Question: Exhibits 17.11 and 17.12 present
Exhibits 17.11 and 17.12 present a partial set of financial statements of Chicago Corporation for 2013, including a consolidated statement of income and retained earnings for 2013 and consolidated comparative balance sheets at December 31, 2012 and 2013. Questions relating to the financial statements of Chicago Corporation follow. You should study the financial statements before responding to these questions and problems. Additional information is as follows: (1) The only transaction affecting common or preferred shares during 2013 was the sale of treasury stock. (2) The bonds payable have a maturity (face) value of $4 million.
Required:
a. Compute the amount of specific customers’ accounts that Chicago Corporation wrote off as uncollectible during 2013, assuming that it made no recoveries during 2013 on accounts written off in years prior to 2013.
b. Chicago Corporation uses the LIFO cost-flow assumption in computing its cost of goods sold and its beginning and ending merchandise inventory amounts. If it had used a FIFO cost-flow assumption, the beginning inventory would have been $1,800,000 and the ending inventory would have been $1,700,000. Compute the actual gross profit (net sales less cost of goods sold) of Chicago Corporation for 2013 under LIFO and the corresponding amount of gross profit if it had used FIFO (ignore income tax effects).
c. Refer to part b. Did the quantity and acquisition cost of merchandise inventory increase or decrease between the beginning and the end of 2013? Explain.
d. Chicago Corporation accounts for its three inter corporate investments in unconsolidated affiliates using the equity method. The acquisition cost of these investments equaled both the carrying value and the fair value of the assets and liabilities of the investees at the time of acquisition. How much did each of these three companies declare in dividends during 2013? How can you tell?
e. Refer to part d. Give the journal entry (entries) made during 2013 to apply the equity method.
f. Chicago Corporation acquired its only building on January 1, 2012. It estimated the building to have a 40-year useful life and zero salvage value at that time. Calculate the amount of depreciation expense on this building for 2013, assuming that the firm uses the straight-line method.
g. Chicago Corporation sold machinery and equipment costing $1,000,000, with a carrying value of $200,000, for cash during 2013. Give the journal entry to record the disposition.
h. The bonds payable carry 6% annual coupons and require the payment of interest on December 31 of each year. Give the journal entry made on December 31, 2013, to recognize interest expense for 2013, assuming that Chicago Corporation uses the effective interest method.
i. Refer to part h. What was the effective or market interest rate on these bonds on the date Chicago Corporation issued them? Explain.
j. The $170,000 deferred portion of income tax expense for 2013 includes $150,000 relating to the use of different depreciation methods for financial and tax reporting. If the income tax rate was 30%, calculate the difference between the depreciation deduction reported on the tax return and the depreciation expense reported on the income statement……………………………………………………………….
Exhibits 17.11:
Exhibits 17.12:
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Chicago Corporation Consolidated Statement of Income and Retained Earnings for 2013 (Problem 10) EXHIBIT 17.11 REVENUES Sales.. $13,920,000 Gain on Sale of Machinery and Equipment... Equity in Earnings of Affiliates: Chicago Finance Corporation... Rosenwald Company. Hutchinson Company. Total Revenues. 200,000 $1,800,000 125,000 75,000 2,000,000 $16,120,000 EXPENSES Cost of Goods Sold $ 5,000,000 Employee Payroll Expense. Depreciation of Plant and Equipment and Amortization of Leased Property Rights... 3,000,000 1,000,000 Amortization of Patent. 125,000 .... Bad Debt Expense...... 120,000 Interest Expense.. General Corporate Expenses 455,000 420,000 Income Taxes-Current 1,430,000 170,000 $11,720,000 $ 4,400,000 Income Taxes-Deferred. Total Expenses Net Income. Less: Dividends on Preferred Shares. (120,000) Dividends on Common Shares (2,080,000) $ 2,200,000 2,800,000 $ 5,000,000 Increase in Retained Earnings.. Retained Eamings, December 31, 2012. Retained Eamings, December 31, 2013... Basic Earnings per Common Share (Based on 1,600,000 Average Shares Outstanding). . Diluted Earnings per Share (Assuming Conversion of Preferred Stock) 2.68 2.20 .... © Cangage Leaming 2014 Chicago Corporation Consolidated Balance Sheets December 31 (Problem 10) EXHIBIT 17.12 December 31: 2013 2012 ASSETS Cerrent Assets Cash... Certificate of Deposit.. Accounts Recrivable (Net of Estimated Uncollectibles of $100,000 in 2012 and $160,000 in 2013). Herchandise Inventory.. Prepayments Total Curent Assets.. S 100,00 225,000 $ 20,000 600,000 S00,000 1,800,000 1,500,000 200,000 200,000 S 2,925,000 $2,400,000 Investments $ 4,00,000 1,05,000 175,000 $ 5,200,000 $ 2,200,000 900,000 chicago Finance Corpoution (40%. Ownod) Rosenwald Company (s0% Owned). Hutchinson Company (25% Owned). Total Inestnents... Property, Plant, and Equipment Land Building.. Machinery and Equipment. Property Rights Acquired Under Lease 100,000 3,200,000 $ 500,000 $ 400,000 4,000,000 8,000,000 1500,000 $14,000,000 4,000,000 7,300,000 1,500,000 $13,200,000 Total.. 4000.00) $10,000,000 Less Accumulated Depeciation and Amortization. Total Property, Plant, and Equipment Intangibles (at Net Canying Value) Patent. . Goodwill (3,800,000) $ 9,400,000 $ 750,000 1,175,000 S 1,875,000 S 5,000 1,125,000 Total Intangbles. Total Assets.. $ 2,000,000 $17,000,000 $20,000,000 LIABILITIES AND SHAREHOLDERS EQUITY Carrent Liabilities Accounts Payable.. Advances fron Dastoners. Salaries Rayable. Incone Tas Payable.. Rent Received in Advance $ 550,000 640,000 300,000 430,000 S0,000 460,000 $ 400,000 660,000 240,000 300,000 Other Curent Liabilities.. 200,000 $ 1,800,000 Total Cunent Liabilities $2430,000 Long Term Debt Honds Payable.. Equipment Mortgage Indebtodness Capitalized lease bligation.. Total Long-Term Debt.. Defered Tax Liablity... Shareholders Equity Convertitle Palerned Stock Common Stock $ 3,645,00 332,000 $ 3,600,000 1,300,000 1,100,000 1,00,000 $ 5,000,000 $6,000,000 $1,400,000 Additional Paid-In Capital Retaied Eamings. Total.. Less Cost of Tmasury Shams. Total Shanholdens iquity.. Total Liabilities and shawholders Equity S 2,000,000 2,000,000 3,000,000 5,000.000 $12,000,000 (1,000,000) $ 2,000,000 2,000,000 2,400,000 2,800,000 $ 9,200,000 (1,400,000) S700,000 $17,000,000 $11,000,000 S20.000,000
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