Background

It is early 2017 and you have just been hired as the financial reporting guru for TECHNOGYM, a diversified exercise/fitness corporation that has just finished a very fast-paced, dynamic year. TECHNOGYM began as the sole distributor of TechTone, a full-body fitness machine sold to fitness centers and hospitals. This remains the main operation of TECHNOGYMs business.

Your predecessor left the firm in a hurry. Your primary responsibility is to finish the 2016 year-end financial statements. Luckily, there is still time to make any necessary adjusting and closing journal entries for the 2016 fiscal year. Throughout the semester you are working on different aspects of the companys financial records relating to: discontinued operations, revenue recognition, accounts receivable, and inventory. As you are working on the 2016 year-end, you are also reviewing the first quarter 2017 journal entries and will make any necessary correcting journal entries.

Note: you may collaborate with classmates on discussing the issues to be considered in this exercise, but you must do your own work. Especially in the memo (part 3), you must independently write your own memoyour document may not have similar wording to another students memo or they will be considered plagiarized. If you want someone else to read your draft memo, choose someone who is not currently taking the course.

Part 1 Requirements (18 points):

Using information in the 2016 preliminary adjusted trial balance (attached), prepare the adjusting journal entry for Income Tax Expense for the full year 2016.

Using information in the 2016 preliminary adjusted trial balance, combined with the adjusting entry for income taxes you did above, prepare the 2016 closing journal entries for TECHNOGYM.

Using information in the 2016 preliminary adjusted trial balance, combined with the adjusting entry for income taxes you did above, prepare the 2016 Balance Sheet and Income Statement for TECHNOGYM. The Balance Sheet must be classified and the Income Statement must be multi-step. Both must be comparative, with columns for the appropriate number of years. Remember this is a public reportit should be formatted appropriately (labeled, values aligned, single page, etc.).

Part 2 Requirements (8 points):

For the first quarter of 2017, prepare any needed correcting or adjusting journal entries related to the following information. For corrections, first prepare an entry reversing the original incorrect entry, then prepare the correct entry. Show the calculation of any amounts not included in the problem. Round intermediate calculations to 4 significant digits (e.g., 63.27%). If no journal entry is needed, write No Entry Needed and explain briefly why it is not needed.

In addition to its normal operations, during the first quarter of 2017, TECHNOGYM launched a new service through its website called MagnaTrain. This web site offers online fitness training through contracted independent trainers. Each trainer sets her own price for a training session. TECHNOGYM connects interested individuals with the trainers but does not directly provide any of the training. For its services and per the contract, TECHNOGYM is entitled to 15% of the total per session fee. TECHNOGYM has recorded the entire $6,000,000 fee collected in cash from the sessions as revenue and recognized its cost associated with MagnaTrain as 85% of the collected fee.

Also, in addition to its normal operations, during the first quarter of 2017, TECHNOGYM entered into a long-term agreement to supply its internally developed smart-phone-interactive fitness equipment, BodyTracker, and maintenance support to a regional 24 hour fitness chain. TECHNOGYM was paid $9,000,000 during March, 2017 for the equipment plus 3 years of maintenance support (beginning on April 1, 2017the first day of the next quarter). The fitness chain could have bought just the equipment for $7,500,000 with no support and they could have independently contracted for the maintenance support for $3,000,000 for the three year period. The cost of the equipment sold was $3,500,000. TECHNOGYM has recorded the $9,000,000 as a point-of-sale cash transaction.

Note: Before answering this item, read the section of chapter 13 in the textbook (9^th edition) about Loss Contingencies on pages 730-732. During the first quarter of 2017, the company to which TECHNOGYM sold its West Coast division on Dec. 31, 2016 filed a lawsuit alleges that TECHNOGYM misrepresented the division's assets and liabilities. The plaintiff is seeking $2.4 million as an adjustment to the purchase price. TECHNOGYMs attorneys advise that it is reasonably possible the company could lose $1 million, but that it's extremely unlikely it could lose the $2.4 million asked for.

Part 3 Requirements (34 points):

During 2016, the following key events occurred at TECHNOGYM. These are the same activities you have analyzed in assignments during the semester. You should refer to the solutions to the TECHNOGYM assignments for Discontinued Operations, Revenue Recognition, and Accounts Receivable for more details about these events and the resulting financial impacts.

