SOLUTIONS TO PROBLEMS
PROBLEM 24-1
ALMADEN CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ($571,000 – $300,000) …. $ 271,000
Long-term investments
Investments in land …………….. 185,000
Cash surrender value of
life insurance policy …………. 84,000
Cash restricted for plant
expansion ……………………….. 300,000 569,000
Property, plant, and equipment
PROBLEM 24-1 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ………………….. $ 510,000
Unearned revenue …………………. 489,500
Long-term liabilities
Notes payable (due 2017) ………. 157,400
Stockholders’ equity
Common stock, par value
$10 per share; authorized
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
of the inventory is overstated because of the need to reduce selling
prices. This factor along with the net realizable value of the inventory
should be disclosed.
5. The fact that the gain on sale of certain plant assets was credited directly
to retained earnings has no effect on the balance sheet presentation.
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.
(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
Reconciliation of revenues
Total segment revenues ……………………………………………….. $785,000
PROBLEM 24-2 (Continued)
Reconciliation of profit or loss
Total segment operating profit ……………………………………… $ 82,000
Profits of immaterial segments ……………………………………… (11,000)
*PROBLEM 24-3
(a) BRADBURN CORPORATION
Ratio Analysis
1.
Current ratio =
Current assets
Current liabilities
2014:
$320,000
= 2.02 to 1
2015:
$403,000
= 2.46 to 1
$158,500
$164,000
2.
Acid test (Quick) ratio =
$270,000
$298,000
$158,500
$164,000
3.
Inventory turnover =
Cost of goods sold
Average inventory
$1,530,000
2015:
$50,000 + $105,000
= 19.7 times (every 18.5 days)
2
= 17.3%
2015:
= 20.4%
*PROBLEM 24-3 (Continued)
5.
Percent Changes
Amounts
Percent Increase
(000s omitted)
2015
2014
(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
(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.
*PROBLEM 24-3 (Continued)
(000 omitted)
2015
2016
2017
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
1,470.0
1,690.5
1,939.8
Operating expenses
860.0
Income before income taxes
Income taxes (40%)
244.0
Net income
$ 366.0
Add: Depreciation
Deduct: Dividends
Note repayment
(6.0)
Funds available for plant expansion
Plant expansion
Excess funds
$ 131.9
$ 229.1
Assumptions:
Sales revenue increases at a rate
of 11.11%.
Cost of goods sold increases at rate
Depreciation remains constant at
$102,500.
Dividends remain at $2 per share.
(d) Topeka National Bank should probably grant the extension of the loan,
if it is really required, because the projected cash flows for 2016 and
2017 indicate that an adequate amount of cash will be generated from
*PROBLEM 24-4
(a) GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2015 and 2014
December 31
Assets
2015
2014
Cash
$ 180,000
5.39%
$ 275,000
9.87%
Accounts receivable (net)
220,000
6.59
155,000
5.57
Short-term Investments
270,000
8.08
150,000
5.39
Inventories
31.74
980,000
35.18
Prepaid expenses
.75
.90
Plant and equipment
77.39
70.02
Accumulated depreciation
(1,000,000)
(29.94)
(26.93)
Total
100.00%
Liabilities and
Stockholders’ Equity
Accounts payable
$ 50,000
1.50%
$ 75,000
2.69%
Accrued expenses
170,000
5.09
7.18
Bonds payable
450,000
13.47
6.82
Capital stock
62.87
63.56
Retained earnings
Total
100.00%
*PROBLEM 24-4 (Continued)
(b) GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2015 and 2014
December 31
Increase or (Decrease)
Assets
2015
2014
$ Change
% Change
Cash
$ 180,000
$ 275,000
$ (95,000)
(34.55)
Accounts receivable (net)
220,000
155,000
65,000
41.94
Investments
270,000
150,000
80.00
Inventories
980,000
80,000
8.16
Prepaid expenses
0
Plant and equipment
32.56
Accumulated depreciation
33.33
Total
$ 3,340,000
$2,785,000
19.93%
Liabilities and
Stockholders’ Equity
Accounts payable
$ 50,000
$ 75,000
$ (25,000)
(33.33)
Accrued expenses
200,000
(15.00)
Bonds payable
190,000
136.84
Capital stock
18.64
Retained earnings
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
simplified into figures that can be more readily grasped. It can also
possible improvements could be made.
(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.
*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.
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.
6. The current position of the company. Is cash available to pay the
dividend? Will working capital be decreased to a dangerous level?
*PROBLEM 24-5 (Continued)
12. Personal tax situations of stockholders if known—whether preference
for dividends or capital gains.
(b)
2015
2014
2013
2012
2011
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
$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
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
(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
*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
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 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
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)
CA 24-6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of segment reporting. The case explores why a
CA 24-7 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the concepts underlying the applications of
CA 24-8 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the applications and requirements of interim
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
CA 24-10 (Time 24–30 minutes)
Purpose—to provide the student with an understanding of the conceptual merits underlying the prepara-
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
*CA 24-13 (Time 24–35 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
Item 2
Unless cumulative preferred dividends are involved, no recommendation by the CPA is required. Common
stock dividend policy is understood by readers of financial statements to be discretionary on the part of
the board of directors. The company need not commit itself to a prospective common stock dividend policy
future.
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 balance sheet. In some
circumstances the auditor might conclude that Ace’s poor competitive situation was evident at year-
end. In any event, the development should be disclosed to users of the financial statements because
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).
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 probable that there will be expenses
incurred in future accounting periods relating to revenues recognized in the current period. As such, a
liability has been incurred to honor the warranty at the same date as the recognition of the revenue.
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
is not enough of a basis to accrue a loss contingency that has not occurred at the date of the financial
statements. An accrual or “reserve” cannot be made for the amount of insurance premium that would
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, 2014.
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, 2014, then appropriate disclosures should
indicate that:
(a) Recovery of costs invested in plant and inventory is in doubt.
CA 24-5
To: Anthony Reese, Accountant
From: Student
Date: Current date
Subject: Determination of reportable segments for Winsor Corp.
I have analyzed the segment information which you gave me and determined that the funeral, the
cemetery, and the real estate segments must be reported separately. The remaining three—the
limousine, floral, and dried whey segments—can be combined under the category of other.
To make this determination, I applied three criteria put forth by the FASB to the information provided for
2015. 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
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,
CA 24-7
(a) Financial reporting for segments of a business enterprise involves reporting financial information
bases of segmentation.
(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:
1. They could be misinterpreted due to the public’s general lack of appreciation of the limitations
of the somewhat arbitrary bases for most allocations of common costs.
2. They may disguise the interdependence of all the segments.
3. They might result in misleading comparisons of segments of different enterprises.
considered by many to be insurmountable.
(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
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.
Such presentation may be by notes or by separate financial statements.
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.