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EMBA FINANCIAL ACCOUNTING
Problem Set 3
Please use the excel template file that is provided for your submission.
QUESTION 1. Delta Products (20 points)
Delta Products Corporation uses aging analysis to determine its allowance for doubtful accounts.
You are given the following information about the age of the receivable held in the books at the
end of 2017:
Age of Receivables Customer Balance
Estimated %
uncollectible
Cu
ent $1,425,000 0%
30-60 days past due 137,560 2%
61-90 days past due 39,600 10%
Over 90 days past due 5,000 50%
Net receivables reported in the balance sheet at beginning of the year was $1,423,430. Allowance
for bad debts at the beginning of the year was of $8,508. Net write‐offs during the year was
$3,970.
1. What allowance for bad debts balance should the company have at the end of 2017?
2. What bad debt expense should the company report in its income statement for 2017?
3. What is the journal entry to record the bad debt expense?
4. What is the journal entry to record the net write‐off?
5. What is the Accounts Receivables (Net) Balance at the end of the year 2017? 2016?
6. If the company reported revenues (all credit sales) of $9,855,500 for 2017, can you estimate
collections from customers during 2017?
7. Compute DSO for 2017 using average receivables.
8. If the company reported revenues of $8,245,000 in 2016, and the reported Accounts
Receivable (net) at the beginning of 2016 was $1,344,600, and allowance of $8,100, compute
DSO for 2016 and compare with the number computed in (7) above.
9. Comment on the adequacy of the credit quality and the adequacy of its allowance. Net write‐
offs in 2016 was $3,520, and in 2015 was $3,425. Allowance at the beginning of 2015 (end of
2014) was $7,980.
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QUESTION 2. Harney Tea 12 Points)
PART A:
The following facts pertain to Harley Tea’s Exotic Teas line. Assume that the company uses
periodic inventory method.
Transactions for 2017 are summarized below:
Cost per
lb.
# of
lbs.
Beginning Inventory $9.60 3,800
Purchases $9.80 4,560
Sales 6,125
Transactions for the year 2018 is summarized in the table below.
Cost per
lb.
# of
lbs.
Beginning Inventory
Purchases $11.50 6,400
Sales 5,890
What is the cost of goods sold and ending inventory reported by the company each year (A) FIFO
and (B) WEIGHTED AVERAGE? Assume that the beginning inventory for 2017 had a cost of $9.60
per pound for FIFO and $9.55 per pound for Weighted Average. Which method is more
profitable (pre‐tax)?
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PART B
The Colgate Palmolive Company reports the following information on inventories:
Inventories XXXXXXXXXX
Raw materials and supplies $ 253 $ 267
Work-in-process XXXXXXXXXX
Finished goods XXXXXXXXXX
Total Inventories $ 1,250 $ 1,221
Income statement data is presented below:
XXXXXXXXXX
Net sales $ 15,544 $ 15,454 $ 15,195
Cost of sales 6,313 6,174 6,072
Gross profit 9,231 9,280 9,123
Selling, general and administrative expenses 5,389 5,400 5,143
Other (income) expense, net XXXXXXXXXX
Operating profit 3,694 3,707 3,955
Required:
Calculate Days Inventory Held (DIH) at the end of years 2018 and 2017 for Finished Goods
Inventory (Use year‐end inventory balances). Comment on your analysis.
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2019 2018
Property plant and equipment (at cost) $1,995,358 $1,841,862
Less Accumulated depreciation $ 605,995 $ 511,522
$1,389,363 $1,330,340
QUESTION 3. Frisky Lamb (15 points)
The Frisky Lamb Company is a leader in the healthy lamb meat market, which it sells as a
healthy alternative to beef. It produces and markets both fresh and frozen lamb meat. Frisk
Lamb’s balance sheet for the fiscal year ended on December 31, 2019 and 2018 disclosed the
following:
In the income statement for 2019 Frisky Lamb disclosed the following:
Depreciation expense $ 105,145
In the cash flow statement for 2019, under Cash Flow from Investing Activities, Frisky Lamb
provided the following information:
Additions to property, plant and equipment $ (145,502)
Proceeds from dispositions of property, plant and equipment $ 2,200
In the supplement to the cash flow statement, the company reported that $20,000 of
PP&E was bought on credit from a supplier.
Required:
a. What was the cost of property, plant and equipment purchased in 2019?
. What was the net book value of property, plant and equipment disposed of during 2019?
c. Did Frisky Lamb generate a gain or a loss on the disposition of PP&E? How much?
d. Frisky Lamb calculates depreciation primarily using the straight‐line method. Assuming
the average life of all of Frisky Lamb’s assets is 9 years, what was the average age of the
property, plant and equipment disposed of in 2019?
e. What is the journal entry for the asset disposal in 2019?
