XYZ Company had the following transactions related to ABC Company over a two-year period
XYZ Company had the following transactions related to ABC Company over a two-year period.
INSTRUCTIONS-follow these instructions.
Turn in: (I don’t want question sheets – just your answers)
- Investment. (1 sheet; Detach this question sheet and use it as your answer sheet, p.1)
- Car loan (1 or 2 sheets). A sheet with explanations of your two car loan decisions. A sheet with supporting calculations (unless you include them in the body of your written explanation).
- MBS loan (1 or 2 sheets) A sheet with your lending decision (Yes or No) and your explanation why (one page of written analysis max and that’s probably what it will take). Include supporting calculations/ratios on that page or a separate page.
- Easy as ABC. What impact will the “Marketing Rebate Deal” have on the financial statements. (I had to give you a chance to “be creative.” NOTE: you are NOT permitted to research this on the web. Don’t waste your time. This really happened. How would you account for it (i.e., provide accounts & amounts on your I/S and B/S?)
One sheet max which includes: Relevant F/S data and supporting analysis/explanations. - Calculate two sets of returns ($300 and $500) for BOTH the
a) Engineering company and
b) the Venture Capital firm. (2 sheets, possibly 1 if you are really good with excel)
Submit NO MORE than 8 sheets of paper.
I am not expecting a treatise. Time estimates are:
Q1. 15-30 minutes (One sheet. Answer and supporting calcs…)
Q2. 30-60 minutes
Q3. 60-120 minutes (Do your analysis. Make up your mind, yes or no. Start writing.)
Q4. 60-90 minutes (you are NOT permitted to work on this >90 minutes. You are NOT to do Internet research. Come up with your own reasoning and amounts….)
Q5. 90-120 minutes (I strongly recommend using Excel for most problems, esp. this one. If you build your spreadsheet properly, your second analysis ($500) should take very little time.)
Hint: Data for Q3. Just copy the data into a spreadsheet and do your analysis.
If it were up to me, I would put a time limit on this.
Make sure your name is on your hard copy exam answer sheet that you turn in.
P1. XYZ Company had the following transactions related to ABC Company over a two-year period:
Year 1
- On January 1, XYZ purchased 35% ownership of ABC Company for $700,000 cash.
- ABC Company had net income of $70,000 for the year.
- At year-end, ABC Company paid its shareholders dividends of $60,000.
Year 2
- XYZ Company purchased on January 1 an additional 5% of ABC Company’s stock for $75,000 cash
- ABC Company had net income of $150,000 for the year.
- At year-end, ABC company paid its shareholders dividends of $100,000
What amounts will appear on the financial statements? $ AMOUNTS
Accounts/Descriptions Year 1 Year 2
B/S
I/S
SCF
Evaluate the performance of your investment. (explain and show supporting amounts/calcs)
P2. Car Shopping
You have just gone car shopping for a new SUV. You are trying to play one dealer off another. You have the following two deals to consider. Dealer 1 is offering you the car at a $6,000 discount off the list price of $30,000. He is offering you a car loan with no money down and making annual payments over five years at 12 percent interest. You went to the bank and found that 12 percent annual interest is what they would have charged you too. Dealer 2, on the other hand did not budge on price, but he had an attractive financing offer of 3.6% over 4 years on the same $30,000 vehicle.
Part 1.
Which dealer should he buy from (assume one payment per year)? Show your analysis in an Excel spreadsheet. Print that sheet and your writeup should be one or two paragraphs explaining your decision and showing me that you understand the numbers.
Part 2.
Car loans actually require monthly payments, not annual payments. Assume the same facts except that the payments are monthly. Does this change your decision? Explain why or why not briefly. Normally, I would ask for supporting calculations. You don’t need to attach your detailed amortization schedule for the monthly loan. Provide the pertinent information only that you used to make your decision (keep it brief).
You can type (or write legibly) your rationale for your loan selection(s) below. (and attach annual payment spreadsheet results on the next page). Typing is preferred.
P3. Financial Statement Analysis
Modern Building Supply, Inc.
