Jensen Wholesalers Corp.

Transcription

1 Jensen Wholesalers Corp. A Comprehensive Case to Accompany Introduction to Financial Accounting First US Edition Prepared by David Annand Version 4125

2 Copyright 2018 David Annand Published by David Annand Box 308, Rochester AB T0G 1Z0 ISBN: Library and Archives Canada Cataloguing in Publication Annand, David, 1954 This case is licensed under a Creative Commons License, Attribution Noncommercial Share Alike 4.0 USA: see This material may be reproduced for non commercial purposes and changes may be used by others provided that credit is given to the author. To obtain permission for uses beyond those outlined in the Creative Commons license, such as personalized assignments for students, please contact David Annand at davida@athabascau.ca. Latest version available at annand edd/ Please forward suggested changes to davida@athabascau.ca. First US Edition July 31, 2018

3 Table of Contents Overview 1 Required 2 Adjusting entries 3 Unadjusted trial balance 9 Bank reconciliation 13 General journal 15 Income statement and statement of changes in equity 21 Balance sheet 23 Statement of cash flows 25 Selected financial ratios 27 Version 4125

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5 Overview of Jensen Wholesalers Corp. Jensen Wholesalers Corp. (Jensen) was established in Its stock was listed on the New York Stock Exchange starting in The corporation s headquarters are located in Denver, CO. It has regional distribution warehouses in Denver and four other midwestern US locations. The corporation buys US made appliances and distributes these to regional retail stores that specialize in providing high quality appliances to customers with higher than average disposable incomes. Jensen has a reputation for purchasing appliances that are innovative and reliable, and backing what it sells through a generous warranty and refund policy. Jensen is recovering from a regional economic downturn due to a decline in world oil prices. Demand for its type of appliances has fluctuated over the past few years. The company has two main competitors, both headquartered in the United States. These both focus on lower cost appliances. Though Jensen is still ranked as the number one appliance wholesaler in the mid west in terms of total sales dollars, its competitors are gaining ground. Jensen has maintained very good relations with manufacturers and retailers. Retailers actively promote Jensen products as good value for money, and provide valuable feedback to Jensen about retail customer purchasing trends and requests for new products. Unlike its competitors, the Jensen sales force is well trained. They monitor changing customer preferences for appliances and communicate these back to Jensen management for consideration. The company recognizes that long term success largely depends on continued promotion of Jensen products by its retail store customers, which means that the chains must be able to continue to earn high gross profit on sales of these same products. However, increased competition from lower priced appliances by Jensen s US competitors has begun to cut into sales and profit margins. Jensen s warehouse distribution facilities and processes are state of the art. Once products have been purchased, they are able to be transported from manufacturing plants and to retailers very quickly. Jensen s distribution costs are usually lower than competitors because its warehouses are closer to customers, and its logistics are efficient. Company management believes costs can also be reduced by renting rather than owning delivery trucks. The trial balance of Jensen Wholesalers Corp. at December 31, 2020 is shown on pages 9 and 11. Remove these pages. Cut and join them where indicated. Version 4125 Pg. 1

6 Required: 1 Refer to the additional information for the company at December 31, 2020, shown on pages 3 to 8. Using the blank general journal pages on pages 15 to 20, prepare year end adjusting entries. General ledger account numbers are not necessary. Show your calculations below each adjusting entry Refer to the partially prepared bank reconciliation on page 13. Prepare a bank reconcilation at December 31, 2020 based on item 'b' shown in the additional information on pages 3 and 4. Post the adjusting entries to the trial balance and prepare an adjusted trial balance. Refer to the partially completed income statement and statement of changes in equity on page 21, and the balance sheet on page 23. Using the adjusted trial balance information, complete these statements for the year ended December 31, Refer to the partially completed statement of cash flows on page 25. Prepare a statement of cash flows for the year ended December 31, Refer to the partially completed selected financial ratios on page 27. Calculate ratios for the year ended December 31, Show your work. Analyze your results. Assume all sales are on credit. Version 4125 Pg. 2

7 Jensen Wholesalers Corp. Adjusting Entries For the Year Ended December 31, 2020 The following additional information is available at the corporation's year end. Sales tax of 5% only applies when indicated. a. The actual amount in petty cash at the end of the year is: $450 Unrecorded receipts in petty cash at the end of the year consist of the following: Delivery expense $70 Office supplies expense $80 b. The general ledger account for Cash in Bank showed the following at December 31, 2020: Cash in Bank Acct. No. 101 Balance DR Date Description PR Debit Credit (CR) Nov. 30 Balance (overdraft) 52,000 Dec Cash receipts CRJ10 890, ,000 Dec Cash Payments CDJ21 860,000 82,000 December deposits made and checks issued were as follows: Deposits Checks Date Amount No. Amount Dec. 3 $14, $37, , , , , , , , , , , , , , , , , , ,000 $890,000 $860,000 Version 4125 Pg. 3

