Question 6

1. The market value of Farmington Corp.'s common shares was quoted at $54 per share at December 31, 2018, and 2017. Planetarium 's balance sheet at December 31, 2018, and 2017, and statement of income and retained earnings for the years then ended are presented below:

Farmington Corp.

Balance Sheet

December 31

2018 2017

Assets:

Current assets:

Cash $ 9,000,000 $ 5,200,000

Short-term investments 17,200,000 15,400,000

Accounts receivable (net) 109,000,000 111,000,000

Inventories, lower of cost or market 122,000,000 140,000,000

Prepaid expenses 4,000,000 2,800,000

Total current assets $261,200,000 $274,400,000

Property, plant, and equipment (net) 350,000,000 315,000,000

Investments, at equity 2,800,000 3,500,000

Long-term receivables 15,000,000 20,000,000

Copyrights and patents (net) 6,000,000 7,000,000

Other assets 8,000,000 9,100,000

Total assets $643,000,000 $629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:

Notes payable $ 7,000,000 $ 17,000,000

Accounts payable 55,000,000 52,000,000

Accrued expenses 27,500,000 30,000,000

Income taxes payable 1,500,000 2,000,000

Current portion of long-term debt 10,000,000 9,500,000

Total current liabilities 101,000,000 110,500,000

Long-term debt 180,000,000 190,000,000

Deferred income taxes 69,000,000 65,000,000

Other liabilities 15,000,000 9,500,000

Total liabilities 365,000,000 375,000,000

Stockholders' equity:

Common stock, par value $1; authorized 20,000,000

shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000

10% cumulative preferred shares, par value $100;

$100 liquidating value; authorized 100,000 shares;

issued and outstanding 60,000 shares 6,000,000 6,000,000

Additional paid-in capital 119,000,000 119,000,000

Retained earnings 141,000,000 117,000,000

Total stockholders' equity 278,000,000 254,000,000

Total liabilities and stockholders' equity $643,000,000 $629,000,000

Farmington Corp.

Statement of Income and Retained Earnings

Year ended December 31

2018 2017

Net sales $540,000,000 $500,000,000

Cost and expenses:

Cost of goods sold 390,900,000 400,000,000

Selling, general, and administrative expenses 70,000,000 65,000,000

Other, net 9,100,000 6,000,000

Total costs and expenses 470,000,000 471,000,000

Income before income taxes 70,000,000 29,000,000

Income taxes 21,000,000 11,600,000

Net income 49,000,000 17,400,000

Retained earnings at beginning of period 117,000,000 113,100,000

Dividends on common stock (24,400,000) (12,900,000)

Dividends on preferred stock (600,000) (600,000)

Retained earnings at end of period $141,000,000 $117,000,000

Instructions

Based on the above information, compute the following (for the year 2018 only): (Show supporting computations in good form.)

(a) Current ratio.

(b) Acid-test (quick) ratio.

(c) Accounts receivable turnover.

(d) Inventory turnover.

(e) Book value per share of common stock.

(f) Earnings per share.

(g) Price-earnings ratio.

(h) Payout ratio on common stock.

Question 7

1. Molina Companys reported net incomes for 2018 and the previous two years are presented

below.

2018 2017 2016

$105,000 $95,000 $70,000

2018s net income was properly determined after giving effect to the following accounting changes, error corrections, etc. which took place during the year. The incomes for 2016 and 2017 do not take these items into account and are stated at the amounts determined in those years. Ignore income taxes.

Instructions

(a) For each of the six accounting changes, errors, or prior period adjustment situations described below, prepare the journal entry or entries Molina Company should record during 2018. If no entry is required, write none.

(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2018. If no entry, write none.

1. Early in 2018, Molina determined that equipment purchased in January, 2016 at a cost of $1,290,000, with an estimated life of 5 years and salvage value of $90,000 is now estimated to continue in use until December 31, 2022 and will have a $30,000 salvage value. Molina recorded its 2018 depreciation at the end of 2018.

(a)

(b)

2. Molina determined that it had understated its depreciation by $20,000 in 2017 owing to the fact that an adjusting entry did not get recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-line depreciation for its trucks.

(a)

(b)

(a)

(b)

2. Molina determined that it had understated its depreciation by $20,000 in 2017 owing to the fact that an adjusting entry did not get recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-line depreciation for its trucks.

(a)

(b)

(a)

(b)

2. Molina determined that it had understated its depreciation by $20,000 in 2017 owing to the fact that an adjusting entry did not get recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date. The truck is expected to be traded at the end of 2020. Molina uses straight-line depreciation for its trucks.

(a)

(b)

Question 8

1. On January 1, 2018, Foley Company (as lessor) entered into a noncancelable lease agreement with Pinkley Company for machinery which was carried on the accounting records of Foley at $9,060,000 and had a fair value of $9,600,000. Minimum lease payments under the lease agreement which expires on December 31, 2027, total $14,200,000. Payments of $1,420,000 are due each January 1. The first payment was made on January 1, 2018 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Pinkley expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions

(a) From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement?

(b) What should be the income before income taxes derived by Foley from the lease for the year ended December 31, 2018?

(c) Ignoring income taxes, what should be the expenses incurred by Pinkley from this lease for the year ended December 31, 2018?

(d) What journal entries should be recorded by Pinkley Company on January 1, 2018?

Question 9

1. Information concerning the debt of Cole Company is as follows:

Short-term borrowings:

Balance at December 31, 2017 $525,000

Proceeds from borrowings in 2018 325,000

Payments made in 2018 (450,000)

Balance at December 31, 2018 $400,000

Current portion of long-term debt:

Balance at December 31, 2017 $1,625,000

Transfers from caption "Long-Term Debt" 500,000

Payments made in 2018 (1,225,000)

Balance at December 31, 2018 $ 900,000

Long-term debt:

Balance at December 31, 2017 $9,000,000

Proceeds from borrowings in 2018 2,250,000

Transfers to caption "Current Portion of Long-Term Debt" (500,000)

Payments made in 2018 (1,500,000)

Balance at December 31, 2018 $9,250,000

In preparing a statement of cash flows for the year ended December 31, 2018, for Cole Company, cash flows from financing activities would reflect

		$2,000,000
		$2,250,000
		$2,575,000
		$3,175,000

Question 10

1. Edwards Company contracted on 4/1/17 to construct a building for $4,800,000. The project was completed in 2019. Additional data follow:

2017 2018 2019

Costs incurred to date $1,120,000 $2,700,000 $3,800,000

Estimated cost to complete 2,080,000 900,000

Billings to date 1,000,000 3,800,000 4,800,000

Collections to date 800,000 2,600,000 4,400,000

Instructions

(a) Calculate the income recognized by Edwards under the percentage-of-completion method of accounting in each of the years 2017, 2018, and 2019.

(b) Prepare all necessary entries for the year 2018.

(c) Present the balance sheet disclosures at December 31, 2018. Proper headings or subheadings must be indicated.