Modern Building Supply sells various building materials to retail outlets. Listed below are its financial statements for the past two years.
| Modern Building Supply | ||||
| Comparative Balance Sheets | ||||
| (amounts in 000’s) | This Year | Last Year | ||
| Assets | ||||
| Current Assets: | ||||
| Cash | $ 90 | $ 200 | ||
| Short-term Investments | 50 | |||
| Accounts Receivable | 650 | 500 | ||
| Inventory | 1,160 | 900 | ||
| Prepaid Expenses | 30 | 20 | ||
| Total Current Assets | 1,930 | 1,670 | ||
| Plant and Equipment, Net | 2,000 | 1,830 | ||
| Total Assets | $ 3,930 | $ 3,500 | ||
| Liabilities and S/E | ||||
| Liabilities: | ||||
| Accounts Payable | 660 | 520 | ||
| Wages Payable | 70 | 50 | ||
| Other Payables | 230 | 130 | ||
| Current Liabilities | $ 960 | $ 700 | ||
| Notes Payable
(12% annual interest) |
750 | 750 | ||
| Total Liabilities | 1,710 | 1,450 | ||
| Stockholders’ Equity | ||||
| Common Stock | 700 | 700 | ||
| Retained Earnings | 1,520 | 1,350 | ||
| Total Equity | 2,220 | 2,050 | ||
| Total Liab. And Equity | $ 3,930 | $ 3,500 | ||
| Comparative Income Statements | ||||
| This Year | Last Year | |||
| Sales | $ 7,000 | $ 6,000 | ||
| Less Cost of Goods Sold | 5,530 | 4,800 | ||
| Gross Profit | 1,470 | 1,200 | ||
| Less Operating Expenses | 930 | 710 | ||
| Operating Income | 540 | 490 | ||
| Less Interest Expense | 90 | 90 | ||
| Income Before Taxes | 450 | 400 | ||
| Income Tax Expense (40%) | $ 180 | $ 160 | ||
| Net Income After Taxes | $ 270 | $ 240 | ||
(you do NOT need to include this sheet with the solution sheets you turn in to me)
Building supply INDUSTRY ratios follow:
| Current Ratio | 2.5 to 1 |
| Quick Ratio | 1.2 to 1 |
| Average Age of Receivables | 30 days |
| Inventory turnover in days | 50 days |
| Debt to Equity Ratio | 0.75 to 1 |
| Times Interest Earned | 5.0 times |
| Return on Total Assets | 10% |
| Price-earnings ratio | 9 |
| Return on Sales (profit margin) | 4% |
The company, MBS, has just approached State Bank requesting a $300,000 short-term loan for working capital purposes. Would you make the loan? Use the information provided above to help make your decision. Keep your explanation to one page or less, analysis on same or second page. You are not limited to the above ratios.
P4. As Easy as ABC
INTRODUCTION
ABC Warehouse operates a chain of 35 discount retail appliance and electronics stores in Michigan, Ohio, and Indiana. The firm is privately held and began operations with a single Michigan location in 1964. ABC’s operations are similar to national retailer BestBuy, but on a smaller scale.
ABC offered a special promotion to its customers, promising a 50 percent cash rebate ten years after the date of purchase. The case asks you to consider the economics and judgment made by management in deciding to offer this promotion. You are then asked to decide how ABC should account for sales revenue and the promised rebates under this promotion. The case requires you to consider the role of estimation in accounting and financial reporting, including appropriate consideration of the potential contingent liability.
THE ABC WAREHOUSE REBATE OFFER
ABC Warehouse advertised the following special offer to customers:
A 50 percent cash rebate on your purchases in ten years.
The offer was subject to several conditions:
- This offer applies to all purchases.
- The application form and a copy of the store receipt must be mailed within 21 days of purchase. Upon receipt, ABC would issue a rebate certificate.
- The rebate certificate must be available ten years from today and must be submitted within 90 days of the ten-year maturity date.
- Customers must survive; rebates are not transferable.
- Customers cannot misplace any of the documents.
Customers are protected even if ABC goes out of business or is sold. ABC will purchase insurance to guarantee payment of the rebates in the (unlikely) event they go bankrupt. Assuming all of the conditions were met, ABC would send a 50 percent cash rebate after ten years.