8 The December bank statement showed: First Chartered Bank Jensen Wholesalers Corp. Bank Statement Month Ended December 31, 2020 Date Type Out In Balance Dec. 3 Deposit 14,000 (67,000) 5 Ck ,000 (277,000) 6 Ck ,000 (314,000) 6 Deposit 13,000 (301,000) 7 Deposit 120,000 (181,000) 10 Ck ,000 (221,000) 12 Ck ,000 (581,000) 13 Deposit 34,000 (547,000) 14 Ck * 87,000 (634,000) 15 Deposit 40,000 (594,000) 16 Ck ,000 (607,000) 17 Deposit 581,000 (26,000) 18 Ck ,000 (99,000) 20 Ck ,000 (114,000) 24 Deposit 39,000 (75,000) 26 Deposit 69,000 (6,000) 28 Deposit 12,000 6, OD int 1,590 4, SC 60 4,350 *drawn in error on Jensen's bank account SC = service charge OD int = overdraft interest expense There were no outstanding deposits or checks at November 30, c. A purchase of parts inventory on account has not been recorded. $9,000 d. Warranty expense for the year as a percentage of sales should be: 4% Version 4125 Pg. 4

9 e. Unpaid gross salaries at year end amount to: $70,000 Deductions from unpaid salaries are as follows: Employee Company Portion Portion Employee income taxes 20% 0% FICA Social Security 6.2% 6.2% FICA Medicare 1.45% 1.45% Company health plan 3% 3% Assume maximum amounts for Social Security purposes have not been reached. f. The estimated year end audit fees are: $70,000 g. h. i. Rent revenue consists of 13 equal monthly payments, including one paid in advance for January The company uses the balance sheet method for estimating the Allowance for Doubtful Accounts balance at the end of each year. An aging of accounts receivable and estimated bad debt percentages is as follows: Age (days) Accounts receivable Estimated bad debt percentage ,300,000 5% ,000 18% ,000 21% ,000 50% Over ,000 90% Totals $5,377,000 The company values merchandise inventory at LCNRV (unit basis). Any adjustments are made to Cost of Goods Sold expense. At year end, merchandise inventory amounts were: Item Total cost Total NRV A $1,000,000 $980,000 B 800, ,000 C 500, ,000 D 800, ,000 E 700, ,000 $3,800,000 $3,787,000 Version 4125 Pg. 5

10 j. A trade account payable was converted to a note payable during the year. No entry has been made to record this. The note payable is due at the end of The amount of the note payable is: $40,000 The annual interest rate on the note payable is: 12% The note payable was created at the end of this month: (January = 1; December = 12) 6 k. The number of shares of common stock issued on July 1, 2020 for $1 cash per share were: 95,000 On December 31, the company declared a dividend of: $660,000 The dividend is payable as of December 31. It will be paid on January 15, Preferred stock dividends are cumulative, at this amount per $100 share of preferred stock: $6 At December , preferred stock dividends in arrears totalled: $20,000 l. Some land was sold during the year for cash of: $90,000 Original cost of the land was: $60,000 The bookkeeper recorded the following entry in the general ledger at the time of sale: Dr. Cash in Bank $90,000 Cr. Land $90,000 m. The building was purchased several years ago. It originally had an estimated useful life of 20 years and residual value of $2 million. Estimates of the building's useful life and residual value have been revised during the year. The remaining estimated useful life of the building in years is now: 8 The new residual value of the building is estimated at: $1,825,000 The building is depreciated on the straight line basis. n. o. Patents are amortized over 20 years on the straight line basis, and have no residual value. No patents have been acquired during the year. At December 31, 2020, fair value of goodwill is estimated by management at: $40,000 Version 4125 Pg. 6