Discontinued Operation: On October 1, 2015, TECHNOGYM made and announced a decision to sell its West Coast operations (considered a component according to the GAAP definition) to an unaffiliated company. On December 31, 2016, the West Coast division was sold, and the actual result of the sale was a $125,200 loss. The journal entries related to the sale were recorded already, along with all other normal 2016 adjusting entries.

Revenue Recognition: TECHNOGYM has a division that builds university fitness centers. At the end of 2016, there was one building project in process, the $45,000,000 Western Sky University project (WSU), which was started in June 2015. Throughout 2016, routine transaction entries were to record construction costs, billings, and collections. During 2016 there were substantial additional cost increases, resulting in a 2016 year-end total cost estimate of $45,500,000 for the job.

Accounts Receivable: TECHNOGYM uses the Accounts Receivable approach to estimate bad debts, based on an A/R aging schedule.

Mr. James Techno, the companys President, has asked you to prepare a brief memo for him, which should include following three key items:

1) Analyze TECHNOGYMs 2016 financial statements, identifying the major factors causing changes in the companys financial health and performance.

Recommendation: Look at the data behind the financial statements and the relationships among the values. It is always a good idea to start with a horizontal (changes year to year) and vertical (percentage of assets, revenues) analyses to assess which values changed the most significantly so you can consider the possible causes and decisions. For example:

Horizontal Analysis for 2015: from 2014 to 2015 Cash changed from $5,610 to $9,200an increase of $3,590 (64%); Accounts Receivable, net changed from $4,575 to $5,340an increase of $765 (17%).

Vertical Analysis for 2015: Inventory was 6% of Total Assets (2,500/41,460); Cost of Goods Sold was 53% of Revenue (57,850/108,840).

How did the various business segments perform against expectations? Think about the related accounts and the journal entries that would be made for the changes. For example, if product sales increase, normally so would A/R, bad debts, COGS, and sometimes inventory and accounts payable (if continued growth is expected). Does the timing of purchases and sales imply anything?

2) Analyze the following applicable ratios:

	2016 Ratio Values	2015 Ratio Values
Current Ratio	2.3	0.5
Quick Ratio	1.4	0.4
Debt-to-Assets Ratio	0.9	0.9
Times-Interest-Earned Ratio	4.3	n/a
Net Profit Margin Pct.	1.7	3.8
Return on Equity Pct.	28.8	68.4
Account Receivable Turnover	10.6	22.0
Inventory Turnover	5.2	24.1

Select several ratios of different types (profitability, efficiency, liquidity, solvency) that provide the best insight into the companys financial performance and position.

Recommendation: Analysis is more than calculating a ratio and saying if it is good or bad. Dont just explain how the numbers changedexplain what they reveal about business decisions and events, and what they might mean for the future. Think about things like: What were the big changes? What caused them? Are they reason for ongoing concern? How were complementary ratios impacted (e.g., if cash was obtained by issuing stock, current ratio would increase but return on equity would decrease)?

3) Provide specific recommendations for improvements.

Note: The 2015 Balance Sheet and 2015 Income Statement are attached to this document. Please include (as an attachment) a small table of the ratios you discuss in the memo. Top management understands the ratios so your explanation should not include definitions. Your explanation memo should be single spaced, and 1 to 1.5 pages in length (not counting the ratio table).

2015 (prior year) Financial Statements:

Preliminary 2016 Adjusted Trial Balance (before the adjusting entry for income tax):

Part 1 Requirements (18 points):

1. Using information in the 2016 preliminary adjusted trial balance, prepare the adjusting journal entry for Income Tax Expense for the full year 2016. You can omit the date, but it must otherwise be in proper form (including showing the basic accounting equation impacts).

Using information in the 2016 preliminary adjusted trial balance, combined with the adjusting entry for income taxes you did above, prepare the 2016 closing journal entries for TECHNOGYM. You can omit the date, but it must otherwise be in proper form.

2. Using information in the 2016 preliminary adjusted trial balance, combined with the adjusting entry for income taxes you did above, prepare the 2016 Balance Sheet for TECHNOGYM. The format must be classified and comparative (with columns for the appropriate number of years). Remember this is a public reportit should be formatted appropriately (labeled, values aligned, single page, etc.).