The offer received attention in the local and regional business press. The offer appeared unique in the U.S., but the reporter noted that such promotions had been successfully employed in the past in both Canada and Europe.
The offer was made near the end of ABC’s fiscal year (Year 0). Assume that the promotion ran for two weeks and generated sales of $5 million. For simplicity, you may assume that all sales were cash sales. You may also assume the ABC’s gross margin is 20 percent of sales. Reminder: I don’t need a Cash amount (balance) on the B/S.
Take Home Exam Question
What amounts will appear in ABC’s Balance Sheet and Income Statement with respect to this problem (year 0 only). Provide the account name(s) and the amounts. Show supporting calculations for any amounts not given in the problem. One sheet of paper limit. (fyi, this is a true story; for my accountants, this happened pre-SOX). You may refer to the discussion questions below for inspiration. Remember though, all I want you to turn in is one page with the (partial/relevant snippets of the) B/S and I/S amounts and any supporting calculations and brief explanations. You are FORBIDDEN to do internet research on this. I could care less what proper GAAP accounting is. Use your logic and put the accounts and amounts you believe should be on the financials.
QUESTIONS FOR DISCUSSION (ignore, just for class)
- Why is ABC offering this rebate? Do you think customers are likely to take advantage of the offer?
- How should ABC record sales and related possible future rebates under this promotion? List/Outline the important judgments and estimates management must make in deciding to offer this promotion to the customers.
- What will be ABC’s accounting entries for this promotion over the next ten years?
- How should ABC account for any unclaimed rebates?
P5. Innovative Engineering was founded by two partners, Gale and Yeaton. Within five years, the partners had built a thriving business, primarily through the development of a product line of measuring instruments based on the laser principle. Success brought with it the need for new permanent capital. The partners placed the amount of this need at $1.2 million. This would replace a term loan that was about to mature and provide for plant expansion and related working capital.
They learned that Arbor Capital Corporation, a venture capital firm, might be interested in providing permanent financing. In thinking about what they should propose to Arbor, their first idea (Proposal A) was that Arbor would be asked to provide $1.2 million, of which $1.1 million would be LTD. For the other $100,000, Arbor would receive 10% of Innovative common stock as a “sweetener.” If Arbor would pay $100,000 for 10% of the stock, this would mean that the 90% that would be owned by Gale and Yeaton would have a value of $900,000. Although this was considerably higher than Innovative’s net assets, they thought that this amount was appropriate in view of the profitability of the product line that they had successfully developed.
They thought this might be too risky, so they considered a second (Proposal B) idea. Specifically, they thought of a package consisting of $200,000 of debt, $900,000 preferred stock, and $100,000 common stock. They learned that Arbor was probably not interested in preferred, even at a fairly high dividend rate. They approached Arbor with a proposal of $600,000 debt and $600,000 of equity (Proposal C). For the $600,000 of equity, Arbor would receive 40% of the common stock.
Arbor was more interested in owning at least 50% of the company. They countered with (Proposal D) $300,000 of debt and $900,000 for half of the equity in the company. Gale and Yeaton were not sure they wanted to share control of the company.
Before proceeding further, they decided to run the numbers on the four proposals. Assume an interest rate of 8% on debt and a dividend rate on preferred stock of 10%. They assumed that Innovative would earn $300,000 a year after income taxes on operating income but before interest costs and the tax savings thereon. They included their own common stock equity at $900,000.
They also believe a good year would be $500,000 (instead of $300,000) and a bad year would be $100,000. (but just run the numbers for $500,000 and $300,000). Innovative’s tax rate is 34%. Assume Innovative pays out as a dividend its entire profit for the year.
For each proposal (A-D), calculate:
- The return on common equity for Innovative Engineering
- Arbor Capital’s pre-tax earnings and return on its $1.2 million investment
(Run the returns to both parties at $300,000; then repeat at $500,000).
No written analysis is required. (tip: the entire answer can fit on one excel spreadsheet, but feel free to use two sheets if needed)
IGNORE P6. It is NOT part of the test.
