24–21
SOLUTIONS TO PROBLEMS
PROBLEM 24-1
ALMADEN CORPORATION
Balance Sheet
December 31, 2012
Assets
Long-term investments
Investments in land …………….. 185,000
Cash surrender value of
life insurance policy …………. 84,000
Cash restricted for plant
PROBLEM 24-1 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ………………….. $ 510,000
Unearned revenue …………………. 489,500
Long-term liabilities
Notes payable (due 2015) ………. 157,400
8% bonds payable (secured
by plant and equipment) ……… $ 750,000
Less unamortized bond
discount* ………………………. 29,900 720,100 877,500
Total liabilities ……………. 2,487,000
Stockholders’ equity
Common stock, par value
**($34,500 ÷ 5 = $6,900; $6,900 X 8/12 = $4,600; $34,500 – $4,600 = $29,900)
**Retained earnings $2,810,600
Accrued wages omitted (225,000)
Accrued interest (40,000)
Bond amortization (4,600)
$2,541,000
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 balance sheet as indicated
or in a footnote.
3. The error in calculating inventory will have been offset, so no adjustment
is needed.
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.
7. Interest payable on the bonds ($750,000 X 8% X 8/12 = $40,000) was
8. Since the loss from heavy damage was caused by a fire after the balance
sheet date, this event does not reflect conditions existing at that date.
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.
3. Identifiable assets test: 10% X $730,000** = $73,000. Segments B
($80,000) and C ($500,000) meet this test.
**$35,000 + $80,000 + $500,000 + $65,000 + $50,000
(b) Disclosures required by GAAP:
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
Cost of Goods Sold
Operating Expenses
40,000
235,000
30,000
Total Expenses
90,000
505,000
79,000
Operating Profit (Loss)
Identifiable Assets
24–25
PROBLEM 24-2 (Continued)
Reconciliation of profit or loss
Total segment operating profit ……………………………………… $ 82,000
Profits of immaterial segments ……………………………………… (11,000)
Profits from reportable segments …………………………..…….. $ 71,000
24–26
*PROBLEM 24-3
(a) BRADBURN CORPORATION
Financial Statistics
1.
Current ratio =
Current assets
Current liabilities
3.
Inventory turnover =
Cost of goods sold
Average inventory
$1,530,000
2013:
$50,000 + $105,000
= 19.7 times (every 18.5 days)
2
2013:
= 20.4%
2012:
= 2.02 to 1
2013:
= 2.46 to 1
2.
Quick ratio =
24–27
*PROBLEM 24-3 (Continued)
5.
Percent Changes
Amounts
Percent Increase
(000s omitted)
2013
2012
(b) Other financial reports and financial analyses which might be helpful
to the commercial loan officer of Topeka National Bank include:
1. The Statement of Cash Flows would highlight the amount of cash
provided by operating activities, the other sources of cash, and the
uses of cash for the acquisition of long-term assets and long-term
debt requirement.
(c) Bradburn Corporation should be able to finance the plant expansion
from internally generated funds as shown in the calculations presented
on the next page.
24–28
*PROBLEM 24-3 (Continued)
(000 omitted)
2013
2014
2015
Sales revenue
$3,000.0
$3,333.3
$3,703.6
Cost of goods sold
1,530.0
1,642.8
1,763.8
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:
(d) Topeka National Bank should probably grant the extension of the loan,
if it is really required, because the projected cash flows for 2014 and
2015 indicate that an adequate amount of cash will be generated from
operations to finance the plant expansion and repay the loan. In actu–
Gross margin
Operating expenses
860.0
Income before taxes
Income taxes (40%)
244.0
Net income
$ 366.0
24–29
*PROBLEM 24-4
(a) GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2013 and 2012
December 31
Assets
2013
2012
Liabilities and
Stockholders’ Equity
Accounts payable
$ 50,000
1.50%
$ 75,000
2.69%
Accrued expenses
170,000
5.09
200,000
7.18
Bonds payable
450,000
13.47
190,000
6.82
Capital stock
62.87
63.56
Retained earnings
Total
100.00%
$ 180,000
5.39%
Accounts receivable (net)
220,000
6.59
Short-term Investments
270,000
8.08
Inventories
31.74
Prepaid expenses
.75
Fixed assets
77.39
Accumulated depreciation
(1,000,000)
(29.94)
(26.93)
Total
100.00%
24–30
*PROBLEM 24-4 (Continued)
(b) GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2013 and 2012
Cash
$ 275,000
$ (95,000)
(34.55)
Accounts receivable (net)
155,000
41.94
Investments
150,000
120,000
80.00
Inventories
980,000
8.16
Prepaid expenses
0
Fixed assets
1,950,000
635,000
32.56
Accumulated depreciation
(750,000)
33.33
Total
$2,785,000
19.93%
Liabilities and
Stockholders’ Equity
Accounts payable
$ 50,000
$ 75,000
$ (25,000)
(33.33)
Accrued expenses
170,000
200,000
(30,000)
(15.00)
Bonds payable
450,000
190,000
260,000
136.84
Capital stock
2,100,000
1,770,000
330,000
18.64
Retained earnings
570,000
550,000
20,000
3.64
Total
$3,340,000
$2,785,000
$555,000
19.93%
(c) The component percentage (common-size) balance sheet makes easier
analysis possible. It actually reduces total assets and total liabilities
and stockholders’ equity to a common base. Thus, the statement is
(d) A statement such as that in part (b) is a good analysis and breakdown
of the total change in assets and liabilities and stockholders’ equity.
