Comprehensive review problem. Exhibits 17.11 and 17.12 present a partial set of financial statements of Chicago Corporation for 2013, including a consolidated statement of income and retained earnings for 2013 and consolidated comparative balance sheets at December 31, 2012 and 2013. Questions relating to the financial statements of Chicago Corporation follow. You should study the financial statements before responding to these questions and problems. Additional information is as follows: (1) The only transaction affecting common or preferred shares during 2013 was the sale of treasury stock. (2) The bonds payable have a maturity (face) value of $4 million. Required a. Compute the amount of specific customers accounts that Chicago Corporation wrote off as uncollectible during 2013, assuming that it made no recoveries during 2013 on accounts written off in years prior to 2013. b. Chicago Corporation uses the LIFO cost-flow assumption in computing its cost of goods sold and its beginning and ending merchandise inventory amounts. If it had used a FIFO cost-flow assumption, the beginning inventory would have been $1,800,000

Chicago Corporation Consolidated Statement of Income and Retained Earnings for 2013 (Problem 10) REVENUES Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,920,000 Gain on Sale of Machinery and Equipment. . . . . . . . . . . . . . . . . . . . . 200,000 Equity in Earnings of Affiliates: Chicago Finance Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,800,000 Rosenwald Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 Hutchinson Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 2,000,000 Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,120,000 EXPENSES Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000,000 Employee Payroll Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 Depreciation of Plant and Equipment and Amortization of Leased Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Amortization of Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 Bad Debt Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455,000 General Corporate Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000 Income TaxesCurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,430,000 Income TaxesDeferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,720,000 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,400,000 Less: Dividends on Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . (120,000) Dividends on Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,080,000) Increase in Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,200,000 Retained Earnings, December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . 2,800,000 Retained Earnings, December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . $ 5,000,000 Basic Earnings per Common Share (Based on 1,600,000 Average Shares Outstanding). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.68 Diluted Earnings per Share (Assuming Conversion of Preferred Stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.20

Chicago Corporation Consolidated Balance Sheets December 31 (Problem 10) December 31: 2013 2012 ASSETS Current Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000 $ 200,000 Certificate of Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 Accounts Receivable (Net of Estimated Uncollectibles of $100,000 in 2012 and $160,000 in 2013) . . . . . . . . . . . . . . . 600,000 500,000 Merchandise Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 1,500,000 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 200,000 Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,925,000 $ 2,400,000 Investments Chicago Finance Corporation (40% Owned) . . . . . . . . . . . . . . . . . . $ 4,000,000 $ 2,200,000 Rosenwald Company (50% Owned). . . . . . . . . . . . . . . . . . . . . . . . 1,025,000 900,000 Hutchinson Company (25% Owned) . . . . . . . . . . . . . . . . . . . . . . . 175,000 100,000 Total Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,200,000 $ 3,200,000 Property, Plant, and Equipment Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000 $ 400,000 Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 4,000,000 Machinery and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 7,300,000 Property Rights Acquired Under Lease . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,500,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,000,000 $13,200,000 Less Accumulated Depreciation and Amortization. . . . . . . . . . . . . . (4,000,000) (3,800,000) Total Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . $10,000,000 $ 9,400,000 Intangibles (at Net Carrying Value) Patent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750,000 $ 875,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125,000 1,125,000 Total Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,875,000 $ 2,000,000 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000,000 $17,000,000 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 550,000 $ 400,000 Advances from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640,000 660,000 Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 240,000 Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,000 300,000 Rent Received in Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 Other Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000 200,000 Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,430,000 $ 1,800,000 Long-Term Debt Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,648,000 $ 3,600,000 Equipment Mortgage Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 332,000 1,300,000 Capitalized Lease Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,000 1,100,000 Total Long-Term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000,000 $ 6,000,000 Deferred Tax Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,570,000 $ 1,400,000 Shareholders Equity Convertible Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000,000 $ 2,000,000 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,000,000 Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,400,000 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 2,800,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000,000 $ 9,200,000 Less Cost of Treasury Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,000,000) (1,400,000) Total Shareholders Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,000,000 $ 7,800,000 Total Liabilities and Shareholders Equity . . . . . . . . . . . . . . . . . $20,000,000 $17,000,000

and the ending inventory would have been $1,700,000. Compute the actual gross profit (net sales less cost of goods sold) of Chicago Corporation for 2013 under LIFO and the corresponding amount of gross profit if it had used FIFO (ignore income tax effects). c. Refer to part b. Did the quantity and acquisition cost of merchandise inventory increase or decrease between the beginning and the end of 2013? Explain. d. Chicago Corporation accounts for its three intercorporate investments in unconsolidated affiliates using the equity method. The acquisition cost of these investments equaled both the carrying value and the fair value of the assets and liabilities of the investees at the time of acquisition. How much did each of these three companies declare in dividends during 2013? How can you tell? e. Refer to part d. Give the journal entry (entries) made during 2013 to apply the equity method. f. Chicago Corporation acquired its only building on January 1, 2012. It estimated the building to have a 40-year useful life and zero salvage value at that time. Calculate the amount of depreciation expense on this building for 2013, assuming that the firm uses the straight-line method. g. Chicago Corporation sold machinery and equipment costing $1,000,000, with a carrying value of $200,000, for cash during 2013. Give the journal entry to record the disposition. h. The bonds payable carry 6% annual coupons and require the payment of interest on December 31 of each year. Give the journal entry made on December 31, 2013, to recognize interest expense for 2013, assuming that Chicago Corporation uses the effective interest method. i. Refer to part h. What was the effective or market interest rate on these bonds on the date Chicago Corporation issued them? Explain. j. The $170,000 deferred portion of income tax expense for 2013 includes $150,000 relating to the use of different depreciation methods for financial and tax reporting. If the income tax rate was 30%, calculate the difference between the depreciation deduction reported on the tax return and the depreciation expense reported on the income statement. k. Give the journal entry that explains the change in the treasury shares during 2013. l. If the original acquisition cost of the patent is $1,250,000, and the firm amortizes that cost on a straight-line basis, how long before December 31, 2013, did the firm acquire the patent? m. Chicago Corporation acquired the stock of Hutchinson Company on December 31, 2012. If it held the same amount of stock during the year, but the amount represented only a 15% ownership of the Hutchinson Company, how would the financial statements have differed? Disregard income tax effects, and assume the market price of the shares exceeds their acquisition cost of $100,000 by $25,000 on December 31, 2013. n. During 2013, Chicago Corporation paid $170,000 to the lessor of property represented on the balance sheet by Property Rights Acquired Under Lease. Property rights acquired under lease have a 10-year life, and Chicago Corporation amortizes them on a straight-line basis. What was the total expense reported by Chicago Corporation during 2013 from using the leased property? o. How would the financial statements differ if Chicago Corporation accounted for inventories on the lower-of-cost-or-market basis and if the market value of these inventories had been $1,600,000 at the end of 2013? Disregard income tax effects. p. Refer to the earnings-per-share amounts in the income statement of Chicago Corporation. How many shares of common stock would the firm issue if holders of the outstanding shares of preferred stock converted them into common stock? q. Prepare a T-account work sheet for the preparation of a statement of cash flows for Chicago Corporation for 2013. The certificate of deposit is a cash equivalent.