P6. The following table presents our (XYZ internet retailer) historical operating results for the periods indicated, including a comparison of the financial results for the periods indicated (dollars in thousands, except per share data):
| Comparison of | Comparison of | |||||||||||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||||||||
| December 30, 2007 to | December 31, 2006 to | |||||||||||||||||||||||||||
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||
| December 30, | December 31, | January 1, | December 31, 2006 | January 1, 2006 | ||||||||||||||||||||||||
| 2007 | 2006 | 2006 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| NIInternet sales | $ | 319,264 | $ | 251,587 | $ | 203,169 | $ | 67,677 | 26.9 | % | $ | 48,418 | 23.8 | % | ||||||||||||||
| CCost of sales | 254,060 | 200,734 | 158,127 | 53,326 | 26.6 | % | 42,607 | 26.9 | % | |||||||||||||||||||
| GrGross profit | 65,204 | 50,853 | 45,042 | 14,351 | 28.2 | % | 5,811 | 12.9 | % | |||||||||||||||||||
| SeSelling, general and administrative expenses | 42,792 | 34,296 | 26,993 | 8,496 | 24.8 | % | 7,303 | 27.1 | % | |||||||||||||||||||
| OOperating income | 22,412 | 16,557 | 18,049 | 5,855 | 35.4 | % | (1,492 | ) | −8.3 | % | ||||||||||||||||||
| OtOther income (expense), net: | ||||||||||||||||||||||||||||
| InInterest income, net | 3,760 | 3,323 | 2,499 | 437 | 13.2 | % | 824 | 33.0 | % | |||||||||||||||||||
| OtOther income | 415 | 100 | 5 | 315 | 315.0 | % | 95 | nm | ||||||||||||||||||||
| 4,175 | 3,423 | 2,504 | 752 | 22.0 | % | 919 | 36.7 | % | ||||||||||||||||||||
| InIncome before income taxes | 26,587 | 19,980 | 20,553 | 6,607 | 33.1 | % | (573 | ) | −2.8 | % | ||||||||||||||||||
| InIncome tax expense | 9,128 | 6,916 | 7,400 | 2,212 | 32.0 | % | (484 | ) | −6.5 | % | ||||||||||||||||||
| NNet income | $ | 17,459 | $ | 13,064 | $ | 13,153 | $ | 4,395 | 33.6 | % | $ | (89 | ) | −0.7 | % | |||||||||||||
| BBasic net income per share | $ | 1.10 | $ | 0.79 | $ | 0.75 | $ | 0.31 | 39.2 | % | $ | 0.04 | 5.3 | % | ||||||||||||||
| DiDiluted net income per share | $ | 1.04 | $ | 0.76 | $ | 0.71 | $ | 0.28 | 36.8 | % | $ | 0.05 | 7.0 | % | ||||||||||||||
XYZ Company had the following transactions related to ABC Company over a two-year period.
SG&A disclosure: Marketing costs in 2007 were up compared to 2006 primarily due to increased spending in online marketing vehicles, such as search, affiliate channels, online portals and other marketing initiatives to drive higher sales volumes. Payroll and related costs increased approximately $2.2 million in the year ended December 30, 2007 compared to the year ended December 31, 2006 due to additional personnel and increased compensation costs. Stock-based compensation increased approximately $1.3 million to $5.6 million compared to the year ended December 31, 2006 due to the number and fair value of stock options expensed under SFAS 123R. Credit card processing fees increased approximately $1.3 million in the year ended December 30, 2007 compared to the year ended December 31, 2006 due to the increase in sales volume. The increase in selling, general and administrative expenses also includes costs related to the establishment of our new international facility in Ireland. As a percentage of net sales, selling, general and administrative expenses were 13.4% and 13.6% in the year ended December 30, 2007 and the year ended December 31, 2006, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales in the year ended December 30, 2007 resulted primarily from our ability to leverage our fixed cost base.
Question: How much was XYZ’s Card Processing Fee expense for 2007? (sorry the first couple letters were cut off the above table)
XYZ Company had the following transactions related to ABC Company over a two-year period.
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