11 p. A lawsuit was commenced against the company in Damages claimed are: Lawyers for the company consider the likelihood of success to be: $30,000 Possible q. The interest rate on the mortgage is: 3% Annual payments (blended principal and interest) are made on Dec. 31 and total: $785,000 The 2020 payment has been recorded as Interest on Long term Debt expense. r. The annual interest rate on the bonds is: 5% Interest is paid once per year at the end of this month: (January = 1; December =12) 8 The bonds were issued on January 1, 2014 at: 101% The bonds were issued for this number of years: 10 s. t. Premium or discount on bonds is amortized on the straight line basis over the term of the bonds. The corporate income tax rate as a percentage of income before income taxes is: Corporate income tax installments during the year have been recorded as income tax expense in the records. Assume any 2020 loss before income taxes will result in the refund of income taxes at the current year's income tax rate. 20% Version 4125 Pg. 7

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13 Adjusted Trial Balance at December 31, 2020 Account Unadjusted Trial Balance Adj. Adjustments Adj. Adjusted Trial Balance Debit Credit # Debit Credit # Debit Credit Petty cash Cash in bank 82,000 0 Accounts receivable 5,377,000 0 Allow. for doubt. accounts 0 161,310 Merchandise inventory 3,800,000 0 Parts inventory 400,000 0 Land 8,400,000 0 Building 7,300,000 0 Accumulated dep'n bldg. 0 3,650,000 Patents 12,000 0 Accum. amort. patents 0 8,400 Goodwill 36,000 0 Trade accounts payable 0 70,000 Interest payable Estimated current liabilities Estimated warranty liability 408,000 0 Dividends payable 0 0 Salaries payable 0 0 Employee inc. taxes pay. 0 0 FICA Social Security pay FICA Medicare payable Co. health plan payable Corp. income tax pay. (receiv.) 0 0 Sales tax payable 0 7,000 Note payable 0 0 Unearned rent revenue Cut and join next page here Pg. 9

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15 Mortgage payable 0 7,850,000 Bonds payable 0 400,000 Discount bonds payable 0 0 Premium bonds payable 0 2,000 Common stock, $1 per share 0 600,000 Preferred stock, $100 per sh ,000 Retained earnings (deficit) 0 9,501,820 Cash div. common stock 0 0 Cash div. preferred stock 0 0 Rent revenue 0 520,000 Sales, net 0 13,600,000 Cost of goods sold 8,568,000 0 Amort. bond prem. (discount) 0 0 Amortization exp. patents 0 0 Bad debts expense 0 0 Co. health ins. expense exp. 12,600 0 Delivery expense 400,000 0 Dep'n. expense building 0 0 FICA Social Security exp. 26,040 0 FICA Medicare exp. 6,090 0 Interest and bank charges 40, Interest on long term debt 785,000 0 Lawsuit damages expense 0 0 Loss (gain) on sale of land 0 0 Office supplies expense 80,000 0 Professional fees 10,000 0 Salaries expense 420,000 0 Warranty expense 4,000 0 Write down of goodwill 0 0 Corp. income tax exp. (recov.) 503, ,670,530 36,670,530 Cut and join previous page here Version 4125 Pg. 11

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17 Jensen Wholesalers Corp. Bank Reconciliation Unreconciled general ledger Cash balance at December 31 At December 31, 2020 Unreconciled bank statement balance at December 31 Add: Add: Less: Less: Adjusted general ledger Cash balance at Dec. 31 Adjusted bank balance at December 31 Version 4125 Pg. 13

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19 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 15

20 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 16

21 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 17

22 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 18

23 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 19

24 Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit Version 4125 Pg. 20

25 Jensen Wholesalers Corp. Income Statement For the Year Ended December 31, Sales, net $12,960,800 Less: Cost of goods sold 8,351,700 Gross profit 4,609,100 Operating expenses Selling Salaries and benefits 487,967 Delivery 368,064 Office supplies 85,686 Warranty 489,600 Total selling 1,431,317 General and administrative Bad debts 312,217 Depreciation and amortization 235,587 Lawsuit damages Professional fees 79,200 Total general and adminstrative 627,004 Total operating expenses 2,058,320 Income (loss) from operations 2,550,780 Other income (expenses) Rent revenue 489,600 Gain (loss) on sale of land Write down of goodwill to fair value 489,600 Income (loss) before interest and income taxes 3,040,380 Interest expense 311,540 Income (loss) before income taxes 2,728,839 Income taxes (recovered) 545,768 Net income (loss) $2,183,072 Jensen Wholesalers Corp. Statement of Changes in Equity For the Year Ended December 31, Common Preferred Ret. earn. stock stock (deficit) Total equity Total equity Balance (deficit) at Jan. 1 $8,751,888 Stock issued Net income (loss) 2,183,072 Cash dividends declared Preferred (37,240) Common (590,900) Balance (deficit) at Dec. 31 $10,306,820 Version 4125 Pg. 21

