Calculate the company’s debt to equity and times interest earned ratios for each year.
1. Eecol Electric Ltd. distributes electronic components and has just completed their first year of operation. Management is looking forward to finding out what the profit for the year was because they get paid a bonus based on net income. The accountant has provided them with the following information concerning their inventory for the year:
Sales: 8,000 units Total revenue:……………… $172,000
Purchases: 10,000 units Total cost:……………………. $190,000
Ending inventory under weighted- average:…………….. $ 36,667
Ending inventory under FIFO: $ 36,000
Due to over-supply in the industry at year end, the price for the product had fallen to $20 and the company estimates that the costs to ship and sell the product are $2.50 per unit.
Instructions
a) Calculate the gross margin if Eecol decides to use the weighted-average cost formula.
b) Calculate the gross margin if Eecol decides to use the FIFO cost formula.
c) Based on your answers to a) and b) which cost formula would management prefer? Why?
d) Have prices for the inventory been rising or falling during the year?
e) What is the net realizable value of the inventory?
f) What value should Eecol report on its financial statements for cost of goods sold and ending inventory? Support your answer.
2. The following information has been provided by Bolero Corporation and Canway Enterprises:
|
in ‘000’s $ |
Bolero |
Canway |
|
2020 |
2020 |
|
|
Cash |
450 |
175 |
|
Inventory |
625 |
872 |
|
Land |
1,050 |
3,533 |
|
Building |
1,000 |
3,100 |
|
Accum Depreciation |
250 |
580 |
|
Machinery |
1,225 |
2,550 |
|
Accum Depreciation |
400 |
1,250 |
Additional Information:
Both Companies use straight-line depreciation, buildings are estimated to have no residual value and a 40 year useful life, while machinery is estimated to have no residual value and a 10 year useful life.
Instructions
Calculate the average age of PPE for 2020 using both the average age % and average age ratios. Assess the age of Bolero and Canway’s assets. Which company is likely to begin to replace its assets first?
3. Spring Water Corporation has the following selected accounts at March 31, 2020 after posting adjusting entries:
Accounts Payable, March 31, 2020………………………… $ 67,500
Accounts Payable, March 31, 2019……………………. 61,500
Credit Purchases……………………………………….. 625,750
Bank Loan Payable, 3-month………………………………… 135,000
Employee Benefits Expense………………………………….. 6,000
Interest Payable…………………………………………………… 7,550
Mortgage Payable………………………………………………… 135,000
Income Tax Payable…………………………………………….. 14,000
Instructions
a) Prepare the current liability section of Spring Water Corporation’s statement of financial position, assuming $19,500 of the mortgage is payable next year.
b) Calculate the A/P turnover, day’s turnover and working capital. Comment on Spring Water’s liquidity, assuming total current assets are $575,000 and supplier terms are net 30.
4. Dynamic Manufacturers Inc. reported the following information in its financial statements:
DYNAMIC MANFACTURERS INC.
Statement of Financial Position
June 30
Assets……………………………………………………………………………….. 2021 2020
Cash……………………………………………………………………………. $ 32,000 $ 29,000
Accounts receivable……………………………………………………… 7,500 5,500
Prepaid Insurance…………………………………………………………. 1,100 1,450
Inventory……………………………………………………………………… 220,000 175,000
Building……………………………………………………………………….. 145,000 155,000
Equipment……………………………………………………………………. 36,000 40,000
Total Assets……………………………………………………………………….. $441,600 $405,950
Liabilities and shareholders’ equity
Accounts Payable…………………………………………………………. $ 12,500 $ 14,500
Notes Payable……………………………………………………………… 10,000 0
Bonds Payable……………………………………………………………… 145,000 95,000
Long-Term Debt…………………………………………………………… 116,000 175,000
Common shares…………………………………………………………… 25,000 25,000
Retained earnings…………………………………………………………. 133,100 96,450
Total liabilities and shareholders’ equity………………………………….. $441,600 $405,950
Revenue……………………………………………………………………………. $450,000 $300,000
Operating expenses…………………………………………………………….. 300,000 210,000
Profit from operations………………………………………………………….. 150,000 90,000
Interest expense…………………………………………………………………. 6,000 9,000
Income tax expense……………………………………………………………. 36,000 20,250
Profit…………………………………………………………………………………. $108,000 $60,750
Instructions
a) Calculate the company’s debt to equity and times interest earned ratios for each year.
b) Determine if the change from 2020- 2021 is an improvement or deterioration.
c) If industry averages for debt to equity is 1.5:1 and times interest earned is 6 times, are Dynamic ratios comparable?
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