Homework SourseThe accountant for Lunn Express wants to develop a balance s
The accountant for Lunn Express wants to develop a balance sheet as of December 31, 2016. The following items pertain to the Liability category and must be considered to determine the items that should be reported in the Current Liabilities section of the balance sheet. You may assume that Lunn began business on January 1, 2016; therefore, the beginning balance of all accounts was zero.
Part B
Required:
X
Part A: Balance Sheet
| a. | During 2016, Lunn purchased $100,000 of inventory on account from suppliers. By yearend, $40,000 of the balance in Accounts Payable had been eliminated as a result of payments. All items were purchased on terms of 2/10, n/30. Lunn uses the gross method of recording payables. |
| b. | On April 1, 2016, Lunn borrowed $10,000 on a one-year note payable from Philips Bank. Terms of the loan indicate that Lunn must repay the principal and 10% interest at the due date of the note. |
| c. | On October 1, 2016, Lunn also borrowed $8,000 from Dove Bank on a one-year note payable. Dove Bank deducted 8% interest in advance and gave to Lunn the net amount. At the due date, Lunn must repay the principal of $8,000. |
| d. | On January 1, 2016, Lunn borrowed $20,000 from Owens Bank by signing a ten-year note payable. Terms of the note indicate that Lunn must make annual payments of principal each January 1 beginning in 2017 and must pay interest each January 1 in the amount of 12% of the outstanding balance of the loan. |
| e. | The accountant for Lunn has completed an income statement for 2016 that indicates that income before taxes was $10,000. Lunn must pay tax at the rate of 40% and must remit the tax to the Internal Revenue Service by April 15, 2017. |
| f. | As of December 31, 2016, Lunn owes its employees salaries of $3,000 for work performed in 2016. The employees will be paid on the first payday of 2017. |
| g. | During 2016, two lawsuits were filed against Lunn. In the first lawsuit, a customer sued for damages because of an injury that occurred on Lunn’s premises. Lunn’s legal counsel advised that it is probable that the lawsuit will be settled in 2017 at an amount of $7,000. The second lawsuit involves a patent infringement suit of $13,000 filed against Lunn by a competitor. The legal counsel has advised that Lunn may be at fault but that a loss does not appear probable at this time. |
Solution
1. Current Liabilities section
a. Inventory $ 60,000
b. Philips Bank Loan
Principal + Interest
= $ 10,000 + 10,000 X 10 / 100
= $ 11,000
c. From Dove Bank = $ 8,000 (This is Princippal + Interest )
d.From Owens Bank -
= Principal + Interest Outstanding
= $20,000 + 20,000X 12/100
= $ 22,400
e. Tax Liability = $ 10,000 X 40 / 100 = $ 4,000
f. Employees salaries = $ 3,000
g. Probable Law Suit Payable = $ 7, 000
To make investment decisions about this company
We require
a. Dividend Payout
b. Risk Free rate
c. Growth Rate
d. Market Return
e. Weight of Debt & Equity
2.
a. Total Period = 5 Years i.e. n = 5 X 2 = 10
Compounding Semi annually it means 2 times per year
Present Value = $ 3,000 i = 6 % per annum i = 6/2 = 3 % per period
Future Value = Present Value X ( 1+ i ) ^ n
= $ 3,000 X ( 1+ 0.03) ^ 10
= $ $ 3000 X 1.34 = $ 4,031.75
b. Future Value = Present Value X ( 1+ i ) ^ n
Present Value = Future Value / ( 1+i ) ^ n
= $ 3,000 X 1 / ( 1+0.03) ^ 10
= $ 3,000 X 0.74
= $ 2,232.28
c. Present Value of Annuity
Annuity = $ 3,000
P ( 1- ( 1+r ) ^ -n / r )
= $ 3, 000 ( 1 - ( 1+0.03) ^ -8 / 0.03 ) = $ 21, 059.08
d. Same as C
e. Present Value = $ 3,000 Future Value = $ 3,000 X 2 = $ 6,000 Period = 10 i = ?
Future Value = Present Value X ( 1+ i ) ^n
( 1+ i) ^10 = $ 6,000 / 3,000 = $ 2
1+ i = 10 th root of 2 = 1.07
i = 1.07 - 1 = 7 % approximately.