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27 Jensen Wholesalers Corp. Balance Sheet At December 31, 2020 Assets Current Cash $43,610 Accounts receivable, net 5,074,398 Inventories 2,372,243 Corporate income taxes receivable 0 7,490,251 Non current Land 8,490,000 Building, net 3,650,000 Patents, net 3,600 Goodwill 36,000 12,179,600 $19,669,851 Liabilities Current Trade accounts payable $38,220 Estimated current liabilities 66,500 Estimated warranty liabilities 139,920 Note payable 0 Dividends payable 628,140 Interest payable 8,795 Salaries and benefits payable 81,328 Sales tax payable 6,930 Unearned rent 40,800 Current portion of mortgage payable 549,500 Corporate income taxes payable 100,398 1,660,531 Non current Mortgage payable 7,850,000 Less: Current portion (549,500) 7,300,500 Bonds payable, net 402,000 7,702,500 Total liabilities 9,363,031 Stockholders' Equity Common stock, $1 per share 505,000 Preferred stock, $100 per share 300,000 Retained earnings (deficit) 9,501,820 10,306,820 Total liabilities and stockholders' equity $19,669,851 Version 4125 Pg. 23

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29 Jensen Wholesalers Corp. Statement of Cash Flows For the Year Ended December 31, Operating activities Net income (loss) $2,183,072 Items not affecting cash flow Depreciation and amortization expense 235,587 Amortization of bond discount (premium) (400) Net increase (decrease) in non cash working capital* (1,143,927) Cash flow from (used by) operating activities 1,274,331 Investing activities Cash flow from (used by) investing activities 0 Financing activities Repayment of mortgage (631,376) Increase (decrease) in sales tax payable** 800 Payment of dividends (640,703) Cash flow from (used by) financing activities (1,271,278) Net increase (decrease) in cash 3,053 Cash (deficiency) at beginning of year 40,557 Cash at end of year $43,610 *Net increase (decrease) in non cash working capital: Decrease (increase) in accounts receivable $119,716 Decrease (increase) in inventories (1,243,756) Increase (decrease) in trade accounts payable (8,156) Increase (decrease) in estimated liabilities (2,800) Increase (decrease) in estimated warranty liabilities 2,376 Increase (decrease) in interest payable 163 Increase (decrease) in salaries and benefits payable (2,711) Increase (decrease) in unearned rent 240 Increase (decrease) in corp. inc. tax payable/receivable (9,000) Net increase (decrease) in non cash working capital ($1,143,927) **Sales tax collections and remittances do not affect the income statement. As a result, changes to the Sales Tax Payable account are considered a financing activity credit Version 4125 Pg. 25

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31 Jensen Wholesalers Corp. Selected Financial Ratios 2020 industry Jensen's ratios average a. Current ratio b. Acid test ratio c. Accounts rec. collection (days) d. Days of sales in inventory e. Revenue operating cycle (days) f. Gross profit ratio 37.1% 35.6% 34.1% g. Operating profit ratio 22.0% 19.7% 17.5% h. Net profit ratio 19.2% 16.8% 14.5% i. Sales to total assets ratio j. Return on total assets ratio 15.1% 13.3% 11.7% k. Return on s/h equity ratio 23.7% 22.9% 26.3% l. Debt to s/h equity ratio m. Times interest earned n. Earnings (loss) per common share $5.83 $4.25 $3.57 o. Price earnings ratio (given) p. Dividend yield per common share (given) 7% 8% 6% 5% Version 4125 Pg. 27

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33 SOLUTIONS Jensen Wholesalers Corp. GENERAL JOURNAL Dec Adjusting entries Debit Credit a. Delivery Expense 70 Office Supplies Expense 80 Petty Cash 150 To adjust petty cash to actual at year end. b. Interest and bank charges expense (see bank rec.) 1,650 Cash in Bank 1,650 To record December service charges and interest. c. Parts Inventory 9,000 Trade Accounts Payable 9,000 To record parts inventory purchase at year end. d. Warranty Expense 540,000 Estimated Warranty Liability 540,000 To adjust estimated warranty liability at yearend as follows: Warranty expense should be $544,000 Warranty expense is (4,000) Adjustment needed $540,000 e.(i) Salaries Expense 70,000 Employee Income Taxes Payable 14,000 FICA Social Security Payable 4,340 FICA Medicare Payable 1,015 Company Health Plan Payable 2,100 Salaries Payable 48,545 To record salaries payable at year end. e.(ii) FICA Social Security Expense 4,340 FICA Medicare Expense 1,015 Company Health Plan Expense 2,100 FICA Social Security Payable 4,340 FICA Medicare Payable 1,015 Company Health Plan Payable 2,100 To record benefits payable at year end. Version 4125 Solution pg. 29

