Smyth Corporation had the following balances at 12/31/x1: CASH $ 2,200,000 INVES
ID: 2732761 • Letter: S
Question
Smyth Corporation had the following balances at 12/31/x1:
CASH $ 2,200,000
INVESTMENTS-TRADING 3,750,000
ACCOUNTS RECEIVABLE (NET) 5,500,000
INVENTORIES 2,600,000
PROPERTY, PLANT, & EQUIP (NET) 5,450,000
ACCOUNTS PAYABLE 4,510,000
INTEREST PAYABLE 90,000
ACCRUED VACATION PAY 7,000
LIABILITY FOR PRODUCT WARRANTIES 21,000
NOTES PAYABLE (long term) 7,000,000
BONDS PAYABLE 5,000,000
COMMON STOCK 1,000,000
COMMON STOCK DIVIDENDS DISTRIBUTABLE 2,000
RETAINED EARNINGS (1/1/x1) 370,000
SALES 19,000,000
COST OF GOODS SOLD 10,900,000
OPERATING EXPENSES 4,700,000
INTEREST EXPENSE 1,900,000
Additional information. No adjustments have been made for any of the additional information. No reversing entries were made at 1/1/x1. (Hints!!! Do not change "Cash".) Financial statements are not issued until March of x2.)
a. Smyth has a policy that allows employees 8 vacation days annually. The vacation days vest after an employee has been employed for six months. Smyth has a workforce of 20 employees each of whom has been with the company for at least three years. The average weekly salary is $1,000 (assume a five day work week). During the year employees took vacation hours totaling 112 days. The bookkeeper debited Wage Expense when the employees were paid for these days. (Ignore payroll taxes)
b. Sales include state sales tax at 4%. The bookkeeper debits Sales Tax Expense when sales taxes are paid to the state. At year end, sales tax of $21,000 is due to the state. Sales Tax Payable at 1/1/x1 was zero.
c. Warranty costs are estimated at 1.6% of selling price. Actual warranty costs incurred during the year totaled $245,000. The bookkeeper debits warranty expense as these costs are incurred.
d. The corporate tax rate is 40%.
e. The company president receives a bonus based upon 10% of net income.
f. $1,000,000 of the bonds mature 6/30/x2. The minutes of the last board meeting state that the company plans to refinance the bonds on a long-term basis when they mature. You have determined that the company has no commitments from any lender to take care of these bonds.
g. $1,000,000 of the bonds matured 1/31/x2. They were extinguished by issuing common stock. (Today's date is 2/1/x2).
h. Smyth issued a 2 year , $90,000, noninterest bearing note on 12/31/x1 for the purchase of a machine. The market rate of interest is 10%.
i. Cash dividends of $15,000 were declared on 12/15/x1 to be paid to stockholders of record on 1/ 15/x2 to be paid 1/31/x2.
j. The company is suing a competitor for patent infringement. The attorneys believe that Smyth will win the lawsuit. The settlement may be for as much as $90,000. The attorney's believe Smyth will probably receive $40,000.
k. The company is being sued by a customer who was hurt while visiting the corporate office. The attorneys believe that Smith may lose as much as $100,000, but that the customer will probably settle for $30,000.
Required:
1. Prepare a balance sheet and income statement for Smyth Company. Show calculations related to the above additional information.
2. Calculate the following financial information: a. Working capital b. Current ratio c. Quick ratio
Explanation / Answer
Answer:
In the books of Smyth Company:
Income Statement:
Expenditure
Amount ($)
Sales
19,000,000
(-) Cost of goods sold
10,900,000
(-) Operating Expenses
4,700,900
(-) Interest Expense
1,900,000
(-) Wage Expense (W.N 1)
22,400
(-) Sales Tax
760,000
Earnings before tax
716,700
(-) Corporate Tax 40%
286,680
Net Income
430,020
Bonus to company’s president
43,002
Cash Dividends
15,000
Interest on non-interest bearing note
9,000
Income available for stockholders
363,018
Balance Sheet:
Liabilities
Amount ($)
Assets
Amount ($)
Shareholders’ Equity:
Fixed Assets:
Common Stock
1,000,000
Property , Plant and Equip
5,450,000
Common stock issued for maturity of bonds
1,000,000
Machinery
99,000
Income available for Shareholders
363,018
Current Assets:
Retained Earnings
370,000
Notes Payable
7,000,000
Cash
2,200,000
Current Liabilities:
Investments Trading
3,750,000
Accounts Payable
4,510,000
Accounts Receivable
5,500,000
Interest Payable
90,000
Inventories
2,600,000
Accrued Vacation Pay
7,000
Liability of Product Warranties
21,000
Dividends Distributable
2,000
Bonds Payable
5,000,000
Provision for unexpected expenses
235,982
19,599,000
19,599,000
A. Contingent Liabilities:
a.The company is suing a competitor for patent infringement. The attorneys believe that Smyth will win the lawsuit. The settlement may be for as much as $90,000. The attorney's believe Smyth will probably receive $40,000.
b.The company is being sued by a customer who was hurt while visiting the corporate office. The attorneys believe that Smith may lose as much as $100,000, but that the customer will probably settle for $30,000.
B. Working Capital = Current Assets – Current Liabilities
Hence, Working Capital = $14,050,000 – $9,865,982
Therefore, Working Capital = $4,184,018
C. Current Ratio = Current Assets / Current Liabilities
Hence, Current Ratio = $14,050,000/ $9,865,982
Therefore, Current Ratio = 1.42
D. Quick Ratio = Current Assets / Quick Liabilities
Here, Quick Liabilities = Current Liabilities – Contingent Liabilities (net)
Therefore, Quick Liabilities = $9,865,982 – ($50,000 {$90,000-$40,000} + $70,000 {$100,000-$30,000})
Therefore, Quick Liabilities = $9,865,982 – $120,000
Therefore, Quick Liabilities = $9,745,982
Hence, Quick Ratio = $14,050,000/ $9,745,982
Therefore, Quick Ratio = 1.44
Working Notes:
1. Wage Expense = (1000/5) * 112 days
Therefore, Wage Expense = $22,400
Expenditure
Amount ($)
Sales
19,000,000
(-) Cost of goods sold
10,900,000
(-) Operating Expenses
4,700,900
(-) Interest Expense
1,900,000
(-) Wage Expense (W.N 1)
22,400
(-) Sales Tax
760,000
Earnings before tax
716,700
(-) Corporate Tax 40%
286,680
Net Income
430,020
Bonus to company’s president
43,002
Cash Dividends
15,000
Interest on non-interest bearing note
9,000
Income available for stockholders
363,018
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