Problem 1-5 (45 minutes)

MESCO COMPANY
Balance Sheet
December 31, Year 5
Assets
Current Assets:
Cash.................................................................... $ 10,250
Accounts receivable..........................................
46,000
Inventories..........................................................
86,250
Total current assets...........................................
Noncurrent assets................................................
Total assets...........................................................

$142,500
280,000
$422,500

Liabilities and Stockholders' Equity

Current liabilities.................................................. $ 22,500
Noncurrent liabilities............................................
62,000
Total liabilities.......................................................

$ 84,500

Stockholders' Equity
Common stock...................................................... $150,000
Additional paid-in capital....................................
60,000
Retained earnings................................................ 128,000
Total stockholders' equity...................................
Total liabilities and equity...................................

$338,000
$422,500

Supporting computations:
Note 1: Compute net income for Year 5
Sales ..............................................................................
Cost of goods sold.......................................................
Gross profit ..................................................................
Operating expenses.....................................................
Income before taxes.....................................................
Taxes expense...............................................................
Net income....................................................................

$920,000
690,000
$230,000
180,000
$ 50,000
20,000
$ 30,000

Note 2: Compute Stockholders' Equity

Common stock ($15 par x 10,000 sh.)........................
Additional paid-in capital ($21-$15) x 10,000 sh........

$150,000
60,000

Retained earnings, Dec. 31, Year 4..............................

Net income....................................................................
Retained earnings, Dec. 31, Year 5..............................
Total................................................................................

(75% of sales)
(25% of sales)
(tax at 40% rate)

$210,000

98,000
30,000
128,000
$338,000

Problem 1-5continued
Note 3:

Total equity

Total debt
Note 4:

$338,000
4
$ 84,500

Cost of goods sold / Inventory = 8

$690,000 / Inventory = 8
Inventory = $86,250
Receivables / (Credit sales360) = 18 days
Receivables / ($920,000360)
= 18 days
Receivables = $46,000

Note 5:

Total assets

Current assets

Cash
Note 6:

= Total equity + Total liabilities

= $338,000 + $84,500
= $422,500

= Total assets - Noncurrent assets

= $422,500 - $280,000
= $142,500
= $142,500 - $46,000 - $86,250
= $10,250

Acid-test ratio = (Cash + Accounts receivable) / Current liabilities = 2.5

Current liabilities = ($10,250 + $46,000)/2.5 = $22,500
Noncurrent liabilities = Total liabilities - Current liabilities
= $84,500 - $22,500 = $62,000

Problem 1-6 (45 minutes)

ASSETS
Current assets:
Cash.....................................
Accounts receivable...........
Inventory..............................
Noncurrent assets...............
Total assets..........................

FOXX COMPANY
Balance Sheet
December 31, Year 2
LIABILITIES AND EQUITY
Current liabilities.......................
$ 75,000
Noncurrent liabilities................
75,000
Total liabilities...........................
50,000
$300,000
Total equity................................
$500,000
Total Liabilities and Equity.......

Supporting computations:
Note 1: Compute net income for Year 2
Sales......................................................................................
Cost of goods sold ..............................................................
Gross profit...........................................................................
Expenses...............................................................................
Net income............................................................................

$1,000,000
500,000
$ 500,000
450,000
$ 50,000

Note 2: Return on end-of-year equity = 20%

Net income / End-of-year equity = 20%
50,000 / Equity
= 0.20
Equity = $250,000
Note 3: Total debt to total equity
Total debt / $250,000
Total debt = $250,000

=1
=1

Note 4: Accounts receivable turnover = Sales / Average accounts receivable

$1,000,000
(
$
50,000
+ ?) / 2
16 =

Ending accounts receivable = $75,000

Note 5: Days sales in inventory = (Inventory x 360) / Cost of goods sold
36
= (Inventory x 360) / $500,000
Ending inventory = $50,000

$100,000
150,000
$250,000
$250,000
$500,000

(50% of sales)
(50% of sales)
(given)

Problem 1-6continued
Note 6:

