On Dec. 14th, apple management was approached by a vendor offering them a chance to purchase specialized set of assets for only $814,000. The set includes two machines, one that retails for $353,000 and one that retails for $365,000, a custom conveyor belt that the vendor estimates has a retail value of $34,000, and a small storage facility with an estimated market value of $388,000. The vendor has offered apple management this deal because the company that ordered the units (one of apple's competitors) has declared bankruptcy.To make room for the new equipment, apple and his team have decided to sell off an old piece of equipment that will be replaced by the new machines. The old equipment was originally purchased for $265,000 and has been fully depreciated to its estimated salvage value of $27,825. Apple's sales department was able to sell the old machine for $25,295, a pretty good deal considering the change in production methods and the improvements in technology. Although the deal was completed on December 29th, no journal entries have yet been recorded. Apple's management would like to know the effect of the sale on the following ratios.
1) Asset Turnover (net sales/average total assets)
2) ROA
3)Current Ratio
Please round all percentages used for assigning values to assets to 3 decimal places.
Assignment:
1) Calculate each of the three (3) ratios before you make any adjustments
2)Make the appropriate journal entries, if any, to account for the trade-in (including any necessary changes to income tax expenses).
3)make any necessary changes needed to the financial statements
4) Calculate the three ratios again after you make any adjustments
5) What do you think apple's creditors (the bank and bond holder) reaction could be to the exchange? Do you think creditors will be happy with it? Why/Why not.
6) Apple's CFO said that the company should pass on the opportunity because of the drain on cash. He said "even though it is a great deal I don't want to be short on cash if something comes up. Also how will we explain the effect on our I/S?". What would be the consequences of following the CFO suggestions? What would be the consequences for making these deals for PPE now?
HINTS: Youll probably want to do your allocation table for each item separate, make sure that your journal entry for the new PPE only includes the accounts that apple has actually chose to use (on balance sheet). Also if you change income statement account there will be a tax effect.
Balance Sheet As of 12/31/2020 Year 2 Year 1 $1,026,000 $2,034,000 ($113,000) $2,731,800 $349,500 $282,500 $6,310,800 $1,130,000 $1,921,000 ($565,000) $3,164,000 $339,000 $226,000 $6,215,000 Current Assets Cash AR Allowance for Bad Debts Inventory 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 $678,000 $1,582,000 $904,000 $678,000 $1,582,000 $2,486,000 $1,582,000 $1,808,000 $1,808,000 $6,328,000 $2,938,000 ($3,616,000) ($2,260,000). $7,006,000 $4,068,000 $339,000 $339,000 $15,237,800 $12,204,000 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $443,944 $1,356,000 Income Tax Payable $385,840 $226,000 Unearned Revenue $565,000 $339,000 Wages Payable $271,200 $282,500 Recourse Liability $0 $0 Total Current Liabilities $1,778,984 $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 $5,507,984 $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 $6,451,816 $4,123,500 Total Stockholders' Equity $9,729,816 $7,401,500 Total Liabilities and Stockholder's Equity $15,237,800 $12,204,000 Statement of Cash Flows For Year Ended December 31, 2020 Cash Flow from Operations Net Income $2,658,316 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 A/P ($912,056) Change in Income Tax Payable $159,840 Change in Unearned Revenue $226,000 Change in Wages Payable ($11,300) $618,684 Net Cash Flow from Operations $3,277,000 Cash Flow from Investments Sale of A/R Purchase of Land Purchase of Equipment Net Cash Flow from Investments $0 ($904,000) ($3,390,000) ($4,294,000) 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 ($104,000) $1,130,000 $1,026,000 Multi-Step Income Statement For Year Ended December 31, 2020 Sales Revenue Sales Revenue Less: Sales Discounts $271,200 Sales Returns $1,073,500 Net Sales Revenue $22,600,000 $1,344,700 $21,255,300 Cost of Goods Sold Cost of Goods Sold Gross Profit $12,402,508 $8,852,792 $423,750 $110,175 $310,750 $1,130,000 $185,038 $2,159,713 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 Utilities Expense Total Administrative Expenses Income from Operations $988,750 $1,356,000 $194,925 $11,159 $87,575 $14,125 $169,500 $2,822,034 $4,981,747 $3,871,045 $70,625 ($144,075) Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income ($73,450) $3,797,595 ($1,139,279) $2,658,316 EPS $ 1.02 Balance Sheet As of 12/31/2020 Year 2 Year 1 $1,026,000 $2,034,000 ($113,000) $2,731,800 $349,500 $282,500 $6,310,800 $1,130,000 $1,921,000 ($565,000) $3,164,000 $339,000 $226,000 $6,215,000 Current Assets Cash AR Allowance for Bad Debts Inventory 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 $678,000 $1,582,000 $904,000 $678,000 $1,582,000 $2,486,000 $1,582,000 $1,808,000 $1,808,000 $6,328,000 $2,938,000 ($3,616,000) ($2,260,000). $7,006,000 $4,068,000 $339,000 $339,000 $15,237,800 $12,204,000 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $443,944 $1,356,000 Income Tax Payable $385,840 $226,000 Unearned Revenue $565,000 $339,000 Wages Payable $271,200 $282,500 Recourse Liability $0 $0 Total Current Liabilities $1,778,984 $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 $5,507,984 $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 $6,451,816 $4,123,500 Total Stockholders' Equity $9,729,816 $7,401,500 Total Liabilities and Stockholder's Equity $15,237,800 $12,204,000 Statement of Cash Flows For Year Ended December 31, 2020 Cash Flow from Operations Net Income $2,658,316 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 A/P ($912,056) Change in Income Tax Payable $159,840 Change in Unearned Revenue $226,000 Change in Wages Payable ($11,300) $618,684 Net Cash Flow from Operations $3,277,000 Cash Flow from Investments Sale of A/R Purchase of Land Purchase of Equipment Net Cash Flow from Investments $0 ($904,000) ($3,390,000) ($4,294,000) 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 ($104,000) $1,130,000 $1,026,000 Multi-Step Income Statement For Year Ended December 31, 2020 Sales Revenue Sales Revenue Less: Sales Discounts $271,200 Sales Returns $1,073,500 Net Sales Revenue $22,600,000 $1,344,700 $21,255,300 Cost of Goods Sold Cost of Goods Sold Gross Profit $12,402,508 $8,852,792 $423,750 $110,175 $310,750 $1,130,000 $185,038 $2,159,713 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 Utilities Expense Total Administrative Expenses Income from Operations $988,750 $1,356,000 $194,925 $11,159 $87,575 $14,125 $169,500 $2,822,034 $4,981,747 $3,871,045 $70,625 ($144,075) Rent Revenue Interest Expense Income from Continuing Operations before Taxes Income Tax Expense Net Income ($73,450) $3,797,595 ($1,139,279) $2,658,316 EPS $ 1.02
