Acc421 Intermediate Accounting: Week 4 – Individual Assignments (I4-1, I4-2, I4-3, I4-4)

Accounting 421 Intermediate Accounting
Week 4 – Individual Assignments

An inexperienced bookkeeper for the Soggy Ground Construction Company has prepared the following balance sheet.

Soggy Ground Construction Company
Balance Sheet
For the Year Ended December 31, xxxx
Current Assets
Cash $149,500
Accounts receivable (net) 220,000
Inventories at lower of average cost or market 260,000
Trading securities at cost 90,000
Property, plant, and equipment
Building (net) 375,000
Office equipment (net) 105,000
Land held for future use 110,000
Intangible assets
Goodwill 52,000
Cash surrender value of life insurance 60,000
Prepaid expenses 8,000
Current Liabilities
Accounts payable 87,500
Notes payable (due within 1 year) 80,000
Pension obligation 53,500
Rent payable 30,500
Discount on bonds payable 35,000
Long-term liabilities
Bonds payable 350,000
Stockholders’ equity
Common stock, $5.00 par, authorized 100,000 shares, issued 39,000 shares 195,000
Additional paid-in capital 105,000

Additional information:
The trading securities have a fair market value of $77,500 on December 31.
The company has no employee eligible to retire and receive pension benefits for at least the next 3 years.
Total life-to-date depreciation expense for the building is $105,000.
Total life-to-date depreciation expense for the office equipment is 65,500.
Allowance for doubtful accounts has a credit balance of $11,500.
The bookkeeper is unsure how to compute the proper balance in retained earnings

Prepare a correct classified balance sheet in good form.

The trial balance of the Grassy Ground Construction Company as of December 31, xxxx follows.
Debit Credit
Cash $89,000
Construction revenue $3,650,000
Trading securities 69,000
Construction expenses 2,150,000
Long-term investments in bonds 134,500
Long-term investments in stocks 124,500
Short-term notes payable 40,000
Accounts payable 204,500
Selling expenses 900,000
Investment revenue 28,500
Land 117,000
Buildings 468,000
Dividends payable 61,500
Accrued liabilities 43,000
Accounts receivable 195,000
Accumulated depreciation – Buildings 68,500
Allowance for doubtful accounts 11,500
Administrative expenses 405,000
Interest expense 95,000
Inventory 270,000
Extraordinary gain 35,000
Long-term notes payable 400,000
Equipment 275,000
Bonds Payable 450,000
Accumulated depreciation - Equipment 25,000
Franchise 75,000
Common stock ($1 par) 400,000
Treasury stock 86,000
Patent 90,000
Retained earnings 95,500
Additional paid-in capital 30,000
$5,543,000 $5,543,000

Additional information:
The trading securities were purchased for $65,000.

The common stock is $1 par; 1,000,000 shares authorized and 400,000 shares issued.

A current, independent real estate appraisal indicates that the fair market value of the buildings is $428,000.

Prepare a classified balance sheet as of December 31 in good form.

Each of the following situations occurred after the date of the Stony Ground Corporation’s financial statements, but before the financial statements were published.
A. A long term employee who was a key research scientist critical to the development of a new process suffered an accident at home. As a result, she is unable to return to work. Her absence will materially impact the profitability of the company related to the new process.

B. Three years ago the company was involved in a traffic accident with one of its company cars. The company was sued shortly after the accident occurred. The suit was settled at a cost of $1,000,000 after the balance sheet date but before the balance sheet was published.

C. The company issued 500,000 shares of $1 par common stock at $20 per share.

D. Just after the balance sheet date, the company launched its new product, the Wizbang 5000. The Wizbang 5000 is expected to contribute a significant amount to the company’s profitability for at least the next 5 years.

E. The company accepted a merger proposal from the Alternative Proposal Corporation of Walla-Walla. The merged company is approximately twice the size of Stony Ground prior to the merger.

F. A long term business dispute over a patent infringement case was settled adversely to Stony Ground and Stony Ground was required to pay a significant amount more than had been anticipated.

G. The Fairly Reliable Corporation filed bankruptcy. At the balance sheet date, Fairly Reliable owed Stony Ground $275,000 and none had been paid up to the date of the bankruptcy.

H. Stony Ground sold a major division of the business to a competitor.

I. Negotiations with the local union at Stony Ground’s Yazoo plant broke down and all union employees walked off the job effectively shutting down the plant.

J. A competitor of Stony Ground undercut Stony Ground’s pricing and stole a major customer representing a loss of in excess of $400,000 in annual revenues.

K. After a long, nationwide search, the company hired Ms. Shirley Johnson as the company’s new chief financial officer. Ms. Johnson brings years of financial experiences to the company and is widely expected to enhance Stony Ground’s capital structure, improving long term profitability.

L. A hurricane caused significant damage to Stony Ground’s yacht production facility on the Miami River in Florida.

For each situation determine if Stony Ground must:
(a) Do nothing.
(b) Disclose the situation in the notes accompanying the financial statements but not record the impact, if any, until the next set of financial statements.
(c) Adjust the year-end financial statements before they are published.

The Muddy Ground Corporation invests excess cash from time to time in relatively short term loans to other corporations, commonly called commercial paper. Muddy Ground has $250,000 in temporary excess cash and is considering commercial paper investments for two companies. Each company is requesting the full $250,000 and the investment cannot be split between the two companies. Below are condensed balance sheets of each company, along with additional information.
ABC Corp. XYZ Corp.

Cash $102,000 $272,000
Accounts receivable 187,000 256,700
Inventory 484,500 440,300
Total current assets 773,500 969,000
Other assets 425,000 520,200
Total assets $1,198,500 $1,489,200

Liabilities and Stockholders’ Equity

Current liabilities $259,250 $297,500
Long-term liabilities 340,000 425,000
Capital stock 382,500 510,000
Retained earnings 216,750 256,700
Total liabilities and equity $1,198,500 $1,489,200

Annual sales $790,500 $1,275,000
Gross profit on sales 25% 35%

Using the above information, compute at least 4 ratios that would be relevant to Muddy Ground’s decision about which company’s commercial paper to buy. Based on your computations, determine which company presents the lower risk and should be Muddy Ground’s choice for investment. Explain how each ratio supports your decision.
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