The statement breaks down the 19.93% increase and makes it easier
*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 enterprise—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.
9. The general condition of the economy in the area where the
enterprise operates, as well as in the United States in general.
24–32
*PROBLEM 24-5 (Continued)
12. Personal tax situations of stockholders if known—whether preference
for dividends or capital gains.
13. Degree of dispersion of stockholdings and stockholders’ needs
or preference for dividends.
(b)
2013
2012
2011
2010
2009
Rate of 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%
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
$700
$600
*$8,000 – $3,600
(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
given full recognition to these increases. This suggests that market
factors (and perhaps industry factors) are having a depressing effect on
internal and external factors outlined in part (a) to this case.
Profit margin on sales
$2,400
$1,400
$800
$700
$250
$6,000
$4,000
12.0%
8.8%
5.7%
11.7%
6.3%
Earnings per share
$2,400
$1,400
$800
$700
$250
20
20
$35.00
24–33
*PROBLEM 24-5 (Continued)
A dividend in the range of 12¢ to 36¢ being 10% to 30% of earnings per
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
to discuss each of these respective disclosures for Inventories and Property, Plant, and Equipment in
the audited financial statements issued to the stockholders.
CA 24-2 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the necessary information which should be
disclosed in the financial statements and notes. The student is required to evaluate the facts of four
items concerning the company’s operations and to discuss any additional disclosures in the financial
statements and notes that the auditor should recommend with respect to these items.
CA 24-3 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the types of disclosures which are necessitated
under certain circumstances. This case involves three independent situations dealing with such concepts
as warranty claims, a self-insurance contingency, and the discovery of a probable loss subsequent to
the date of the financial statements. The student is required to discuss the accrual treatment and type
of disclosure necessary and the reasons why such disclosure is appropriate for each of the three
situations.
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)
Purpose—to provide the student with an understanding of segment reporting requirements, including
providing explanations as to which segments are reportable.
CA 24-6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of segment reporting. The case explores why a
company did not have to prepare certain segment information. In addition, examination of when export
sales should be disclosed is discussed. Finally, the student is asked to determine why international
segments should be reported if significant international operations exist.
CA 24-7 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the concepts underlying the applications of
segment reporting. The student is required to identify the reasons for requiring financial data to be
reported by segments, the possible disadvantages of this requirement, and the accounting difficulties
inherent in segment reporting.
CA 24-8 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the applications and requirements of interim
financial reporting. The student is required to explain how a company’s operating results would be
reflected in a quarterly report and describe what financial information must be disclosed to a company’s
stockholders in the quarterly reports.
24–35
Time and Purpose of Concepts for Analysis (Continued)
CA 24-9 (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
how accounting facts might be reported on a company’s quarterly reports. The student is required to
evaluate each example and state whether the method proposed to be used for interim reporting would
be acceptable under generally accepted accounting principles applicable to interim financial data.
CA 24-10 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the conceptual merits underlying the prepara-
tion of financial forecasts. The student is required to discuss the arguments for preparing profit forecasts,
the purpose of the “safe harbor” rule, and the reasons why corporations are concerned about presenting
financial forecasts.
CA 24-11 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of an ethical dilemma that may arise in the
future. In this case, the reason for the profit margin increasing is not properly described by the financial
vicepresident and the controller realizes the misstatement. The question is what should the controller do?
CA 24-12 (Time 10–15 minutes)
Purpose—to provide the student with an understanding of an ethical dilemma that may arise in the
future. In this case, the company decides to delay the issuance of a debt offering to make their ratios
look more impressive.