34 f. Professional Fees 70,000 Estimated Current Liabilities 70,000 To record estimated audit fees at year end. g. Rent Revenue 40,000 Unearned Rent Revenue 40,000 To adjust rent revenue at year end. h. Bad Debts Expense 289,090 Allowance for Doubtful Accounts 289,090 To adjust allowance for doubtful accounts at year end as follows: Age (days) Accounts receivable percentage amount 1 30 $4,300,000 5% $215, ,000 18% 144, ,000 21% 39, ,000 50% 33,500 Over ,000 90% 18,000 Totals $5,377,000 $450,400 Allowance for doubtful accounts should be $450,400 Allowance for doubtful accounts is (161,310) Adjustment needed $289,090 i. Cost of Goods Sold 42,000 Merchandise Inventory 42,000 To write down inventory at year end to LCNRV as follows: LCNRV Item Total cost Total NRV Unit basis A $1,000,000 $980,000 $980,000 B 800, , ,000 C 500, , ,000 D 800, , ,000 E 700, , ,000 $3,800,000 $3,787,000 $3,758,000 Merchandise inventory should be $3,758,000 Merchandise inventory is (3,800,000) Adjustment needed ($42,000) Estimated bad debt Estimated uncollectible Version 4125 Solution pg. 30

35 j. Trade Accounts Payable 40,000 Notes Payable 40,000 Interest and Bank Charges Expense 2,400 Interest Payable 2,400 To record notes payable and accrued interest at year end as follows: Amount of note payable (a) $40,000 Interest rate (b) 12% Number of months to year end (c) 6 Divided by months in year (d) 12 Interest expense (a x b x c/d) $2,400 k. Cash Dividends Declared on Preferred Stock 38,000 Cash Dividends Declared on Common Stock 622,000 Dividends Payable 660,000 To record dividends declared at year end as follows: Total dividends declared $660,000 Less preferred stock dividends in arrears (20,000) Less 2020 preferred stock dividends (18,000) Common stock dividends $622,000 There is no adjustment needed re. stock issued during the year. The transaction has already been recorded in the general ledger accounts. l. Land 30,000 0 Loss (Gain) on Sale of Land 0 30,000 To adjust for sale of land as follows: Original cost $60,000 Proceeds (90,000) Loss (gain) ($30,000) m. Depreciation Expense Building 228,125 Accumulated Depreciation Building 228,125 To record building depreciation as follows: Remaining carrying amount $3,650,000 Less new residual value (1,825,000) Net (a) $1,825,000 Remaining useful life (b) 8 Annual revised depreciation (a/b) $228,125 Version 4125 Solution pg. 31

36 n. Amortization Expense Patents 600 Accumulated Amortization Patents 600 To record patent amortization at year end. o. Write down of Goodwill to Fair Value 0 Goodwill 0 No adjustment is made if FV exceeds cost. Fair value of goodwill $40,000 Goodwill per trial balance (36,000) Excess (deficiency) of fair value over cost $4,000 p. Lawsuit Damages Expense Estimated Current Liabilities No entry is recorded since the likelihood of success is not probable. q. Mortgage Payable (see bolded amount below) 549,500 Interest on Long term Debt Expense 549,500 To adjust mortgage payable at year end as follows: Reduction of Year Beginning bal. Interest principal Ending bal $7,850,000 $235,500 $549,500 $7,300, ,300, , ,985 6,734,515 The current portion of the mortgage at Dec. 31, 2020 is shown in the outlined box above. r. Interest on Long term Debt 6,667 Interest Payable 6,667 To record interest accrued on bonds as follows: Amount of bonds payable (a) $400,000 Interest rate (b) 5% Number of months to year end (c) 4 Divided by months in year (d) 12 Interest expense (a x b x c/d) $6,667 Version 4125 Solution pg. 32

37 s. Amortization of bond premium (discount) Premium on Bonds Payable To amortize bonds payable as follows: Unamortized bond premium or discount (a) $2,000 Years remaining (outstanding 5 years at Dec. 31, 2020) (b) 5 Amortization expense (a/b) $400 t. Corporate Income Tax Expense 106,807 0 Corporate Income Taxes Payable 0 106,807 To adjust corporate income taxes at year end as follows: Income (loss) before income taxes per income statement (a) $3,050,033 Corporate tax rate (b) 20% Corporate income tax expense (recovery) should be (a x b) $610,007 Corporate income tax balance is currently (503,200) Additional income tax expense (reduction) $106,807 Version 4125 Solution pg. 33

