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HVAC Parts & Machinery – RoyalCustomEssays

HVAC Parts & Machinery

Cloud Business Intelligence
December 8, 2018
Netflix
December 8, 2018
0
Case
Steve Prescott runs a successful corporation selling electrical parts used for large production companies. He employs several people, but is looking to expand his operations further.  In addition to expanding the sales of electrical parts, he also wants to start selling heating, ventilation and air conditioning (HVAC) parts and machinery through a separate division of the company called “HVAC Parts & Machinery.”  Currently, Steve owns all the shares in the corporation. To raise the needed cash, he decides to offer common and preferred shares for sale to investors starting in 2019. Below is the balance sheet at the end of 2018.
Prescott Electric Inc.
Balance Sheet
As at December 31, 2018
Assets Liabilities
Cash $50,000 Accounts Payable $10,400
Accounts Receivable 14,200 Unearned Revenue 5,100
Prepaid Insurance 3,600 Bank Loan 23,000
Inventory 45,000 Total Liabilities 38,500
Property, Plant & Equipment 120,000 Shareholders’ Equity
Accumulated Depreciation -14,000 Common Shares – 110,000 issued 60,000
Retained Earnings 120,300
Total Shareholder’s Equity 180,300
Total Assets $218,800 Liabilities & Owner’s Equity $218,800
Steve has authorized 140,000 common shares and 15,000 preferred shares. The preferred shares will be cumulative and pay $5 dividends. Steve wants to keep control of his business, so he will keep his 110,000 common shares and will sit on the board of directors.
Steve has located a few private investors that wish to purchase shares in the new corporation. Some want common shares, while other are interested in preferred shares. On January 20, 2019, Steve issues 25,000 common shares for $62,500 cash and issues 3,000 preferred shares for $12,000 cash.
On March 1, 2019, Prescott Electric Inc. issued and sold $180,000, 5 year bonds with an interest rate of 5%. The market rate at the time of issue was 6%. Any premium or discount on the bond is amortized using the effective interest rate method. Interest will be paid annually on February 28. Use a 4 decimal factor for the bond calculation.
During 2019, the company has performed well, so the board of directors decided to pay dividends. On November 30, 2019, the company declared cash dividends of $60,000, which will be paid out on December 15, 2019. Use the cash dividends method and close cash dividends at the end of the year.
During the year, Prescott Electric made the following investments:
a) On January 1, Prescott purchased a strategic investment of 3,000 shares in Louis Inc. for $6 per share. This represents 30% of Louis Inc. common shares. On December 31, Louis Inc. declares and pays a $20,000 dividend and reports a net income of $150,000. Prescott will use the equity method to record this investment.
b) On April 17, they purchased a $30,000, 90 day T-bill at 2,% for $29,852. The T-bill matures on July 16.
c) On July 1, they purchased a $20,000, 5 year bond paying 6% when the market rate was 8%. Interest is paid every 6 months on December 31 and June 30. Prescott paid $18,378 to purchase the bond and plans to hold onto the bond until it matures.
d) On November 23, the company purchased 500 shares of Duke Inc. at $15 per share for the purpose of trading. The shares are less than 3% of the total shares of Duke Inc. and are a non-strategic investment. By December 31, the price per share had gone up to $18 per share.
Prepare the journal entries for the issue of shares, issue of the bonds and the dividends, plus all the investments made during the year. Also prepare adjustments at year end to accrue interest on the bond and to record change to any applicable investments.
Date Account Title and Explanation DR CR
At the end of the year, Prescott Electric has the following list of accounts and adjusted balances.
– The expansion into HVAC did not go as planned and had to be discontinued.
– All balances are normal balances.
– Complete the list by filling in the missing values from the journal entries you created during the year.
– The cash balance includes all transactions during the year, including the ones you prepared.
– Interest expense includes interest accrued on the bond plus interest paid on the bank loan.
– Interest payable will only contain interest accrued.
– Interest revenue is only from items in the journal entries for the year
Assume the tax rate is 30%. Assume income tax has already been paid. You will just have to calculate the income tax expense on the income statement.
Account Title Balance
Accounts Payable $122,000
Accounts Receivable 122,168
Accumulated Depreciation 49,000
Bank Loan 50,000
Bonds Payable
Cash 132,500
Common Shares
Cost of Goods Sold 292,500
Depreciation Expense 35,000
Discount on Bonds
Gain on Fair Value Adjustment
Insurance Expense 1,200
Interest Expense 11,122 -7500
Interest Payable 7,500
Interest Revenue
Inventory 210,160
Investment in Associate – Louis Inc.
Long-Term Investment – Bond
Loss on Fair Value Adjustment
Loss from Discontinued Operations (10,200)
Maintenance Expense 8,000
Preferred Shares
Premium on Bonds
Prepaid Insurance 14,000
Professional Fees Expense 5,400
Property, Plant & Equipment 200,000
Rent Expense 32,000
Revenue from Investment in Associate
Salaries Expense 70,000
Sales Discounts 6,000
Sales Returns and Allowances 7,000
Sales Revenue 650,000
Short-Term Investment – Duke Inc.
Telephone Expense 3,000
Travel Expense 15,400
Unearned Revenue 26,100
Notes:
The bank loan is payable over 5 years and $10,000 will be paid by December 31, 2019.
$45,000 5500 5
Prepare a multistep income statement for the year ending December 31, 2019. Round answers to the nearest whole number.
Prescott Electric Inc.
 Income Statement
For the Year Ended December 31, 2019
 
 
 
 
   
 
   
 
 
Calculate the earnings per share for i) Income from Continuing Operations, ii) income from Discontinued Operations and iii) Net Income.
Prepare a statement of retained earnings at December 31, 2019. Round answers to the nearest whole number.
Prescott Electric Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2019
 
Prepare a Classified Balance Sheet at December 31, 2019. Round answers to the nearest whole number.
Prescott Electric Inc.
Balance Sheet
As at December 31, 2019
 
 
   
 
 
 
   
   
 
 
   
 
Using the balance sheet from the end of last year (when the company was still a proprietorship) and the balance sheet just created, prepare a cash flow statement using the indirect method. Round answers to the nearest whole number.
Note: No Property, Plant and Equipment was sold during the year.
Prescott Electric Inc.
Cash Flow Statement
For the Year Ended December 31, 2019
 
 
 
   
 
Prescott Electric was able to find financial statements of another company, Hill Supplies Inc.,  that operates in the same industry. The income statement and balance sheet of this company is shown below.
Hill Supplies Inc.
 Income Statement
For the Year Ended December 31, 2019
Sales Revenue $900,000
Less Cost of Goods Sold 360,000
Gross Profit 540,000
Operating Expenses
Operating Expenses $412,000
Interest Expense $18,000
Depreciation Expense 12,000
Total Operating Expenses 442,000
Income from Operations 98,000
Income Tax Expense   29,400
Net Income 68,600
Hill Supplies Inc.
Balance Sheet
As at December 31, 2019
Assets
Current Assets
Cash $280,000
Accounts Receivable 170,000
Prepaid Insurance 64,000  
Inventory 100,000  
Total Current Assets $614,000
Non-Current Assets
Property, Plant & Equipment 500,000
Accumulated Depreciation (130,000)
Total Non-Current Assets 370,000
Total Assets $984,000
Liabilities
Current Liabilities
Accounts Payable 85,400
Unearned Revenue 32,000
Total Current Liabilities $117,400
Non-Current Liabilities    
Bank Loan 70,000  
Total Non-Current Liabilities 70,000
Total Liabilities 187,400
Shareholders’ Equity
Common Shares 110,000
Retained Earnings 686,600
Total Shareholders’ Equity 796,600
Liabilities & Shareholders’ Equity $984,000
Using the income statement and balance sheet from Prescott Electric and Hill Supplies, calculate the appropriate ratios to determine which company is doing better in the categories listed below. For ratios that use averages of two years, just use the single value given in the statement. Round all ratios to 2 decimal places. Write your explanations in the textbox.
a) profitability (gross profit margin, EBITDA to sales, interest coverage, net profit margin, ROE, ROA)
b) liquidity (current ratio, quick ratio, debt-to-equity)
c) management performance (DSO, A/R turnover, inventory days on hand, inventory turnover)
d) Analyze and compare the performance of the two companies using at least two ratios from each category. (The analysis is not expected to exceed 250 words).
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