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QUESTION 4. Apple (28 points)
You are given portions of Apple’s 2016 Annual Report. (Note fiscal year 2016 ends on
September 24, 2016 ‐ all references to years in the questions refer to fiscal year). The file has
34 non‐consecutive pages. (File is available on Canvas).
PART A – The following questions relate to
material already covered in class. You are
equired to submit answers to these questions.
a. Describe in no more than three lines Apple’s business. [Hint: See Note 1]
. Consider Apple’s Accounting Equation for September 24, 2016 and September 26,
2015. What is the percentage increase in the level of the equation? Which asset had
the highest growth in terms of dollar amount?
c. Calculate the Operating working capital (OWC) for Apple as of September 24, 2016. Use
the formula OWC = Receivables + Inventory – Payables for this calculation.
d. Over the years where data exists, in which year did Apple report the highest percentage
of Gross Margin, relative to Net Sales? In which year did Apple report the highest
percentage of Net Income, relative to Net Sales?
e. Briefly explain the revenue recognition policies adopted by Apple for sales of iPhone.
f. As of September 24, 2016, what was the total cash received from customers that
Apple had not yet recognized as revenue?
g. How does Apple record shipping costs that are billed to customers? What is the effect of
this policy on Net Income?
h. When does Apple expense wa
anty related costs? When does Apple expense
advertising costs?
i. Which apple do you like better (i) or (ii) ? Why?
j. Did the percentage of gross accounts receivable that Apple does not anticipate
collecting increase or decrease in 2016, relative to 2015? What kind of business
partners account for the highest percentage of trade receivables?
k. What depreciation method does Apple use? How much was the Depreciation
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and Amortization on Property and Equipment in 2016?
l. When and how does Apple decide a Long‐lived Asset is impaired? Did Apple record
any significant impairment on Long‐Lived Assets in 2016?
m. What is the net balance of acquired intangible assets with definite service life
as of September 24, 2016?
n. What cost flow assumption did Apple use in valuing its inventory? What is the
main category (or categories) of inventory items?
PART B – The following questions relate to
material not yet covered in class. You do not
have to submit this with your problem set. It
will be a good review for the final when we
cover these materials in class.
o. How many shares were used to calculate Apple’s Diluted Earnings Per Share in 2016?
What was the percentage impact of the dilution on the reported Basic EPS?
p. Was 2016 Net Income higher or lower than Total Comprehensive Income? What was
the main reason for the difference (item and magnitude)?
q. Do you know that scientists recently found proof of Einstein’s theory of gravity being the
curvature of space time?
. What journal entry did Apple make to record repurchase of Common Stock during 2016?
s. Provide the journal entry that summarizes Apple’s Income Tax Expense for 2016.
How much was actually paid in cash by Apple for Income Taxes?
t. What statutory federal income tax rate did Apple use for 2016? What was Apple’s
effective tax rate for the same year? Which item was the most significant in explaining the
difference?
u. As of September 24, 2016, is the market value of Apple’s available‐for‐sale marketable
securities above or below their costs? Did the company report the cost or market
value on the Balance Sheet? What is the amount?
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v. What was Apple’s Rent Expense for its Operating Leases during 2016? How much is Apple
anticipating paying in 2017? What is the longest lease term for retail space?
w. Which geographical segment generated the highest Net Sales during 2016? Which
geographical segment has the highest percentage sales growth from 2015 to 2016?
Which quarter generates the highest sales for Apple? Does this quarter include the
holiday season?