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39 Jensen Wholesalers Corp. Bank Reconciliation At December 31, 2020 Unreconciled general ledger Cash balance at Dec. 31 Unreconciled bank statement $82,000 balance at Dec. 31 $4,350 Add: Outstanding deposits Dec. 9 88,000 Dec , ,000 Add: Check drawn in error 87,000 Less: Less: Oustanding checks Overdraft Interest 1,590 Check No. Amount Bank charges 60 (1,650) , ,000 (127,000) Adjusted general ledger Cash balance at Dec. 31 Adjusted bank balance at Dec. $80, $80,350 Version 4125 Solution pg. 35

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41 Adjusted Trial Balance At December 31, 2020 Account Unadjusted TB Adjustments Adjusted TB 9,501,820 Debit Credit Debit Credit Debit Credit Petty cash a Cash in bank 82,000 1,650 b. 80,350 0 Accounts receivable 5,377,000 5,377,000 Allow. for doubt. accounts 161, ,090 h. 450,400 Merchandise inventory 3,800,000 42,000 i. 3,758,000 Parts inventory 400,000 c. 9, ,000 Land 8,400,000 l. 30,000 0 l. 8,430,000 Building 7,300,000 7,300,000 Accumulated dep'n bldg. 3,650, ,125 m. 3,878,125 Patents 12,000 12,000 Accum. amort. patents 8, n. 9,000 Goodwill 36, ,000 Trade accounts payable 70,000 j. 40,000 9,000 c. 39,000 Interest payable 2,400 j. 9,067 6,667 r. Estimated current liabilities 70,000 f. 70,000 0 p. Estimated warranty liability 408, ,000 d. 132,000 Dividends payable 660,000 k. 660,000 Salaries payable 48,545 e.(i) 48,545 Employee inc. taxes pay. 14,000 e.(i) 14,000 FICA Social Security pay. 4,340 e.(i) 8,680 4,340 e.(ii) FICA Medicare payable 1,015 e.(i) 2,030 1,015 e.(ii) Co. health plan payable 2,100 e.(i) 4,200 2,100 e.(ii) Corp. income tax pay. (rec.) 0 106,807 t ,807 Sales tax payable 7, ,000 Note payable 40,000 j. 40,000 Unearned rent revenue 40,000 g. 0 40, Solution pg. 37

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43 Mortgage payable 7,850,000 q. 549,500 7,300,500 Bonds payable 400, ,000 Discount bonds payable Premium bonds payable 2,000 s ,600 Common stock, $1 per sh. 600, ,000 Preferred stock 300, ,000 Retained earnings (deficit) 0 9,501, ,501,820 Cash div. common stock k. 622, ,000 Cash div. preferred stock k. 38,000 38,000 Rent revenue 520,000 g. 40, ,000 Sales, net 13,600,000 13,600,000 Cost of goods sold 8,568,000 i. 42,000 8,610,000 Amort. bond prem. (discount) s Amortization exp. patents n Bad debts expense h. 289, ,090 Co. health ins. expense exp. 12,600 e.(ii) 2,100 14,700 Delivery expense 400,000 a ,070 Dep'n. expense building m. 228, ,125 FICA Social Security exp. 26,040 e.(ii) 4,340 30,380 FICA Medicare exp. 6,090 e.(ii) 1,015 7,105 Interest and bank charges 40,000 b. 1,650 44,050 j. 2,400 Interest on long term debt 785,000 r. 6, ,500 q. 242,167 Lawsuit damages expense p. 0 0 Loss (gain) on sale of land l. 0 30,000 l. 0 30,000 Office supplies expense 80,000 a ,080 Professional fees 10,000 f. 70,000 80,000 Salaries expense 420,000 e.(i) 70, ,000 Warranty expense 4,000 d. 540, ,000 Write down of goodwill o. 0 0 Corp. income tax exp. (recov.) 503,200 t. 106, , ,670,530 36,670,530 2,693,843 2,693,843 37,733,173 37,733, Solution pg. 39

