Accounting 529
Week 3 – Problems
Jerry Kennedy
P4.18
A) Based on your answers to Problem 4.17,prepare an income statement (ignoring
income taxes) for Kissick Co.’s first year of operations and a balance sheet as of the
end of the year. (Hint:You may find it helpful to prepare T-accounts for each account
affected by the transactions.)
Kissick Co.
Income Statement
For the Year Ended, December 31, 2005
Net sales ………………………………………………………………
Cost of goods sold ……………………………………………………
Gross profit ……………………………………………………………
Selling, general, and administrative expenses ……………………
Income from operations ……………………………………………
Interest expense ………………………………………………………
Net income ……………………………………………………………
Net income per share of common stock outstanding …………
$
$
$
$
$
910,000
(580,000)
330,000
(526,000)
(194,000)
(60,000)
(256,000)
(1.28)
Kissick Co.
Balance Sheet
December 31, 2005
Assets
Cash and cash equivalents…………………………………………
Accounts receivable…………………………………………………
Inventory… ……………………………………………………………
Total Current Assets…………………………………………………
Buildings and equipment……………………………………………
Total Assets……………………………………………………………
Liabilities
Accounts payable……………………………………………………
Note payable…………………………………………………………
Interest payable………………………………………………………
Rent payable…………………………………………………………
Total liabilities…………………………………………………………
$
$
$
$
1,029,000
85,000
60,000
1,174,060
150,000
1,324,060
$
20,000
500,000
60,000
10,000
590,000
Owner’s Equity
Common stock………………………………………………………… $
Retained earnings……………………………………………………
Total owner’s equity…………………………………………………
$
Total liabilities and owner’s equity…………………………………
$
1,000,000
(256,000)
744,000
1,334,000
B) Kissick Co. had a bad year. Wither earnings per share at ($1.28), investors are
not likely to be very pleased. However, it is typical for a company to expect week
earnings or even losses in the first year of operations. This is mainly due to the
high start up costs such as the $150,000 for equipment.
Kissick also has a high cost of production. With $580,000 in cost of goods sold
and $526,000 in general costs on $910,000 sales the company operates at a loss.
But they may have handled their cash position poorly by paying cash for things
like equipment rather than amortizing off such costs.
E 7.9
Bonds payable —record issuance and premium amortization. Kaye Co. issued
$1 million face amount of 11% 20-year bonds on April 1, 2004. The bonds pay
interest on an annual basis on March 31 each year.
Required:
A) Assume that market interest rates were slightly lower than 11% when the bonds
were sold. Would the proceeds from the bond issue have been more than, less
than, or equal to the face amount? Explain.
The proceeds would be slightly higher. Since the bond rate is greater than market
rates, the interest payment on the bond issue is a more attractive investment. To
compensate for this disparity, the purchaser has to pay a premium (above par)
amount that considers the present value to be higher than the true bond issue face
amount.
B) Independent of your answer to part a, assume that the proceeds were $1,080,000.
Use the horizontal model (or write the journal entry) to show the effect of issuing
the bonds.
Balance Sheet
Assets
Cash
$1,080,000
=
Liabilities
Income Statement
+
Owner’s
Equity
 Net
Income
=
Bonds
payable
$1,000,000
Revenues
-
Cash
Flows
Expenses
+1,080.000
FA
Premium
on bonds
$80,000
C) Calculate the interest expense that Kaye Co. will show with respect to these bonds
in its income statement for the fiscal year ended September 30, 2004, assuming
that the premium of $80,000 is amortized on a straight-line basis.
Interest expense (September 30, 2004) =
($1,000,000 * 0.11) – ($80,000/20) =
($110,000) – ($4,000) =
$106,000.
P9.18
Using the information below, prepare an Income Statement in good form.
SPENSER, CO.
Income Statement
For the Year Ended, December 31, 2004
Net sales.………………………………………………………………
Cost of goods sold.……………………………………………….
Selling, general, and administrative expenses.…………………..
Research and development expenses…………………………...
Operating expenses………………………………………………
Operating income.……..…………………………………………….
Interest expense………………………………………………….
Income from continuing operations before taxes………………...
Provision for income taxes……………………………………….
Income from continuing operations………………………………
Discontinued operations, net of income taxes:
Loss from discontinued operations, net…………………
Earnings before extraordinary item
Extraordinary item:
Gain from early retirement of bonds, net of tax expense.
Net income……………………………………………………………
$
$
579,000
272,000
51,000
37,000
360,000
219,000
64,000
155,000
74,000
81,000
$
16,000
65,000
$
104,000
169,000
$
$
P9.28
Prepare statement of cash flows (indirect method) using balance sheet data. Presented
below are comparative balance sheets for Millco, Inc., at January 31 and February 28,2004.
Required:
Prepare a statement of cash flows that explains the change that occurred in cash during the
month. You may assume that the change in each balance sheet amount is due to a single
event (e.g., the change in the amount of production equipment is not the result of both a
purchase and sale of equipment). (Hints: What is the purpose of the statement of cash
flows? How is this purpose accomplished?) Use the space to the right of the January 31 data
to enter the difference between the February 28 and January 31 amounts of each balance
sheet item; these are the amounts that will be in your solution.
Below is the copy of a working document indicating the differences in position between
periods:
28-Feb
31-Jan
Assets
Cash
Accounts receivable
Merchandise inventory
Total current assets
Plant and equipment:
Production equipment
Less:Accumulated depreciation
Total assets
42000
64000
81000
187000
166000
37000
53000
94000
184000
152000
Cash Flow
5000
11000
(13000)
3000
14000
(24000)
329000
(21000)
315000
(3000)
14000
Liabilities
Short-term debt
Accounts payable
Other accrued liabilities
Total current liabilities
Long-term debt
Total liabilities
44000
37000
21000
102000
33000
135000
44000
41000
24000
109000
46000
155000
0
(4000)
(3000)
(7000)
(13000)
(20000)
Owners ’ Equity
Common stock,no par value,40,000 shares authorized,
30,000 and 28,000 shares issued,respectively
104000
Retained earnings:
64000
Beginning balance .
36000
Net income for month
(10000)
Dividends .
90000
Ending balance
194000
Total owners ’ equity .
329000
Total liabilities and owners ’ equity .
36000
96000
43000
29000
(8000)
64000
160000
315000
29000
8000
21000
7000
(2000)
26000
34000
14000
7000
MILLCO, INC.
Consolidated Statements of Cash Flows
For the Month Ended February 28, 2004
Cash Flows from Operating Activities:
Net Income
Add (Deduct) items not affecting cash
Depreciation expense
Increase in accounts receivable
Increase in current assets
Decrease in inventories
Increase in plant and equipment
Decrease in current liabilities
Net cash provided by operating activities
$
7,000
$
( 3,000)
11,000
3,000
( 13,000)
14,000
( 7,000)
5,000
$
( 14,000)
( 14,000)
Cash used for retirement of long-term debt
Payment of dividends
Sale of common stock of common stock
Net cash provided by financing activities
$
( 13,000)
( 2,000)
8,000
( 7,000)
Net increase (decrease) in cash
$
( 16,000)
Cash Flows from Investing Activities:
Purchase of equipment
Net cash used for investing activities
Cash Flows from Financing Activities: