
PROBLEM 24.2
(a) Determination of reportable segments:
1. Revenue test: 10% X $785,000* = $78,500. Only Segment C ($580,000)
meets this test.
(b) Disclosures required by IFRS:
A
B
C
Other
Totals
External Revenues
$40,000
$ 55,000
$480,000
$ 90,000
$665,000
Intersegment Revenues
20,000
100,000
120,000
Total Revenues
75,000
580,000
90,000
$785,000
Cost of Goods Sold
Operating Expenses
40,000
235,000
30,000
Total Expenses
90,000
505,000
79,000
Operating Profit (Loss)
$11,000
$ 75,000
$ 11,000
$ 82,000
Identifiable Assets
$35,000
$ 80,000
$500,000
$115,000
$730,000
Reconciliation of revenues
Total segment revenues ……………………………………………….. $785,000
PROBLEM 24.2 (Continued)
Reconciliation of profit or loss
Total segment operating profit ……………………………………… $ 82,000
Reconciliation of assets
Total segment assets …………………………………………………… $730,000
*PROBLEM 24.3
(a) BRADBURN PLC
Financial Statistics
Current ratio =
Current assets
Current liabilities
Quick ratio =
2018:
= 1.70 to 1
2019:
= 1.82 to 1
Inventory turnover =
Cost of goods sold
Average inventory
£1,530,000
2019:
£50,000 + £105,000
= 19.7 times (every 18.5 days)
2
Return on assets =
2018:
= 17.3%
= 20.4%
*PROBLEM 24.3 (Continued)
5.
Percent Changes
Amounts
Percent Increase
(000s omitted)
2019
2018
Sales revenue
£3,000
£2,700
£300
= 11.11%
£2,700
Cost of goods sold
£105
£1,425
Gross margin
= 15.29%
£1,275
(b) Other financial reports and financial analyses which might be helpful
to the commercial loan officer of Hibernia Bank include:
1. The Statement of Cash Flows would highlight the amount of cash
2. Projected financial statements for 2020 including a projected Statement
3. A closer examination of Bradburn’s liquidity by calculating some addi-
4. An examination as to the extent that leverage is being used by
Bradburn.
(c) Bradburn PLC should be able to finance the plant expansion from
internally generated funds as shown in the calculations presented on
the next page.
*PROBLEM 24.3 (Continued)
(000 omitted)
2019
2020
2021
Sales revenue
£3,000.0
£3,333.3
£3,703.6
Cost of goods sold
1,530.0
1,642.8
1,763.8
Gross margin
Operating expenses
860.0
948.2
1,045.5
Income before taxes
Income taxes (40%)
244.0
296.9
357.7
Net income
£ 366.0
£ 445.4
£ 536.6
Add: Depreciation
102.5
102.5
Deduct: Dividends
(260.0)
(260.0)
Note repayment
(6.0)
Funds available for plant expansion
281.9
379.1
Plant expansion
(150.0)
(150.0)
Excess funds
£ 131.9
£ 229.1
Assumptions:
Sales increase at a rate of 11.11%.
Depreciation remains constant at
(d) Hibernia Bank should probably grant the extension of the loan, if it is
really required, because the projected cash flows for 2020 and 2021
indicate that an adequate amount of cash will be generated from
*PROBLEM 24.4
(a) OZTURK LTD
Comparative Statement of Financial Position
December 31, 2019 and 2018
December 31
Assets
2019
2018
Fixed assets
₺ 2,585,000
77.39%
₺1,950,000
70.02%
Accumulated depreciation
(1,000,000)
(29.94)
(750,000)
(26.93)
Prepaid expenses
.75
.90
Inventories
31.74
35.18
Accounts receivable (net)
6.59
5.57
8.08
Cash
5.39
Total
100.00%
₺2,785,000
Equity and Liabilities
Share capital—ordinary
₺2,100,000
62.87%
₺1,770,000
63.56%
Retained earnings
17.07
19.75
Bonds payable
13.47
6.82
Accrued expenses
5.09
7.18
Accounts payable
Total
₺3,340,000
100.00%
₺2,785,000
*PROBLEM 24.4 (Continued)
(b) OZTURK LTD
Comparative Statement of Financial Position
December 31, 2019 and 2018
December 31
Increase or (Decrease)
Assets
2019
2018
₺ Change
% Change
Fixed assets
₺ 2,585,000
₺1,950,000
₺ 635,000
32.56%
Accumulated depreciation
(1,000,000)
(750,000)
(250,000)
(33.33)
Prepaid expenses
0
Inventories
8.16
Accounts receivable (net)
41.94
Short-term investments
80.00
Cash
(34.55)
Total
₺ 3,340,000
₺2,785,000
₺ 555,000
19.93%
Equity and Liabilities
Share capital—ordinary
₺2,100,000
₺1,770,000
₺330,000
18.64
Retained earnings
3.64
Bonds payable
136.84
Accrued expenses
(15.00)
Accounts payable
(33.33)
Total
₺3,340,000
₺2,785,000
₺555,000
19.93%
(c) The component percentage (common-size) statement of financial
position makes easier analysis possible. It actually reduces total assets
and total equity and liabilities to a common base. Thus, the statement
(d) A statement such as that in part (b) is a good analysis and breakdown
of the total change in assets and liabilities and equity. The statement
*PROBLEM 24.5
(a) In establishing a dividend policy, the following are factors that should
be taken into consideration:
1. The expansion plans or goals of the organization and the need for
monies to finance new activities.
