Goal: To practice recording contingent liabilities and reporting them in the financial statements. (See Topic Guides LE 6, 7, 8). Information: At the beginning of 2020, Burkett was informed that a new city ordinance would require them to restore the woods behind their main factory if they intend to keep using it. The estimated cost of the restoration will be approximately $690,000 and must be done within the next 4 years or the factory will be shut down. When the notice was received, Burkett's board decided to wait until the beginning of 2023 to start the restoration. Although the notice was received and the board's decision made at the beginning of the year, no journal entries have yet been made for this obligation. The factory was built 2 years ago when Burkett was still a privately held company and is being depreciated using SL depreciation using the original estimate of a 12 year useful life. The depreciation for the building has already been recorded for 2020. The restoration will not change the factory's salvage value. Burkett's management would like to know the effect of the restoration on the following ratios: . Current Ratio ROA Assignment: Calculations 1. Calculate each of the two (2) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to account for the new liability (including any necessary changes to income tax expense). In making your entries, assume that Burkett's Internal Rate of Return is 5%. 3. Make any necessary changes to the financial statements. 4. Calculate the two (2) ratios after you make any adjustments. Critical Thinking 5. What do you think investors' reaction will be to this new obligation? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with this new requirement? Why or why not? 6. Burkett's CEO argued that they should wait until they had to actually satisfy the obligation to record it, after all they weren't going to have to actually pay anything until then. What are the possible consequences of this decisions and who is likely to be affected? Hints: 1. An obligation that will be paid more than 1 year out should be recorded at its present value, not its face value. 2. You will need to make two journal entries in addition to the initial recognition of the obligation (not including taxes). When you make the estimates for these adjusting entries, you only need to use the information from the initial recognition of this obligation. You won't need to redo any other estimates or other adjusting entries from earlier Burkett problems. + 3. When working on the Statement of Cash Flows, pay close attention to the actual cash amounts in your journal entries. The total change in cash should change by that amount. Any non-cash changes to NI will need to be removed from the CFO section to correctly make your statement to balance (just like we remove Depreciation because it doesn't have a real cash effect). When making those adjustments, the common line title when adjusting for interest on an ARO is 'Accretion Expense. Intermediate 1 FSU Project Part #2: Acquiring and Disposing of PPE Ratio Analysis Ratio Analysis Before the Change Asset Tumover Net Sales Average Total Assets $21,255,300 $13,720,900 1.549 + Current Ratio Current Assets Current Liabilities $6,310,800 $1,778,984 3.547 ROA Net Income Average Total Assets $2,658,316 $13,720,900 0.194 Ratio Analysis After the Change Asset Tumover Net Sales Average Total Assets $21,255,300 $13.719,635 1.549 Current Ratio Current Assets Current Liabilities $5,522,095 $1,778,225 3.105 ROA Net Income Average Total Assets $2,656,545 $13,719,635 0.194 + Adjusting Journal Entries Correcting Entries Sales Price $814,000 Mkt Values Percentage Basket Price Machine 1 $353,000 31.0% $252,340 Machine 2 $365,000 32.0% $260,480 Conveyor Belt $34,000 3.0% $24,420 Storage Facility $388,000 34.0% $276,760 $1,140,000 100% $814,000 Equipment $537,240 Building $276,760 Cash $814,000 To record the purchase of the new set of equipment Loss on Sale $2,530 Cash $25,295 Accumulated Depreciation $237,175 Equipment $265,000 Sale of old machines to make room for new set Income Tax Payable $759 Income Tax Expense $759 To record change in taxes due to exchange Burkett Co. Multi-Step Income Statement For Year Ended December 31, 2020 Sales Revenue Sales Revenue $22,600,000 Less: Sales Discounts $271,200 Sales Returns $1,073,500 $1,344,700 Net Sales Revenue $21,255,300 Cost of Goods Sold + Cost of Goods Sold $12,402.508 Gross Profit $8,852,792 Operating Activities Selling Expenses Advertising Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Total Selling Expenses Administrative Expenses Executive Salaries Expense Depreciation Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense Consulting and legal Fees $423,750 $110,175 $310,750 $1,130,000 $185,038 $2,159 713 $988,750 $1,356,000 $194.925 $11,159 $87,575 $14126 Consulting and Legal Fees Utilities Expense Total Administrative Expenses Income from Operations $14,125 $169,500 $2,822,034 $4,981,747 $3,871,045 Other Gains and Losses Rent Revenue $70,625 Interest Expense ($144,075) Loss on Sale ($2,530) ($75,980) Income from Continuing Operations before Taxes + $3,795,065 Income Tax Expense ($1.138,520) Net Income $2,656,545 EPS 1.02 Burkett Co. Balance Sheet As of 12/31/2020 Year 2 Year 1 $237,295 $1,130,000 $2,034,000 $1,921,000 ($113,000) ($565,000) $2,731,800 $3,164,000 $349,500 $339,000 $282,500 $226,000 $5,522,095 $6,215,000 Current Assets Cash A/R Allowance for Bad Debts Inventory, net Prepaid Insurance Prepaid Utilities Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents Total Assets $904,000 $904,000 $678,000 $678,000 $1,582,000 $1,582,000 $2,486,000 $1,582,000 $2,084,760 $1,808,000 $6,600,240 $2,938,000 ($3,378,825) ($2,260,000) $7,792,175 $4,068,000 $339,000 $339,000 $15,235,270 $12,204,000 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $443,944 $1,356,000 Income Tax Payable $385,081 $226,000 Uneamed Revenue $565,000 $339,000 Wages Payable $271,200 $282,500 Current Portion of Loan Payable $113,000 $113,000 Total Current Liabilities $1,778,225 $2,316,500 Long-term Debt Loan Payable $565,000 $678,000 Notes Payable $3,164,000 $1.808,000 Total Long-term Debt $3,729,000 $2,486.000 Total Liabilities $5,507,225 $4,802,500 Stockholders' Equity Common Stock $2,600,000 $2,600,000 ($1 par, $5,200,000.00 authorized, $2,600,000 outstanding Additional Paid-In Capital $678,000 $678,000 Retained Earnings $6,450,045 $4,123,500 Total Stockholders' Equity $9.728,045 $7,401,500 Total Liabilities and Stockholder's Equity $15,235,270 $12,204,000 Burkett Co. For Year Ended December 31, 2020 Cash Flow from Operations Net Income $2,656,545 Adjustments: Change in A/R ($565,000) Change in Inventory $432,200 Change in Prepaid Insurance ($10,500) Change in Prepaid Utilities ($56,500) Depreciation + $1,356,000 Change in AP ($912,056) Change in Income Tax Payable $159,081 Change in Unearned Revenue $226,000 Change in Wages Payable ($11,300) Loss on Sale $2,530 $620,455 Net Cash Flow from Operations $3,277,000 Cash Flow from Investments Sale of A/R $0 Sale of Equipment $25,295 Purchase of Land ($904,000) Purchange of Building ($278.760) Purchase of Equipment ($3,927 240) Net Cash Flow from Investments (55,082,705) Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing ($113,000) $1,356,000 ($330,000) $913,000 + Net Increase (Decrease) in Cash Cash, January 1, 2020 Cash, December 31, 2020 ($892,705) $1,130,000 $237 295 Goal: To practice recording contingent liabilities and reporting them in the financial statements. (See Topic Guides LE 6, 7, 8). Information: At the beginning of 2020, Burkett was informed that a new city ordinance would require them to restore the woods behind their main factory if they intend to keep using it. The estimated cost of the restoration will be approximately $690,000 and must be done within the next 4 years or the factory will be shut down. When the notice was received, Burkett's board decided to wait until the beginning of 2023 to start the restoration. Although the notice was received and the board's decision made at the beginning of the year, no journal entries have yet been made for this obligation. The factory was built 2 years ago when Burkett was still a privately held company and is being depreciated using SL depreciation using the original estimate of a 12 year useful life. The depreciation for the building has already been recorded for 2020. The restoration will not change the factory's salvage value. Burkett's management would like to know the effect of the restoration on the following ratios: . Current Ratio ROA Assignment: Calculations 1. Calculate each of the two (2) ratios before you make any adjustments. 2. Make the appropriate journal entries, if any, to account for the new liability (including any necessary changes to income tax expense). In making your entries, assume that Burkett's Internal Rate of Return is 5%. 3. Make any necessary changes to the financial statements. 4. Calculate the two (2) ratios after you make any adjustments. Critical Thinking 5. What do you think investors' reaction will be to this new obligation? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with this new requirement? Why or why not? 6. Burkett's CEO argued that they should wait until they had to actually satisfy the obligation to record it, after all they weren't going to have to actually pay anything until then. What are the possible consequences of this decisions and who is likely to be affected? Hints: 1. An obligation that will be paid more than 1 year out should be recorded at its present value, not its face value. 