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45 Jensen Wholesalers Corp. Income Statement For the Year Ended December 31, Sales, net $13,600,000 $12,960,800 Less: Cost of goods sold 8,610,000 8,351,700 Gross profit 4,990,000 4,609,100 Operating expenses Selling Salaries and benefits 542, ,967 Delivery 400, ,064 Office supplies 80,080 85,686 Warranty 544, ,600 Total selling 1,566,335 1,431,317 General and administrative Bad debts 289, ,217 Depreciation and amortization 228, ,587 Lawsuit damages 0 Professional fees 80,000 79,200 Total general and adminstrative 597, ,004 Total operating expenses 2,164,150 2,058,320 Income (loss) from operations 2,825,850 2,550,780 Other income (expenses) Rent revenue 480, ,600 Gain (loss) on sale of land 30,000 Write down of goodwill to fair value 0 510, ,600 Income (loss) before interest and income taxes 3,335,850 3,040,380 Interest expense 285, ,540 Income (loss) before income taxes 3,050,033 2,728,839 Income taxes (recovered) 610, ,768 Net income (loss) $2,440,027 $2,183,072 Jensen Wholesalers Corp. Statement of Changes in Equity For the Year Ended December 31, 2020 Version Retained Common Preferred earnings stock stock (deficit) Total equity Total equity Balance (deficit) at Jan. 1 $505,000 $300,000 $9,501,820 $10,306,820 $8,751,888 Stock issued 95,000 95,000 Net income (loss) 2,440,027 2,440,027 2,183,072 Cash dividends declared Preferred (38,000) (38,000) (37,240) Common (622,000) (622,000) (590,900) Balance (deficit) at Dec. 31 $600,000 $300,000 $11,281,847 $12,181,847 $10,306,820

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47 Jensen Wholesalers Corp. Balance Sheet At December 31, 2020 Assets Current Cash $80,800 $43,610 Accounts receivable, net 4,926,600 5,074,398 Inventories 4,167,000 2,372,243 Corporate income taxes receivable 0 0 9,174,400 7,490,251 Non current Land 8,430,000 8,490,000 Building, net 3,421,875 3,650,000 Patents, net 3,000 3,600 Goodwill 36,000 36,000 11,890,875 12,179,600 $21,065,275 $19,669,851 Liabilities Current Trade accounts payable $39,000 $38,220 Estimated current liabilities 70,000 66,500 Estimated warranty liabilities 132, ,920 Note payable 40,000 0 Dividends payable 660, ,140 Interest payable 9,067 8,795 Salaries and benefits payable 77,455 81,328 Sales tax payable 7,000 6,930 Unearned rent 40,000 40,800 Current portion of mortgage payable 565, ,500 Corporate income taxes payable 106, ,398 1,747,313 1,660,531 Non current Mortgage payable 7,300,500 7,850,000 Less: Current portion (565,985) (549,500) 6,734,515 7,300,500 Bonds payable, net 401, ,000 7,136,115 7,702,500 Total liabilities 8,883,428 9,363,031 Stockholders' Equity Common stock 600, ,000 Preferred stock, $ , ,000 Retained earnings (deficit) 11,281,847 9,501,820 12,181,847 10,306,820 Total liabilities and S/H equity $21,065,275 $19,669,851 Version 4125 Solution pg. 43

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49 Jensen Wholesalers Corp. Statement of Cash Flows For the Year Ended December 31, Operating activities Net income (loss) $2,440,027 $2,183,072 Items not affecting cash flow Depreciation and amortization expense 228, ,587 Amortization of bond discount (premium) (400) (400) Write down of goodwill to fair value 0 Loss (gain) on disposal of land (30,000) Net increase (decrease) in non cash working capital* (1,608,592) (1,143,927) Cash flow from (used by) operating activities 1,029,760 1,274,331 Investing activities Proceeds from sale of land 90,000 0 Financing activities Repayment of mortgage (549,500) (631,376) Increase (decrease) in sales tax payable*** Issuance of common stock 95,000 Payment of dividends**** (628,140) (640,703) Cash flow from (used by) financing activities (1,082,570) (1,271,278) Net increase (decrease) in cash 37,190 3,053 Cash (deficiency) at beginning of year 43,610 40,557 Cash (deficiency) at end of year $80,800 $43,610 *Net increase (decrease) in non cash working capital: Decrease (increase) in accounts receivable $147,798 $119,716 Decrease (increase) in inventories (1,794,757) (1,243,756) Increase (decrease) in trade accounts payable** 40,780 (8,156) Increase (decrease) in estimated liabilities 3,500 (2,800) Increase (decrease) in estimated warranty liabilities (7,920) 2,376 Increase (decrease) in interest payable Increase (decrease) in salaries and benefits payable (3,873) (2,711) Increase (decrease) in unearned rent (800) 240 Increase (decrease) in corp. inc. tax payable/receivable 6,408 (9,000) Net increase (decrease) in non cash working capital ($1,608,592) ($1,143,927) **includes note payable, as the conversion from an account payable does not affect cash flow. ***Sales tax collections and remittances do not affect the income statement. As a result, changes to the Sales tax Payable account are considered a financing activity credit extended by the government. ****the dividends payable at December 31, 2019 must have been paid in cash in Version 4125 Solution pg. 45