4. The earnings ability and stability of the company—past and future.
5. The ability of the organization to maintain a given dividend in future
years. To offer a dividend this year that cannot be maintained
may be harmful. It could also be harmful to establish a policy
seeming to call for increasing dividends over the years in the event
the increase could not be kept up.
10. The tax situation of the company.
*PROBLEM 24.5 (Continued)
12. Personal tax situations of shareholders if known—whether preference
for dividends or capital gains.
13. Degree of dispersion of shareholdings and shareholders’ needs
or preference for dividends.
(b)
2019
2018
2017
2016
2015
Return on assets
€2,400
€1,400
€800
€700
€250
€22,000
€19,000
€11,500
€4,200
€3,000
10.9%
7.4%
7.0%
16.7%
8.3%
Profit margin on sales
€2,400
€1,400
€6,000
€4,000
12.0%
8.8%
5.7%
11.7%
6.3%
Earnings per share
€2,400
€1,400
€800
€700
€250
€35.00
Price-earnings ratio
€9
€6
€4
€1.20
€.70
€.40
7.5 times
8.6 times
10 times
Current ratio
€8,000
€6,000
€3,000
€1,200
€1,000
€2,800
€1,800
(c) While the return on assets, profit margin on sales, and earnings per
share have been increasing, the market price of the shares has not
*PROBLEM 24.5 (Continued)
A dividend of 20¢ per share for 2019 would appear to be reasonable. Cash
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 24.1 (Time 10–20 minutes)
Purpose—to provide the student with an understanding of the necessary information which must be
disclosed in the financial statements with regard to certain asset classifications. The student is required
CA 24.2 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the necessary information which should be
CA 24.3 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the types of disclosures which are necessitated
CA 24.4 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the proper accounting for subsequent event
transactions. Bankruptcy, issue of debt, strikes, and other typical subsequent event transactions are
presented.
CA 24.5 (Time 30–35 minutes)
CA 24.6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the applications and requirements of interim
CA 24.7 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of the concepts of interim reporting and its
respective applications to specific financial information. This case involves six independent examples on
CA 24.8 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual merits underlying the prepara-
Time and Purpose of Concepts for Analysis (Continued)
CA 24.9 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of an ethical dilemma that may arise in the
do?
CA 24.10 (Time 10–15 minutes)
Purpose—to provide the student with an understanding of an ethical dilemma that may arise in the
*CA 24.11 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of the effects which various transactions have
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 24.1
Koch Corporation must disclose the following information regarding inventories:
1. The dollar amount assigned to inventory.
The following information must be disclosed for property, plant, and equipment:
1. The balance of major classes of depreciable assets (assets classified by nature or function).
CA 24.2
Item 1
The staff auditor reviewing the loan agreement misinterpreted its requirements. Retained earnings are
restricted in the amount of €420,000, which was the balance of retained earnings at the date of the
agreement. The nature and amount of the restriction should be disclosed in the statement of financial
position or a note to the financial statements.
Item 2
Unless cumulative preferred dividends are involved, no recommendation by the CPA is required. Ordinary
share dividend policy is understood by readers of financial statements to be discretionary on the part of
CA 24.2 (Continued)
Item 3
A competitive development of this nature normally is considered to be the type of subsequent event that
provides evidence with respect to a condition that did not exist at the date of the statement of financial
position. In some circumstances, the auditor might conclude that Ace’s poor competitive situation was
Item 4
The lease agreement with Wichita National Bank meets the criteria for a finance lease because it con-
tains a bargain purchase option (a 25-year-life building can be purchased at the end of 10 years for €1).
Additionally, unless the fair value of the building is considerably greater than its €2,400,000 cost, the
CA 24.3
Situation 1
When a company sells a product subject to a warranty, it is likely that there will be expenses
incurred in future accounting periods relating to revenues recognized in the current period. As such, a
Situation 2
Even though: (1) there is a probable loss on the contract, (2) the amount of the loss can be reasonably