hey bannis – I am learning too… this was something I was working at with all of you… writing down and scribbling my stuff on a page of paper
We could take some private tutions from you cpk for all these adjustments.
- Choice “a” is correct. Adjusted cost of goods sold is $290,000 and adjusted inventory is $84,000. Thus, adjusted inventory turnover is 3.45x ($290,000/84,000). Choice “b” is incorrect. This inventory turnover is incorrectly calculated using the unadjusted cost of goods sold of $315,000. Choice “c” is incorrect. This inventory turnover is incorrectly calculated using the unadjusted inventory of $62,000. Cost of Goods Sold: $315,000 -25,000 (If the leases were treated as capitalized, then there would be no lease expense of $25,000.) Adjusted COGS: $290,000 Inventory: $62,000 + 22,000 (For LIFO to FIFO) Adjusted Inventory: $84,000
ok- say you had cpk vs. 'da bears. who would win?
for some reason they are not adjusting the LIFO Cogs to FIFO COGS by removing the 7 LIFO Reserve - possibly because LIFO on Income statement is good. based on the 290 figure above - and 47.495 Interest cost, 70 Op Exp, 44.6 Depr - NI = 36.543 and ROCE = 36.543 / 337 = 10.8%
bears handsdown…
^ correct sir. LIFO better on I/S, FIFO better on B/S.
DA BEARRRRRRRRRRRRRRRRRSSSSSSSSSSS! with that, i bid you all a good night. just when i had rocked a few 85% and above q-bank quizes on SS11 today, i get shot right back down with this winnah (as they’d say here in boston).
- Choice “b” is correct. The firm’s adjusted total debt is $535,424 and the adjusted total equity is $337,000: Debt-to-equity = $535,424/$337,000 = 1.59x Choice “a” is incorrect. This calculation incorrectly excludes the $32,015 current portion of the long-term debt. Choice “c” is incorrect. This is adjusted total liabilities over total equity. Adjusted Debt Total Liabilities: $620,424 - 14,000 (Other Current Liabilities) - 71,000 (Accounts Payable) = $535,424 Adjusted Equity Total Equity: $310,000 + 27,000 Adjustment to retained earnings (Plug: Total Adj Assets - Total Adj Liab - Equity) = $337,000
- Choice “b” is correct. GS’s adjusted net income is $40,495 and its adjusted equity is $337,000. The firm’s adjusted return on common equity is therefore, 12.0% ($40,495/337,000). Choice “a” is incorrect. This return on common equity excludes the elimination of the $6,000 impairment loss when calculating adjusted net income. Choice “c” is incorrect. This return on common equity excludes the adjustment for the capitalized interest when calculating adjusted net income. Sales: $525,000 Adj COGS: $315,000-25,000=290,000 (If the leases were treated as capitalized, no lease expense of $25,000.) Adj GP: 235,000 Adj Op Exp: 76,000 - 6,000 = 70,000 (Impairment loss is eliminated bc non-cash adjustment with no economic substance) Adj Depr 44,000 +19,262 = 63,262 ($115,572/6 for SL Depr) Adj Oper Income = 101,738 Adj Int Exp: 10,000 + 15,000 + 9,246 = 34,246 +15,000 (Capitalized interest) +9,246 ( The liability drops from $115,572 to $99,818 during 20X7. This is a $15,754 decline and the payment is $25,000. The difference of $9,246 ($115,572 x 8%) is the amount of interest expense.) Adj Pretax Oper Income = 67,492 40% Tax = 26,997 Adj NI = 40,495
Summary 1. Choice “b” is correct. The completed adjusted balance sheet is included below. The firm’s adjusted current assets are $316,296 and the current liabilities are $163,311. Thus, the current ratio is $316,296/163,311 = 1.94x. Choice “a” is incorrect. This is the unadjusted current ratio. Choice “c” is incorrect. This is the adjusted quick ratio. 2. Choice “c” is correct. The firm’s adjusted total assets are $957,424. Choice “a” is incorrect. This amount excludes the adjustment for the throughput commitments. Choice “b” is incorrect. This amount incorrectly excludes the adjustment from LIFO to FIFO inventory. 3. Choice “b” is correct. The firm’s adjusted total liabilities are $620,424. Choice “a” is incorrect. This amount is the unadjusted total liabilities. Choice “c” is incorrect. This amount does not eliminate the deferred tax liability. As Johnson believes this will never be paid, it should be eliminated. 4. Choice “a” is correct. Adjusted cost of goods sold is $290,000 and adjusted inventory is $84,000. Thus, adjusted inventory turnover is 3.45x ($290,000/84,000). Choice “b” is incorrect. This inventory turnover is incorrectly calculated using the unadjusted cost of goods sold of $315,000. Choice “c” is incorrect. This inventory turnover is incorrectly calculated using the unadjusted inventory of $62,000. 5. Choice “b” is correct. The firm’s adjusted total debt is $535,424 and the adjusted total equity is $337,000: Debt-to-equity = $535,424/$337,000 = 1.59x Choice “a” is incorrect. This calculation incorrectly excludes the $32,015 current portion of the long-term debt. Choice “c” is incorrect. This is adjusted total liabilities over total equity. 