*CA 24-13 (Time 24–35 minutes)
Purpose—to provide the student with an understanding of the effects which various transactions have
on a company’s financial status. The student is required to decide for each of these transactions the
respective effect on the company’s net income, retained earnings, current ratio, stockholders’ equity,
and stockholders’ equity per share of stock.
24–36
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 24-1
Koch Corporation must disclose the following information regarding inventories:
1. The dollar amount assigned to inventory.
2. The method of inventory pricing; e.g., FIFO, LIFO, weighted average.
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 balance sheet or a note to
Note that the SEC encourages companies to disclose their dividend policy in their annual report. Those
that: (1) have earnings but fail to pay dividends or (2) do not expect to pay dividends in the foreseeable
future are encouraged to report this information. In addition, companies that show a consistent pattern
of paying dividends are encouraged to indicate whether they intend to continue this practice in the
future.
CA 24-2 (Continued)
Item 4
The lease agreement with Wichita National Bank meets the criteria for a capital 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).
CA 24-3
Situation 1
When a company sells a product subject to a warranty, it is probable 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
estimated and (3) the likelihood of the loss was discovered prior to the issuance of the financial state-
ments, the fact that the contract was entered into subsequent to the date of the financial statements
Situation 3
The fact that a company chooses to self-insure the contingency of injury to others caused by its vehicles
24–38
CA 24-4
1. The financial statements should be adjusted for the expected loss pertaining to the remaining
receivable of $240,000. Such adjustment should reduce accounts receivable to their realizable
value as of December 31, 2012.
4. This case is a difficult problem. If this event is of the second type which provides evidence with
respect to conditions that did not exist at December 31, 2012, then appropriate disclosures should
indicate that:
5. Adjust the inventory figure as of December 31, 2012, as required by a market price of $2.00
instead of $1.40, applying the lower–of-cost-or-market principle. The actual quotation was a transitory
error and no purchases had been made at this quotation.
CA 24-5
To: Anthony Reese, Accountant
From: Student
Date: Current date
Subject: Determination of reportable segments for Winsor Corp.
To make this determination, I applied three criteria put forth by the FASB to the information provided
from 2013. First, a segment must be reported separately if its revenue is greater than or equal to
10 percent of the enterprise’s combined revenue. This is the case with both the funeral and the cemetery
segments as revenue for both is greater than $40,600 (10 percent of combined revenue).
CA 24-5 (Continued)
Third, a segment must be reported separately if its identifiable assets are greater than or equal to
10 percent of the combined identifiable assets for all segments. Again, the funeral, the cemetery, and
the real estate segments meet this test. Note that the limousine, floral, and dried whey segments meet
none of the above criteria, so they are not reported separately.
CA 24-6
(a) Some companies such as H. J. Heinz have only one dominant product or service and therefore it
is impossible to provide segmented data in a meaningful fashion. Dominant means that a given
segment has 90% of all the sales, profit and identifiable assets of the company. In this case,
segmented data are not provided, but the industry in which the dominant segment operates must
be identified.
CA 24-7
(a) Financial reporting for segments of a business enterprise involves reporting financial information
on a less-than-total enterprise basis. These segments may be defined along organizational lines,
(b) The reasons for requiring financial data to be reported by segments include the following:
1. They would provide more detailed disclosure of information needed by investors, creditors,
and other users of financial statements.
2. Appraisers can evaluate major segments of a business enterprise before considering the
CA 24-7 (Continued)
(c) The possible disadvantages of requiring financial data to be reported by segments include the
following:
products, plans for new products or entries into new markets, apparent weaknesses that
might induce competitors to increase their own efforts to take advantage of the weakness,
and the existence of advantages not otherwise indicated.
5. Information thus made available might cause customers to challenge prices to the disad–
vantage of the company.
(d) The accounting difficulties inherent in segment reporting include the following:
1. The transfer prices must be determined. Transfer prices are those charged when one segment
deals with another segment of the same enterprise. Various possible transfer prices exist,
and the company must select one.
2. The computation of segment net income must be defined. The net income may be merely a
contribution margin, that is, sales less variable costs, or a more conventional measure of net
income. If a contribution-margin approach is used, the variable costs must be identified. If a
more conventional measure of net income is used, the treatment of various items for each
segment’s net income must be established. Such items include the following:
(a) Determining whether common costs should be allocated to segments.
companies, should be attributed to segments.
3. The treatment of segment information in interim financial reports must be established.
4. The method of presenting segment information in financial statements must be established.
CA 24-8
(a) 1. The company should report its quarterly results as if each interim period is an integral part
of the annual period.