2. You will need to make two journal entries in addition to the initial recognition of the obligation (not including taxes). When you make the estimates for these adjusting entries, you only need to use the information from the initial recognition of this obligation. You won't need to redo any other estimates or other adjusting entries from earlier Burkett problems. + 3. When working on the Statement of Cash Flows, pay close attention to the actual cash amounts in your journal entries. The total change in cash should change by that amount. Any non-cash changes to NI will need to be removed from the CFO section to correctly make your statement to balance (just like we remove Depreciation because it doesn't have a real cash effect). When making those adjustments, the common line title when adjusting for interest on an ARO is 'Accretion Expense. Intermediate 1 FSU Project Part #2: Acquiring and Disposing of PPE Ratio Analysis Ratio Analysis Before the Change Asset Tumover Net Sales Average Total Assets $21,255,300 $13,720,900 1.549 + Current Ratio Current Assets Current Liabilities $6,310,800 $1,778,984 3.547 ROA Net Income Average Total Assets $2,658,316 $13,720,900 0.194 Ratio Analysis After the Change Asset Tumover Net Sales Average Total Assets $21,255,300 $13.719,635 1.549 Current Ratio Current Assets Current Liabilities $5,522,095 $1,778,225 3.105 ROA Net Income Average Total Assets $2,656,545 $13,719,635 0.194 + Adjusting Journal Entries Correcting Entries Sales Price $814,000 Mkt Values Percentage Basket Price Machine 1 $353,000 31.0% $252,340 Machine 2 $365,000 32.0% $260,480 Conveyor Belt $34,000 3.0% $24,420 Storage Facility $388,000 34.0% $276,760 $1,140,000 100% $814,000 Equipment $537,240 Building $276,760 Cash $814,000 To record the purchase of the new set of equipment Loss on Sale $2,530 Cash $25,295 Accumulated Depreciation $237,175 Equipment $265,000 Sale of old machines to make room for new set Income Tax Payable $759 Income Tax Expense $759 To record change in taxes due to exchange Burkett Co. Multi-Step Income Statement For Year Ended December 31, 2020 Sales Revenue Sales Revenue $22,600,000 Less: Sales Discounts $271,200 Sales Returns $1,073,500 $1,344,700 Net Sales Revenue $21,255,300 Cost of Goods Sold + Cost of Goods Sold $12,402.508 Gross Profit $8,852,792 Operating Activities Selling Expenses Advertising Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Total Selling Expenses Administrative Expenses Executive Salaries Expense Depreciation Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense Consulting and legal Fees $423,750 $110,175 $310,750 $1,130,000 $185,038 $2,159 713 $988,750 $1,356,000 $194.925 $11,159 $87,575 $14126 Consulting and Legal Fees Utilities Expense Total Administrative Expenses Income from Operations $14,125 $169,500 $2,822,034 $4,981,747 $3,871,045 Other Gains and Losses Rent Revenue $70,625 Interest Expense ($144,075) Loss on Sale ($2,530) ($75,980) Income from Continuing Operations before Taxes + $3,795,065 Income Tax Expense ($1.138,520) Net Income $2,656,545 EPS 1.02 Burkett Co. Balance Sheet As of 12/31/2020 Year 2 Year 1 $237,295 $1,130,000 $2,034,000 $1,921,000 ($113,000) ($565,000) $2,731,800 $3,164,000 $349,500 $339,000 $282,500 $226,000 $5,522,095 $6,215,000 Current Assets Cash A/R Allowance for Bad Debts Inventory, net Prepaid Insurance Prepaid Utilities Total Current Assets Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents Total Assets $904,000 $904,000 $678,000 $678,000 $1,582,000 $1,582,000 $2,486,000 $1,582,000 $2,084,760 $1,808,000 $6,600,240 $2,938,000 ($3,378,825) ($2,260,000) $7,792,175 $4,068,000 $339,000 $339,000 $15,235,270 $12,204,000 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $443,944 $1,356,000 Income Tax Payable $385,081 $226,000 Uneamed Revenue $565,000 $339,000 Wages Payable $271,200 $282,500 Current Portion of Loan Payable $113,000 $113,000 Total Current Liabilities $1,778,225 $2,316,500 Long-term Debt Loan Payable $565,000 $678,000 Notes Payable $3,164,000 $1.808,000 Total Long-term Debt $3,729,000 $2,486.000 Total Liabilities $5,507,225 $4,802,500 Stockholders' Equity Common Stock $2,600,000 $2,600,000 ($1 par, $5,200,000.00 authorized, $2,600,000 outstanding Additional Paid-In Capital $678,000 $678,000 Retained Earnings $6,450,045 $4,123,500 Total Stockholders' Equity $9.728,045 $7,401,500 Total Liabilities and Stockholder's Equity $15,235,270 $12,204,000 Burkett Co. For Year Ended December 31, 2020 Cash Flow from Operations Net Income $2,656,545 Adjustments: Change in A/R ($565,000) Change in Inventory $432,200 Change in Prepaid Insurance ($10,500) Change in Prepaid Utilities ($56,500) Depreciation + $1,356,000 Change in AP ($912,056) Change in Income Tax Payable $159,081 Change in Unearned Revenue $226,000 Change in Wages Payable ($11,300) Loss on Sale $2,530 $620,455 Net Cash Flow from Operations $3,277,000 Cash Flow from Investments Sale of A/R $0 Sale of Equipment $25,295 Purchase of Land ($904,000) Purchange of Building ($278.760) Purchase of Equipment ($3,927 240) Net Cash Flow from Investments (55,082,705) Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing ($113,000) $1,356,000 ($330,000) $913,000 + Net Increase (Decrease) in Cash Cash, January 1, 2020 Cash, December 31, 2020 ($892,705) $1,130,000 $237 295