Total assets

= Total liabilities + Total equity

= $250,000 + $250,000
= $500,000

Current assets

= Total assets - Noncurrent assets

= $500,000 - $300,000
= $200,000

Current ratio
2
Current liabilities

= Current assets Current liabilities

= $200,000 ?
= $100,000

Noncurrent liabilities= Total liabilities - Current liabilities

= $250,000 - $100,000
= $150,000
Note 7:

Cash

= Current assets - Accounts receivable - Inventory

= $200,000 - $75,000 - $50,000
= $75,000

Problem 1-7 (70 minutes)

a.
VOLTEK COMPANY
Balance Sheet
December 31, Year 6
Assets
Current Assets
Cash....................................................................
Account receivable............................................
Inventories..........................................................
Prepaid expenses..............................................
Total current assets...........................................
Plant and equipment, net.....................................
Total assets...........................................................
Liabilities and Stockholders' Equity
Current liabilities..................................................
Bond payable........................................................
Stockholders equity............................................
Total liabilities and equity...................................

$3,900
2,600
1,820
1,430
$ 9,750
6,000
$15,750
$6,500
6,500
2,750

Supporting computations:
Note 1:Net income/Sales = 10%
$1,300 / ? = 10%
Sales
= $13,000
Note 2:Gross Margin

= Sales x Gross margin ratio

= $13,000 x 30%
= $3,900

Cost of good sold= Sales - Gross margin

= $13,000 - $3,900
= $9,100
Inventory

= Cost of goods sold Inventory turnover

= $9,100 5
= $1,820

Note 3:Accounts recble. = Sales Accounts receivable turnover

= $13,000 5
= $2,600

$15,750

Problem 1-7continued
Note 4:Working capital

= Sales Sales to end-of-year working capital

= $13,000 4
= $3,250

Note: Current assets

= Current liabilities + Working capital
Current assets
= Current liabilities + $3,250
Current liabilities = Current assets - $3,250
Then: Current ratio
= Current assets Current liabilities
1.5
= Current assets (Current assets - $3,250)
Current assets /1.5 = (Current assets - $3,250)
Current assets
= 1.5 x Current assets - $4,875
0.5 x Current assets= $4,875
Current assets
= $9,750
And:

Current liabilities = $9,750 - $3,250

= $6,500

Note 5:Acid-test ratio

= 1.0

Then: Cash + Accounts receivable = Current liabilities

Cash
= $6,500 - $2,600 = $3,900
Note 6:Prepaid expenses = Current assets - Cash - Accounts recble. - Inventory
= $9,750 - $3,900 - $2,600 - $1,820
= $1,430
Note 7:Times interest earned
5
5 (Interest expense)
4 (Interest expense)
Interest expense

= (Income before tax + Interest exp.) / Interest exp.

= ($1,300 + Interest expense) / Interest expense
= $1,300 + Interest expense
= $1,300
= $325

Par value of bonds payable = Interest expense / Interest rate on bonds

= $325 / 0.05
= $6,500
Note 8:Shareholders' equity

= Total assets - Current liabilities - Bonds payable

= $15,750 - $6,500 - $6,500 = $2,750

Note 9:Par value of preferred stock = Dividend on preferred Dividend rate

= $40 0.08
= $500
Note 10:

EPS = (Net income-Preferred dividend) / Common shares outstanding

$3.75 = ($1,300 - $40) / Common shares outstanding
$3.75 x Common shares outstanding = $1,260
Common shares outstanding = 336
Par value of common stock = 336 x $5 = $1,680

Problem 1-7continued
Note 11:

Retained earnings

= Stockholders' equity -Common stock - Preferred stock

= $2,750 - $1,680 - $500
= $570

b. Dividends paid on common stock:

Retained earnings, Jan. 1, Year 6................................. $ 350
Net income for Year 6.................................................... 1,300 $1,650
Dividends paid on preferred.........................................
40
Dividends paid on common plug..............................
?
Retained earnings, Dec. 31, Year 6...............................
$ 570
Dividends paid on common stock = $1,040