Tamisha McQuilkin

Financial Accounting Principles and Analysis

25-May-10
Sandra Gates

8--8
1
2007

Building cost 364,000

Depreciation -14,000
350,000

$350,000/25 years = $14,000

2008

Building Cost $364,000

Depreciation -14,000
Residual value -14,000
336,000
Pollution control equipment 42,000
378,000

$378,000/30 years = $12,600

The cost of the pollution

control equipment was not
expensed in 2008 because it
was capitalized. Merton would
have been able to expense
the equipment if it did not add
value to the building. If Merton
could choose he would
probably want to expense the
pollution control equipment
because it would help him tax
wise.

Building Cost $364,000

Pollution control equipment 42,000
2007 depreciation -14,000
2008 depreciation -12,600
379,400
2009 depreciation -3,150
Value 376,250

Sold 392,000
Value -376,000
Gain 15,750

Building cost $364,000

Depreciation 31,500
Value 332,500

Sold 392,000
Value -332,500
Gain 59,500
9--11

1
$9,750 x 5.895 = $57,476

2
$42,487/$21,600 = 1.97

3
$15,000/1.714 = $8,751

4
$15,026/$5,800 = 2.59
10--3

1
Column 1 Column 2 Column 3
Date Cash Interest Interest Expense Premium Amortized
10% 8% Col. 1 - Col. 2

1/1/2008 - - -
12/31/2008 $1,000 864 136
12/31/2009 1,000 853 147
12/31/2010 1,000 842 158
12/31/2011 1,000 829 171
12/31/2012 1,000 809 191

2
Interest expense $4,197
Cash interest payment 5000
Premium amortized 803

3
Bonds payable $10,000
Premium 362
Payment 10,362

Assets= Liabilities + Stockholders equity

Cash (1000) Premium (158) Interest expense (842)
Column 4
Carrying Value

10,803
10,667
10,520
10,362
10,191
10,000
11--5

1
a.
Retained earnings and total stockholders' equity decreases

b.
The stock holders equity accounts:
Dividends increased by $7,500
Common stock increased by $6000
Retained earnings decreased by $13,500
Total stockholders equity did not change

c.
Retained earnings and total stockholders' equity decreased by $7875

d.
Nothing changes

2
Frederiksen's Inc.
Partial Balance Sheet
31-Dec-08

Stockholders' Equity

Preferred Stock $240,000

Common Stock 157,500
Capital from preferred stock 60,000
Capital from common stock 231,000
Total contributed capital 688,500
Retained earnings 2,711,825
Total stockholders' equity 3,400,325

3
A stock dividend occurs when a
company declares and issues
additional shares of its own stock
to existing stockholders.

A stock split is similar to a stock

dividend but it reduces the par
value of par value per share and
the accounting transaction in not
recorded.
13--7

1 2
Ratio Heartland Inc. Industry Average

Current ratio 0.92 1.23

Acid-test (quick) ratio 0.53 0.75

Accounts receivable turnover 39 times 33 times

Inventory turnover 31 times 29 times
Debt-to-equity ratio 0.69 0.53
Times interest earned 4.43 times 8.65 times
Return on sales 4.54% 6.57%
Asset turnover 1.98 times 1.95 times
Return on assets 8.97% 12.81%
Return on common stockholders' equity 11.78% 17.67%

The bank probably would not approve

Heartland's loan because they are not
that profitable and compared to industry
averages they are lacking in several
areas.
Comparison
Heartland is not as liquid as
the industry average
"
Collecting accounts at a
better rate than the industry
average
Doing slightly better than the industry average
Not as solvent as the industry
Earning approx. half time interest earned
Slightly lower than industry norm
Slightly higher than industry norm
Lower than industry average
"