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Answered: Vince Corporation has current assets of $300,000 and current liabilities of $175,000. Compute the effect of each of the following transactions on Vince’s current ratio:

Assignment 04

A04 Intermediate Accounting I

Directions:  Be sure to make an electronic copy of your answer before submitting it to Ashworth College for grading.  Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and grammar.  Sources must be cited in APA format.  Refer to the “Assignment Format” page for specific format requirements.

Part A (40 points)

Vince Corporation has current assets of $300,000 and current liabilities of $175,000.

Compute the effect of each of the following transactions on Vince’s current ratio:

  1. Refinanced a $50,000 long-term mortgage with a short-term note.
  2. Purchasing $80,000 of merchandise inventory with short-term accounts payable.
  3. Paying $30,000 of  short-term accounts payable.
  4. Collecting $40,000 of short-term accounts receivable. 

Part B (20 points)

Selected data of the Peninsula Company follow: 

As of December 31
Balance Sheet Data 2014 2013
Accounts receivable $671,000 $642,000
Allowance for doubtful accounts 31,000 22,000
Net accounts receivable $640,000 $620,000
Inventories—lower of cost or market $542,500 $642,500
Year Ended December 31
Income Statement Data 2014 2013
Net credit sales $3,150,000 $3,000,000
Net cash sales 800,000 600,000
Net sales $3,950,000 $3,600,000
Cost of goods sold $2,370,000 $2,160,000
Selling, general, and administrative expenses 475,000 350,000
Other 150,000 125,000
Total operating expenses $2,995,000 $2,635,000
Net income $955,000 $965,000
  1. What is the accounts receivable turnover for 2014?
  2. What is the inventory turnover for 2014?

Part C (40 points)

Selected information taken from the 2014 annual report of Aardvark Company follows.  During 2014, the company had no nonoperating or nonrecurring items included in income and had no outstanding preferred stock.

($ in millions) 2014 2013
Sales $19,903 $18,781
Interest expense 130 169
Net income 1,153 1,088
Total assets 12,673 12,461
Dividends (153) (131)
Total stockholders’ equity $4,288 $4,007
Assumed tax rate 35% 35%
Industry ROA 7.32%
Industry operating profit margin 6.1%

For 2014, calculate:

  1. ROA
  2. ROCE
  3. Operating profit margin
  4. Asset turnover.

Round your percentage answers to one decimal place.  For example, .1234 = 12.3%.

Sample Answer

Part A

Vince Corporation has current assets of $300,000 and current liabilities of $175,000.

Compute the effect of each of the following transactions on Vince’s current ratio:

Current ratio =

=   = 1.71

  1. Refinanced a $50,000 long-term mortgage with a short-term note.

Current liabilities increases while the current ratio decreases.

Current liabilities+ $175,000 + $50,000 = $225,000

c. Paying $30,000 of short-term accounts payable.

Current asset = $300,000 – $30,000 = $270,000

Current liabilities = $ 175,000 – $30,000 = 145,000

Current ratio = 270,000/145,000  =1.86

There were a decrease in both current asset and liabilities by $30,000, thus increases the current ratio to 1.86.

  1. Collecting $40,000 of short-term accounts receivable has no effect on Vince current ratio.

Part B  

Selected data of the Peninsula Company follow: 

As of December 31
Balance Sheet Data 2014 2013
Accounts receivable $671,000 $642,000
Allowance for doubtful accounts 31,000 22,000
Net accounts receivable $640,000 $620,000
Inventories—lower of cost or market $542,500 $642,500
Year Ended December 31
Income Statement Data 2014 2013
Net credit sales $3,150,000 $3,000,000
Net cash sales 800,000 600,000
Net sales $3,950,000 $3,600,000
Cost of goods sold $2,370,000 $2,160,000
Selling, general, and administrative expenses 475,000 350,000
Other 150,000 125,000
Total operating expenses $2,995,000 $2,635,000
Net income $955,000 $965,000
  1. What is the accounts receivable turnover for 2014?

Part C

Selected information taken from the 2014 annual report of Aardvark Company follows.  During 2014, the company had no nonoperating or nonrecurring items included in income and had no outstanding preferred stock.

($ in millions) 2014 2013
Sales $19,903 $18,781
Interest expense 130 169
Net income 1,153 1,088
Total assets 12,673 12,461
Dividends (153) (131)
Total stockholders’ equity $4,288 $4,007
Assumed tax rate 35% 35%
Industry ROA 7.32%
Industry operating profit margin 6.1%

 For 2014, calculate:

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