Chapter 13, Problem 9ESB

a)

To determine

Calculate the balance in accounts receivable for the year December 31, 2019.

Explanation of Solution

The calculation of the accounts receivable is as follows:

$\begin{array}{c}\text{Accounts receivables}=\text{ Quick assets}-\text{Cash}\\ \text{=\$52,000 }(1)-\text{\$15,000 }\\ \text{=\$37,000}\end{array}$

Hence, the accounts receivable for year 2019 is $37,000.

Working notes:

Compute current liabilities.

$\begin{array}{c}\text{Current liabilities}=\text{Accounts payable (trade)}+\text{Income taxes payable}\\ =\$26,000+\$14,000\\ \text{ = \$40,000}\end{array}$

Determine quick assets.

$\begin{array}{c}\text{Quick ratio}=\frac{\text{Quick Assets}}{\text{Current Liabilities}}\\ 1.3=\frac{\text{Quick Assets}}{\$40,000}\\ \text{Quick Assets}=\$40,000\times 1.3\\ =\$52,000\end{array}$ (1)

b)

To determine

Calculate the turnover assets for the year December 31, 2019.

Explanation of Solution

Turnover of assets: It is the extended form of rate of return on total assets. Rate of return on total assets measures the profit generated but asset turnover measures the sales generated whereas from the use of total assets.

$\text{Turnover of assets}=\frac{\text{Net Sales Revenue}}{\text{Average Total Assets}}$

The calculation of the turnover of assets for year 2019 is as follows.

$\begin{array}{c}\text{Turnover of assets}=\frac{\text{Net Sales Revenue}}{\text{Average Total Assets}}\\ =\frac{\$486,000\left(5\right)}{\$360,000\left(6\right)}\\ =1.35\end{array}$

Hence, the turnover of assets for year 2019 is 1.35.

Working note:

Determine the current assets

$\begin{array}{c}\text{Working capital}=\text{ Current assets}-\text{Current liabilities }\\ \text{Current assets}=\text{Working capital}+\text{Current liabilities}\\ \text{Current assets}=\$42,000+\$40,000\\ \text{Current assets}=\$82,000\end{array}$ (2)

Determine the value of ending inventory

$\begin{array}{c}\text{ Current assets}=\text{Cash}+\text{Inventory}+\text{Accounts receivable}\\ \$82,000\left(2\right)=\$15,000+\text{Inventory}+\$37,000\left(1\right)\\ \text{Inventory}=\$82,000-\$52,000\\ \text{Inventory}=\$30,000\end{array}$ (3)

Determine the value of inventory at the end of the year December 31, Year 2109.

$\begin{array}{c}\text{Inventory turnover }=\frac{\text{Cost of goods sold}}{\text{Ending inventory}}\\ 12\text{ times}=\frac{\text{Cost of goods sold}}{\text{\$30,000 }\left(3\right)}\\ \text{Cost of goods sold}=\text{\$30,000}\times 12\\ \text{Cost of goods sold}=\$360,000\end{array}$ (4)

Determine the amount of sales for the year December 31, Year 2019.

$\begin{array}{c}\text{Gross margin}=\text{Sales}-\text{Cost of goods sold}\\ \text{Sales}=\text{Gross margin for Year 4}+\text{Cost of goods sold }\\ \text{Sales =\$126,000+\$360,000 }\left(4\right)\\ \text{Sales =\$486,000}\end{array}$ (5)

Calculate the total assets:

$\begin{array}{c}\text{Total assets}=\text{Total current assets}+\text{Fixed assets}\left(\text{Property, plant and equipment}\right)\\ =\$82,000\left(2\right)+\$278,000\\ =\$360,000\end{array}$ (6)

c)

To determine

Calculate the balance in long-term debt for the year December 31, 2019.

Explanation of Solution

The calculation of long-term debt is as follows:

$\begin{array}{c}\text{Debt equity ratio}=\frac{\text{Total liabilities}}{\text{Total stockholders' equity}}\\ \begin{array}{l}\text{Total liabilities}\\ \left(\text{Long term debt}\right)\end{array}\}\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{Debt equity}\\ \text{ ratio}\end{array}\right)\times \left(\begin{array}{l}\text{Total stockholders' }\\ \text{equity}\left(8\right)\end{array}\right)-\\ \text{Accounts payable}-\text{Income tax payable}\end{array}\right)\\ \text{=0}\text{.8}\times \text{200,000}-\$26,000-\$14,000\\ \text{=\$120,000}\end{array}$

Hence, the long-term debt for the year 2019 is $120,000.

Working note:

Calculate the total liabilities and stockholders’ equity amount:

Total liabilities and stockholders’ equity equal to the total assets. Therefore, the total liabilities and stockholders’ equity is $360,000. (7)

Here, Total Liabilities: L, Total Stockholders’ Equity: SE and Common Stock: CS.

$\begin{array}{c}\text{L}+\text{SE=\$360,000}\left(7\right)\\ \text{L}÷\text{SE=0}\text{.8}\\ \text{L=0}\text{.8SE}\\ \text{0}\text{.8SE}+\text{SE}=\$360,000\end{array}$

$\begin{array}{c}1.8\text{SE=\$360,000}\\ \text{SE=}\frac{\text{\$360,000}}{1.8}\\ \text{SE}=\$200,000\end{array}$ (8)

d)

To determine

Calculate the balance in retained earnings for the year December 31, 2019.

Explanation of Solution

The calculation of retained earnings is as follows:

$\begin{array}{c}\text{ Total stockholders' equity}=\text{Common stock}+\text{Retained earnings}\\ \text{Retained earnings = Total stockholders' equity}-\text{Common stock}\\ \text{=\$200,000}\left(8\right)-\text{\$160,000}\\ \text{=\$40,000}\end{array}$

Hence, the retained earnings for the year 2019 is $40,000.