APPLE INC
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
Consolidated Statements of Operations for the years ended September 24, 2016, September 26, 2015 and September 27, 2014 39
Consolidated Statements of Comprehensive Income for the years ended September 24, 2016, September 26, XXXXXXXXXXand September 27, 2014 40
Consolidated Balance Sheets as of September 24, 2016 and September 26, 2015 41
Consolidated Statements of Shareholders’ Equity for the years ended September 24, 2016, September 26, 2015 and September 27, 2014 42
Consolidated Statements of Cash Flows for the years ended September 24, 2016, September 26, 2015 and September 27, 2014 43
Notes to Consolidated Financial Statements 44
Selected Quarterly Financial Information (Unaudited) 69
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm 70
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Apple Inc. | 2016 Form 10-K | 38
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
Years ended
September 24,
2016
September 26,
2015
September 27,
2014
Net sales $ 215,639 $ 233,715 $ 182,795
Cost of sales 131,376 140,089 112,258
Gross margin 84,263 93,626 70,537
Operating expenses:
Research and development 10,045 8,067 6,041
Selling, general and administrative 14,194 14,329 11,993
Total operating expenses 24,239 22,396 18,034
Operating income 60,024 71,230 52,503
Other income/(expense), net 1,348 1,285 980
Income before provision for income taxes 61,372 72,515 53,483
Provision for income taxes 15,685 19,121 13,973
Net income $ 45,687 $ 53,394 $ 39,510
Earnings per share:
Basic $ 8.35 $ 9.28 $ 6.49
Diluted $ 8.31 $ 9.22 $ 6.45
Shares used in computing earnings per share:
Basic 5,470,820 5,753,421 6,085,572
Diluted 5,500,281 5,793,069 6,122,663
Cash dividends declared per share $ 2.18 $ 1.98 $ 1.82
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2016 Form 10-K | 39
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years ended
September 24,
2016
September 26,
2015
September 27,
2014
Net income $ 45,687 $ 53,394 $ 39,510
Other comprehensive income/(loss):
Change in foreign cu
ency translation, net of tax effects of $8, $201 and $50,
espectively 75 (411) (137)
Change in unrealized gains/losses on derivative instruments:
Change in fair value of derivatives, net of tax benefit/(expense) of $(7), $(441)
and $(297), respectively 7 2,905 1,390
Adjustment for net (gains)/losses realized and included in net income, net of tax
expense/(benefit) of $131, $630 and $(36), respectively (741) (3,497) 149
Total change in unrealized gains/losses on derivative instruments, net of tax XXXXXXXXXX,539
Change in unrealized gains/losses on marketable securities:
Change in fair value of marketable securities, net of tax benefit/(expense) of
$(863), $264 and $(153), respectively 1,582 (483) 285
Adjustment for net (gains)/losses realized and included in net income, net of tax
expense/(benefit) of $(31), $(32) and $71, respectively 56 59 (134)
Total change in unrealized gains/losses on marketable securities, net of tax 1, XXXXXXXXXX
Total other comprehensive income/(loss XXXXXXXXXX,427) 1,553
Total comprehensive income $ 46,666 $ 51,967 $ 41,063
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2016 Form 10-K | 40
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
September 24,
2016
September 26,
2015
ASSETS:
Cu
ent assets:
Cash and cash equivalents $ 20,484 $ 21,120
Short-term marketable securities 46,671 20,481
Accounts receivable, less allowances of $53 and $63, respectively 15,754 16,849
Inventories 2,132 2,349
Vendor non-trade receivables 13,545 13,494
Other cu
ent assets 8,283 15,085
Total cu
ent assets 106,869 89,378
Long-term marketable securities 170,430 164,065
Property, plant and equipment, net 27,010 22,471
Goodwill 5,414 5,116
Acquired intangible assets, net 3,206 3,893
Other non-cu
ent assets 8,757 5,422
Total assets $ 321,686 $ 290,345
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Cu
ent liabilities:
Accounts payable $ 37,294 $ 35,490
Accrued expenses 22,027 25,181
Defe
ed revenue 8,080 8,940
Commercial paper 8,105 8,499
Cu
ent portion of long-term debt 3,500 2,500
Total cu
ent liabilities 79,006 80,610
Defe
ed revenue, non-cu
ent 2,930 3,624
Long-term debt 75,427 53,329
Other non-cu
ent liabilities 36,074 33,427
Total liabilities 193,437 170,990
Commitments and contingencies
Shareholders’ equity:
Common stock and additional paid-in capital, $ XXXXXXXXXXpar value: 12,600,000 shares authorized;
5,336,166 and 5,578,753 shares issued and outstanding, respectively 31,251 27,416
Retained earnings 96,364 92,284
Accumulated other comprehensive income/(loss) 634 (345)
Total shareholders’ equity 128,249 119,355
Total liabilities and shareholders’ equity $ 321,686 $ 290,345
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2016 Form 10-K | 41
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions, except number of shares which are reflected in thousands)
Common Stock and
Additional Paid-In Capital
Retained
Earnings
Accumulated Othe
Comprehensive
Income/(Loss)
Total Shareholders’
Equity Shares Amount
Balances as of September 28, 2013 6,294,494 $ 19,764 $ 104,256 $ (471) $ 123,549
Net income — — 39,510 — 39,510
Other comprehensive income/(loss) — — — 1,553 1,553
Dividends and dividend equivalents declared — — (11,215) — (11,215)
Repurchase of common stock (488,677) — (45,000) — (45,000)