BOOKER JONES

CRYSTAL PRANOTO
1. A. From comparing exhibit 1 & 2, we could see an increase in cost due
to the price of the barrels used, and cost of warehousing. This is due to
companys decision to increase the production, which increase the
need to use 20,000 more barrels. A barrel now cost $31,50, so 20,000
x $31.50 = 630,000 reduction in profit.
B. If barrels were considered as inventory, and not as other operating
costs, then we could move them out from income Statement, and
would only be mentioned when its actually sold. When it was sold, its
going to be states as Sold Whisky Cost, and match it with revenue.
Right now there is a lot of mismatching.
(i) Balance sheet at end of 1960
- If retroactive changes are made in 1959, then balance sheet of
1960 would look different because 1959 wouldnt show the barrels
in inventory, and 1960 would account the barrels in inventory.
- In 1959, there was 172,000 barrels each cost $31.5, resulting in
$5.4 million inventor.
172,000 x $31.5 = $5,418,000 increase in inventory
- Finished case whiskey (because they sat in barrels too, so additional
barrels)
175,000/35 = 5,000 x $31.5 = $158,000 increase in
inventory
- Bulk = 4,506,000 + 5,418,000 = 9,924
- Cased = 1,969,000 + 158,000 = 2,127
- So, Increase in Inventory = 12,051,000
- So, they need to debit Inventory by $5,600,000 (12,051,000(4,506,000+1,969,000))
- Credit Retained Earnings by the same amount (as Expense)
- Before they understated them
(ii) Balance sheet at end of 1961
- Company would increase the number of barrel from 172,000 to
192,000 as they need 20,000 more because of the increase in
production. Barrel inventory would increase by $192,000 x $21.5 =
$6.05 million
192,000 x $21.5 = $6,048,000 increase in Inventory
Bulk = 5,030 + 6,048,000 = $11,078,000
Cased Whiskey = 1,969,000 + 158,000 = $2,127,000
So, Increase in Inventory = $13,205,000
Inventory should increase by $6,252,261, and credit
Retained Earnings

(iii) Operating statement of 1960 > no effect.

Reconcile Retained Earnings, what happen before and after
adjustments?

1960
RE beginning balance
Profit (loss)
RE End Balance

Before
Adjustment
2,794
462
3,256

Adjustment
5,576
5,576

After
Adjustment
8,730
462
8,832

As we can see, theres no change in Net Income.

2. No! I dont believe that Jones went from profit (1960) to loss (1961). He
invested for the future by increasing the production in 1961. If he
didnt increase the production from last year, his profits would be
comparable to the year before.
3. Use direct and variable costing. Even though barrels are not essential
fixed cost. Warning for variable costing, and you have products that
ages, its going blow up.
Jones should capitalize the number of barrels, then put them in the
inventory. It will make the number of the financial accounting looks
more profitable and a better reflection of the business performance.
GAAP > Finished goods warehouse, should be in SG&A (period cost).
But Bourbon becomes bourbon after 4 years, they use the barrels to
make the bourbon. Its Indirect Material cost > manufacturing OH and
should be production cost.
You need the warehouse in order to finish the bourbon, you need
the taster as well. They are all production costs. They should
have been capitalize too. You cant make the bourbon without
them, so they are production cost.
4. ROE = (Net Income / Shareholders Equity) x 100%
ROE = (462,000/RE + Common Stock) x 100%
ROE = 462,000/5,056,000 x 100%
ROE = 9.14% > their ROE looks terrible!
5. 633 + (3,462) = ($2,829)

 Also include interest cost

They Probably need 3,000,000 more 3 year expansion. They
missed it by half.
6. Economic rate of return = (Current Value of Investment
Cost of Inv)/Cost of investmern * 100%
= 9,800,000 8,621,000 * 100%
= 13.7% economic rate of return
7. They might say no because they are going to show up with wrong
calculation (the loss), bank are going to know they understated the
loan. They cant do their accounting right. What if their projections
are not right? His market research might be wrong, and decided to
bump up production by 50%. Not to sophisticated. The bank is going
to finance the whole project. Zero equity for this expansion. Bank is
not going to be very impressed, no investment by Henry. They also
did no planning for the future.
If the bank is going to say yes, which is most likely the case. Its
because the company has strong profitable history, so, the bank
should be willing to lend Booker as there is small risk of default.
They have never been unprofitable. They make good products. The
collateral is so good for this loan, which guarantees the safety of the
bank. They also have Liquid Assets if they go bankrupt and need to
pay back the loan (building, barrels, whisky, equipment) It also
seems that the manager is doing well in trying to increase the sales
revenue. Their liabilities (long term ad short term) are already under
Ridgeview Bank. They should know that they are doing fine.
8. Do they have the production capacity to increase production? Are
they currently accounting for these extra costs? If they start
producing more whiskey will customers think that they have lower
quality bourbon? They are only 1.5% market. They are doing flat
pricing, all these time. If demand is truly climbing, they have the
chance to increase their prices. What about doing two different
quality of bourbon? 2 years bourbon and 4 years bourbon. Jones
could continue to expand the production, but change the financial
reporting, and capitalize the numbers of barrel, so it better reflects
the performance, and would give him the loans.