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Question 61. The market value ofFarmington Corp.'s common shares was quoted at $54 per share atDecember 31, 2018, and 2017. Planetarium 's balance sheet atDecember 31, 2018, and 2017, and statement of income and retainedearnings for the years then ended are presented below:Farmington Corp.Balance Sheet December31 2018 2017Assets:Current assets: Cash $ 9,000,000 $ 5,200,000 Short-terminvestments 17,200,000 15,400,000 Accountsreceivable(net) 109,000,000 111,000,000 Inventories,lower of cost ormarket 122,000,000 140,000,000 Prepaidexpenses 4,000,000 2,800,000 Total currentassets $261,200,000 $274,400,000Property, plant, and equipment(net) 350,000,000 315,000,000Investments, atequity 2,800,000 3,500,000Long-termreceivables 15,000,000 20,000,000Copyrights and patents(net) 6,000,000 7,000,000Otherassets 8,000,000 9,100,000 Totalassets $643,000,000 $629,000,000Liabilities and Stockholders' Equity:Current liabilities: Notespayable $ 7,000,000 $17,000,000 Accountspayable 55,000,000 52,000,000 Accruedexpenses 27,500,000 30,000,000 Income taxespayable 1,500,000 2,000,000 Current portionof long-termdebt 10,000,000 9,500,000 Total currentliabilities 101,000,000 110,500,000Long-termdebt 180,000,000 190,000,000Deferred incometaxes 69,000,000 65,000,000Otherliabilities 15,000,000 9,500,000 Totalliabilities 365,000,000 375,000,000Stockholders' equity: Common stock,par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000shares 12,000,000 12,000,000 10% cumulativepreferred shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares 6,000,000 6,000,000 Additionalpaid-incapital 119,000,000 119,000,000 Retainedearnings 141,000,000 117,000,000 Total stockholders'equity 278,000,000 254,000,000 Total liabilities and stockholders'equity $643,000,000 $629,000,000Farmington Corp.Statement of Income and Retained Earnings Year ended December31 2018 2017 Netsales $540,000,000 $500,000,000Cost and expenses: Cost of goodssold 390,900,000 400,000,000 Selling, general, andadministrativeexpenses 70,000,000 65,000,000 Other,net 9,100,000 6,000,000 Total costs andexpenses 470,000,000 471,000,000Income before incometaxes 70,000,000 29,000,000Incometaxes 21,000,000 11,600,000Netincome 49,000,000 17,400,000Retained earnings at beginning ofperiod 117,000,000 113,100,000Dividends on commonstock (24,400,000) (12,900,000)Dividends on preferredstock (600,000) (600,000)Retained earnings at end ofperiod $141,000,000 $117,000,000InstructionsBased on the above information, compute the following (for theyear 2018 only): (Show supporting computations in good form.)(a) Current ratio.(b) Acid-test (quick) ratio.(c) Accounts receivableturnover.(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 71. Molina Company’s reportednet incomes for 2018 and the previous two years are presentedbelow. 2018 2017 2016 $105,000 $95,000 $70,0002018’s net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2016 and 2017 donot take these items into account and are stated at theamounts determined in those years. Ignore income taxes.Instructions(a) For each ofthe six accounting changes, errors, or prior period adjustmentsituations described below, prepare the journal entry or entriesMolina Company should record during 2018. If no entry is required,write “none.”(b) Afterrecording the situation in part (a) above, prepare the year-endadjusting entry for December 31, 2018. If no entry, write“none.”1. Early in 2018, Molina determined that equipment purchased inJanuary, 2016 at a cost of $1,290,000, with an estimated life of 5years and salvage value of $90,000 is now estimated to continue inuse 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 notget recorded.(a)(b)3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-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 notget recorded.(a)(b)3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-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 notget recorded.(a)(b)3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.(a)(b)Question 81. On January 1, 2018, FoleyCompany (as lessor) entered into a noncancelable lease agreementwith Pinkley Company for machinery which was carried on theaccounting records of Foley at $9,060,000 and had a fair value of$9,600,000. Minimum lease payments under the lease agreement whichexpires on December 31, 2027, total $14,200,000. Payments of$1,420,000 are due each January 1. The first payment was made onJanuary 1, 2018 when the lease agreement was finalized. Theinterest rate of 10% which was stipulated in the lease agreement isthe implicit rate set by the lessor. The effective interest methodof amortization is being used. Pinkley expects the machine to havea ten-year life with no salvage value, and be depreciated on astraight-line basis. Collectibility of the payments is reasonablypredictable, and there are no important uncertainties surroundingthe costs yet to be incurred by the lessor.Instructions(a) From thelessee's viewpoint, what kind of lease is the above agreement? Fromthe lessor's viewpoint, what kind of lease is the aboveagreement?(b) Whatshould be the income before income taxes derived by Foley from thelease for the year ended December 31, 2018?(c) Ignoringincome taxes, what should be the expenses incurred by Pinkley fromthis lease for the year ended December 31, 2018?(d) What journalentries should be recorded by Pinkley Company on January 1,2018?Question 91. Information concerning the debt of Cole Company is as follows: Short-term borrowings: Balance at December 31,2017 $525,000 Proceeds from borrowings in2018 325,000 Payments made in2018 (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-TermDebt" 500,000 Payments made in2018 (1,225,000) Balance at December 31,2018 $ 900,000 Long-term debt: Balance at December 31,2017 $9,000,000 Proceeds from borrowings in2018 2,250,000 Transfers to caption "Current Portion of Long-TermDebt" (500,000) Payments made in2018 (1,500,000) Balance at December 31,2018 $9,250,000 In preparing a statement of cash flows for the year ended December31, 2018, for Cole Company, cash flows from financing activitieswould reflect$2,000,000$2,250,000$2,575,000$3,175,000Question 101. Edwards Companycontracted on 4/1/17 to construct a building for $4,800,000. Theproject was completed in 2019. Additional data follow: 2017 2018 2019 Costs incurred todate $1,120,000 $2,700,000 $3,800,000 Estimated cost tocomplete 2,080,000 900,000 — Billings todate 1,000,000 3,800,000 4,800,000 Collections todate 800,000 2,600,000 4,400,000Instructions(a) Calculate theincome recognized by Edwards under the percentage-of-completionmethod of accounting in each of the years 2017, 2018, and 2019.(b) Prepare allnecessary entries for the year 2018.(c) Present thebalance sheet disclosures at December 31, 2018. Proper headings orsubheadings must be indicated.
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