6. Choice “b” is correct. GS’s adjusted net income is $40,495 and its adjusted equity is $337,000. The firm’s adjusted return on common equity is therefore, 12.0% ($40,495/337,000). Choice “a” is incorrect. This return on common equity excludes the elimination of the $6,000 impairment loss when calculating adjusted net income. Choice “c” is incorrect. This return on common equity excludes the adjustment for the capitalized interest when calculating adjusted net income. Explanations of the Adjustments: Balance Sheet (1) Market value of these assets and liabilities is equal to their recorded book values (Note 9). (2) LIFO inventory must be adjusted to FIFO inventory by adding the LIFO reserve of $22,000 because FIFO inventory is the best estimate of fair value (Note 1). (3) The operating leases are treated as if they were capitalized. The total present value of the leases on December 31, 20X7 is $99,818. This amount is recorded as a liability after determining the current versus long-term portion. The present value at March 31, 20X8 is calculated to be $82,803 (payments of $25,000, 8% rate, four years remaining). Thus, the current portion of the lease is $17,015 ($99,818 - $82,803). The offset to the liability is an addition to plant & equipment of $99,818. (4) The carrying value of the fixed assets must be reduced by the capitalized interest of $15,000. No adjustment is made to accumulated depreciation as the adjustment would not be material. (5) The present value of the throughput contract is recorded as both current and long-term asset and current and long-term liability. The present value of the current throughput commitment is $46,296. The present value of long-term value throughput commitments is $119,310. (Note 2). (6) The guaranteed debt of $20,000 is added to long-term debt and to assets as an investment in affiliate. (7) Deferred taxes are eliminated, as Adams believes this amount will never be paid. (8) The equity adjustment is a PLUG to make the adjusted balance sheet be in balance. We show the entire $27,000 as an adjustment to retained earnings. Alternatively, equity could be a net number. Income Statement (9) If the leases were treated as capitalized, then there would be no lease expense of $25,000. Thus, the $25,000 is removed from the COGS. In addition, interest expense needs to be recorded. This will be equal to the difference between the payment amount and the amount the liability declines during the year. The liability drops from $115,572 to $99,818 during 20X7. This is a $15,754 decline and the payment is $25,000. The difference of $9,246 ($115,572 x 8%) is the amount of interest expense. In addition, because an asset is recorded, depreciation needs to be calculated. The asset at December 31, 20X6 was $115,572. Using a 6-year life (the remaining lease term on December 31, 20X6) and the straight-line method, the depreciation for the year ended December 31, 20X7 is $19,262 ($115,572/6). It is important to remember that we are not attempting to make balanced accounting entries. The goal is to adjust the financial statements at a point in time to best reflect economic substance. (10) The $6,000 impairment loss is eliminated because it is a non-cash adjustment with no economic substance. (11) The capitalized interest of 15,000 is added to interest expense. (12) Taxes are adjusted to reflect the new loss as opposed to the previous pretax income. Adjusted Balance Sheet, December 31, 20X7 (000s) Reported Adjustment Adjusted Assets Cash and equivalents 105,000 -- (1) 105,000 Accounts receivable 81,000 – (1) 81,000 Current throughput contract 46,296 (5) 46,296 Inventories 62,000 22,000 (2) 84,000 Total current assets $248,000 $68,296 $316,296 Plant & equipment (net) 390,000 99,818 (3) (15,000) (4) 474,818 LT throughput contract - 119,310 (5) 119,310 Interest in affiliate - 20,000 (6) 20,000 Pension asset 27,000 - 27,000 Total assets $665,000 $360,720 957,424 Liabilities Accounts payable 71,000 -- (1) 71,000 Current portion of debt 15,000 17,015 (3) 32,015 Current throughput commitment 46,296 (5) 46,296 Other current liabilities 14,000 – (1) 14,000 Total current liabilities $100,000 $63,311 $163,311 Long-term debt 235,000 82,803 (3) LT throughput commitment 119,310 (5) 20,000 (6) 457,113 Deferred tax liability 20,000 (20,000) (7) – Total liabilities $355,000 $265,424 620,424 Equity Common stock 90,000 - $ 90,000 Retained earnings 220,000 27,000 (8) 247,000 Total equity $310,000 27,000 $337,000 Total liabilities and equity $665,000 $292,424 $957,424 Adjusted Income Statement Year Ended December 31, 20X7 (000s) Reported Adjustment Adjusted Sales $525,000 525,000 Cost of goods sold 315,000 (25,000) (9) 290,000 Gross profit 210,000 235,000 Operating expenses 76,000 (6,000) (10) 70,000 Depreciation 44,000 19,262 (9) 63,262 Operating income 90,000 101,738 Interest expense 10,000 9,246 (9) 15,000 (11) 34,246 Pretax operating income 80,000 67,492 Income taxes (40%) 32,000 26,997 (12) Net income 48,000 40,495
This is too much… I need to print all of this out to solve it…
- A. CA = 248+ LIFO adjustment + current portion of lease. A. CL = 100k+ PV throughput PV of throughput = already given. CPof lease = 99818*.08 = 7985.44 25-7.985 =17.015. (248+46.926+22)/(100+46.926+17.015) = ~ 1.94x B.
- CA+PV Throughput + Debt Gurantee + P&E - Cap int. cost + Pension asset. + PV of lease. = 316.296 + 119.310 + 20 + 390 - 15 +27 +99.818 =957.424
That debt guarantee can be considered cash put aside to pay back its supplier?