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51 Jensen Wholesalers Corp. Selected Financial Ratios 2020 industry Jensen's ratios average a. Current ratio b. Acid test ratio c. Accounts rec. collection (days) d. Days of sales in inventory e. Revenue operating cycle (days) f. Gross profit ratio 37.1% 36.7% 35.6% 34.1% g. Operating profit ratio 22.0% 20.8% 19.7% 17.5% h. Net profit ratio 19.2% 17.9% 16.8% 14.5% i. Sales to total assets ratio j. Return on total assets ratio 15.1% 13.9% 13.3% 11.7% k. Return on s/h equity ratio 23.7% 21.7% 22.9% 26.3% l. Debt to s/h equity ratio m. Times interest earned n. Earnings (loss) per common share $5.83 $4.49 $4.25 $3.57 o. Price earnings ratio (given) p. Dividend yield per common share 7% 8% 6% 5% (given) a. Ratios a e are measures of liquidity. The current ratio has increased compared to 2018 and The acid test ratio has decreased compared to 2018 and 2019 Jensen's declining acid test ratio indicates that the company is growing less liquid in terms of cash and accounts receivable available to satisfy current liabilities. However, the industry seems to have unusually high current and acid test ratios as a whole. Jensen is not significantly different than its competitors in this regard. There do not appear to be any future liquidity issues. The accounts receivable collection period is decreasing. Jensen is doing a better job collecting accounts receivable compared to the prior year. The level of inventories relative to annual sales is increasing. Jensen may be carrying too much merchandise inventory, and should consider reducing this. Overall, the revenue operating cycle is increasing. This is worrisome. Jensen management should consider means to reduce both accounts receivable and inventory levels towards industry averages. Version 4125 Solution pg. 47

52 b. Ratios f k are measures of profitability. The gross profit ratio has increased, indicating that the company is able to sell items for a higher average price than in prior years. The operating profit ratio has decreased, indicating that the company's operating expenses are relatively higher than prior years compared to sales. The net profit ratio has decreased, indicating that the company has not been able to earn as much profit relative to sales compared to last year. The sales to total assets ratio is increasing, indicating that Jensen is utilizing its total assets more efficiently. However, it still lags behind industry averages. c. Ratios l and m are leverage ratios. ROSE has decreased, indicating that less net income has been earned in 2020 relative to the amount of stockholders' equity. The D/E ratio is increasing. Jensen is becoming more reliant on debt. This is likely acceptable, as the industry average D/E ratio is even higher. The risk of Jensen not being able to meet its interest obligations has increased and this risk is greater than industry average. d. Ratios n p are market ratios. EPS has decreased due to the company's deteriorating profit picture compared to prior years. Jensen's P/E ratio has declined. The market does not consider that the company will be as profitable in the future as it was in prior years. Jensen's P/E ratio is higher than the industry average. The market considers that Jensen will be more profitable in the future compared to its competitors. Jensen's P/E ratio is steaily declining. The market is indicating that Jensen's prospects of profitability are declining from 2018 to The amount of dividends paid compared to market value per common share has decreased. The rate is the same as industry average now. Version 4125 Solution pg. 48

53 e. Overall analysis On most measures, Jensen lags behind industry averages. This likely indicates the continuing effects of the economic downturn in the mid west (see overview). Its main competitors may have a broader geographic base, including areas outside the mid west. Jensen's greater dependence on the more limited regional economy seems to have delayed the company's recovery. All these possibilities should be considered as well as the company specific suggestions noted above. Version 4125 Solution pg. 49

54 Copyright 2018 David Annand Published by David Annand Box 308, Rochester AB T0G 1Z0 ISBN: Library and Archives Canada Cataloguing in Publication Annand, David, 1954 This case is licensed under a Creative Commons License, Attribution Non commercial Share Alike 4.0 USA: see This material may be reproduced for non commercial purposes and changes may be used by others provided that credit is given to the author. To obtain permission for uses beyond those outlined in the Creative Commons license, such as personalized assignments for students, please contact David Annand at davida@athabascau.ca. Latest version available at annand edd/ Please forward suggested changes to davida@athabascau.ca. First US Edition July 31, 2018