Problem 24-3 Sunland Corporation was formed 5 years ago through a public subscri
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Problem 24-3
Sunland Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Sunland and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $34,660 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,010 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Sunland’s cash flow problems are due primarily to the company’s desire to finance a $298,840 plant expansion over the next 2 fiscal years through internally generated funds.
The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.
SUNLAND CORPORATION
BALANCE SHEET
MARCH 31
2018
2017
SUNLAND CORPORATION
INCOME STATEMENT
FOR THE FISCAL YEARS ENDED MARCH 31
2018
2017
(a) Compute the following items for Sunland Corporation. (Round answer to 2 decimal places, e.g. 2.25 or 2.25%.)
2017
2018
SUNLAND CORPORATION
BALANCE SHEET
MARCH 31
2018
2017
Cash $18,270 $12,480 Notes receivable 147,920 132,320 Accounts receivable (net) 132,770 124,290 Inventories (at cost) 105,380 49,890 Plant & equipment (net of depreciation) 1,462,720 1,422,440 Total assets $1,867,060 $1,741,420 Liabilities and Owners’ Equity Accounts payable $79,230 $90,420 Notes payable 76,430 62,080 Accrued liabilities 13,350 8,010 Common stock (130,000 shares, $10 par) 1,310,960 1,298,480 Retained earningsa 387,090 282,430 Total liabilities and stockholders’ equity $1,867,060 $1,741,420 aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year 2018.Explanation / Answer
Answer to Part 1.
Current Ratio = Current Assets / Current Liabilities
Year 2017:
Current Assets = Cash + Notes Receivable + Accounts Receivable, Net + Inventories
Current Assets = $12,480 + $132,320 + $124,290 + 49,890
Current Assets = $318,980
Current Liabilities = Accounts Payable + Accrued Liabilities
Current Liabilities = $90,420 + $8,010
Current Liabilities = $98,430
Current Ratio = 318,980 / 98,430
Current Ratio = 3.24 : 1
Year 2018:
Current Assets = Cash + Notes Receivable + Accounts Receivable, Net + Inventories
Current Assets = $18,270 + $147,920 + $132,770 + $105,380
Current Assets = $404,340
Current Liabilities = Accounts Payable + Accrued Liabilities
Current Liabilities = $79,230 + $13,350
Current Liabilities = $92,580
Current Ratio = 404,340/ 92,580
Current Ratio = 4.37 : 1
Answer to Part 2.
Acid Test (Quick) Ratio = (Current Assets – Inventories) / Current Liabilities
Year 2017:
Acid Test Ratio = (318,980 – 49,890) / 98,430
Acid Test Ratio = 269,090 / 98,430
Acid Test Ratio = 2.73 : 1
Year 2018:
Acid Test Ratio = (404,340 – 105,380) / 92,580
Acid Test Ratio = 298,960 / 92,580
Acid Test Ratio = 3.23 : 1
Answer to Part 3.
Inventory Turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (105,380 + 49,890) / 2
Average Inventory = $77,635
Inventory Turnover = 1,536,070 / 77,635
Inventory Turnover = 19.79 times
Answer to Part 4.
Return on Assets = Net Income / Average Total Assets
Year 2017:
Average Total Assets = (1,679,620 + 1,741,420) / 2
Average Total Assets = $1,710,520
Return on Assets = 302,496 / 1,710,520
Return on Assets = 17.68%
Year 2018:
Average Total Assets = (1,867,060 + 1,741,420) / 2
Average Total Assets = $1,804,240
Return on Assets = 349,776 / 1,804,240
Return on Assets = 19.39%
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