(continued) Using information in the 2016 preliminary adjusted trial balance, combined with the adjusting entry for income taxes you did above, prepare the 2016 Income Statement for TECHNOGYM. The format must be multi-step and comparative (with columns for the appropriate number of years). Remember this is a public reportit should be formatted appropriately (labeled, values aligned, single page, etc.).

Part 2 Requirements (8 points):

For the first quarter of 2017, prepare any needed correcting or adjusting journal entries related to the following information. For corrections, first prepare an entry reversing the original incorrect entry, then prepare the correct entry. Show the calculation of any amounts not included in the problem. Round intermediate calculations to 4 significant digits (e.g., 63.27%). If no journal entry is needed, write No Entry Needed and explain briefly why it is not needed.

Part 3 Requirements (34 points):

Insert memo to Mr. Techno here.

TECHNOGYM Balance Sheet As of December 31 All amounts are in $Thousands 2015 2014 ASSETS Cash Accounts Receivable, Net Inventory, Net Assets Held For Sale $5,610 4,575 $9,200 500 860 $18,900 22,560 $41,460 1,885 $14,370 36,000 Subtotal Current Assets Property, Plant & Equipment, Net TOTALASSETS LIABILITIES and EQUITIES $25,588 $24,507 18,070 Accounts Payable Interest Payable Income Tax Payable Construction Contract Liability Liabilities Held For Sale 3,631 $35,428 Subtotal Current Liabilities $48,963 Common Stock Retained Earn ings 500 407 TOTAL LIABIUTIES and EQUITIES $41,460 TECHNOGYM Income Statement For the Years Ended December 31 All amounts are in $Thousands (except per-share amounts) 2015 2014 2013 $108,840 57,850 $50,990 46,560 $4,430 17,600 17,400 $4,630 $62,736 33,840 $28,896 28,584 $312 9,960 9,752 $78,420 Sales Revenue Cost of Goods Sold $36,120 35,730 $390 12,450 12,190 $650 221 29 Gross Profit Operating Expenses Operating Income Other Revenues Other Expenses Income Before Taxes & Other Items me Tax Expense/(Benefit) Income from Continuing Operations 3,056 (200) Discontinued Operating Results Loss on Sale of Discontinued Oper Tax Expense/(Benefit) from Disc. Ops. 1,620 (250) 551 $1,069 68 Discontinued Operations Total ($165) 132 NET INCOME 264 EPS Continu ing Operations EPS Discontinued Operations EPS Net Income $3.43 ($1.32) $20.37 $7.13(S1.65) 64 $27.50 TECHNOGYM Balance Sheet As of December 31 All amounts are in $Thousands 2015 2014 ASSETS Cash Accounts Receivable, Net Inventory, Net Assets Held For Sale $5,610 4,575 $9,200 500 860 $18,900 22,560 $41,460 1,885 $14,370 36,000 Subtotal Current Assets Property, Plant & Equipment, Net TOTALASSETS LIABILITIES and EQUITIES $25,588 $24,507 18,070 Accounts Payable Interest Payable Income Tax Payable Construction Contract Liability Liabilities Held For Sale 3,631 $35,428 Subtotal Current Liabilities $48,963 Common Stock Retained Earn ings 500 407 TOTAL LIABIUTIES and EQUITIES $41,460 TECHNOGYM Income Statement For the Years Ended December 31 All amounts are in $Thousands (except per-share amounts) 2015 2014 2013 $108,840 57,850 $50,990 46,560 $4,430 17,600 17,400 $4,630 $62,736 33,840 $28,896 28,584 $312 9,960 9,752 $78,420 Sales Revenue Cost of Goods Sold $36,120 35,730 $390 12,450 12,190 $650 221 29 Gross Profit Operating Expenses Operating Income Other Revenues Other Expenses Income Before Taxes & Other Items me Tax Expense/(Benefit) Income from Continuing Operations 3,056 (200) Discontinued Operating Results Loss on Sale of Discontinued Oper Tax Expense/(Benefit) from Disc. Ops. 1,620 (250) 551 $1,069 68 Discontinued Operations Total ($165) 132 NET INCOME 264 EPS Continu ing Operations EPS Discontinued Operations EPS Net Income $3.43 ($1.32) $20.37 $7.13(S1.65) 64 $27.50