Chapter 17 Answers

17-7
Current assets = $930,000
Fixed assets = $320,000
Depreciation on fixed assets = $108,000
Total worth of fixed asset after depreciation = Fixed assets Depreciation on fixed assets
= $320,000 $108,000
= $212,000
Current liabilities = $350,000
Long-term liabilities = $185,000
(a)
Firms equity = Assets Liabilities
= (Current + Fixed assets) (Current + Long-term liabilities)
= ($930,000 + $212,000) ($350,000 + $185,000)
= $1,142,000 $535,000
= $607,000
(b)
Retained earning = Equity (Capital surplus + Stock)
= $607,000 $402,000
= $205,000

17-13
Balance Sheet Data
Assets
Cash
Accounts receivable
Inventories
Bad debt provision
Liabilities
Accounts payable
Notes payable
Accrued expenses

Amount
$1,740
$2,500
$900
$75
$1,050
$500
$125

(a)
Current ratio = Current assets/Current liabilities
For J&W Graphics Supply, the current ratio = $5,065/$1,675 = 3.02
Such a high current ratio indicates that J&W Graphics Supply does not have any liquidity
problems, and its accounts payable are covered by the accounts receivable just over three
times. The company is in a healthy financial position.
(b)
Balance Sheet for J&W Graphics Supply (all amounts in thousands)
Assets
Amount
Liabilities
Current assets
Cash
Accounts receivable
Inventories
(minus) bad debt provision
Total of current assets
Fixed assets
Land
Plant and equipment
(minus) accumulated depreciation
Total fixed assets

Total assets
(c)

Total assets = $7,580,000

Total liabilities = $2,625,000
Total earnings = $4,230,000

$1,740
$2,500
$900
$75
$5,065
$475
$3,100
$1,060
$2,515

$7,580

Amount

Current liabilities
Accounts payable
Accrued expenses
Notes payable
Total current liabilities
Long-term liabilities
Total liabilities
Equity
Stock
Capital surplus
Retained earnings
Total equity

$680
$45
$4,230
$4,955

Total liabilities and equity

$7,580

$1,050
$500
$125
$1,675
$950
$2,625

17-15
The answer depends on the industry as well as the individual firms management
practices and philosophies. For a full assessment, we would need to examine the
companys values from previous periods and the broad-based industry standards.
However, if a firm has a current ratio less than 2.0 and an acid-test ratio less than 1.0, it
indicates that the company is not in good financial health. These two ratios are known as
the liquidity ratios and are used to measure the liquidity of the firm. The acid-test ratio is
used to measure the firms capacity to repay its debts at any given time. An acid-test ratio
of less than 1.0 suggests that the firm does not have the ability to pay its debts at this
time. However, since most firms pay their debts over a longer period of time, such low
current and acid-test ratios may not spell immediate trouble. If these trends continue over
a sustained period of time (and if the industry benchmarks are higher than those of this
firm), the firm will run into liquidity problems in the future.

17-21
Computation of net income before taxes and net profit after taxes of Fly-Buy-Nite
Engineering Company:
Income Statement for Fly-Buy-Nite
(amounts in thousands)
Operating revenues
Sales
Total operating income

$30,000.00
$30,000.00

Operating expenses
Subcontracted services
Development expenses
Administrative expenses
Sales expenses
Total operating expenses

$18,000.00
$900.00
$2,750.00
$4,500.00
$26,150.00

Total operating income

Non-operating expenses
Interest
Total non-operating expenses
Net income before taxes
Taxes
Net profit for the year

$3,850.00

$200.00
$200.00
$3,650.00
$985.50
$2,664.50

17-23
Interest coverage = Total income/Interest payment
Total income = Total revenue Earning/Income before tax and interest
= $455 $372
= $83
Interest payment = $22
Therefore:
Interest coverage = 83/22
= 3.77
Net profit ratio = Net profit/Net sales revenue
Net profit = $31
Net sales revenue = Sales Returns
= $395 $15
= $380
Therefore:
Net profit ratio = 31/380
= 0.0815
We cannot fully assess the health of Andrews business by referring to the net profit
percentage as a stand-alone measure. An individual value of the net profit ratio assumes
significance only when it is compared with other time periods for the same firm and with
industry benchmarks in the same time period.
An interest coverage ratio above 3 is always considered to be adequate. With an interest
coverage ratio of 3.77, Andrews business can be considered a safe business as far as
interest payments are concerned. The companys revenue would have to decrease by a
little over two-thirds (unlikely) before it becomes impossible for the firm to pay the
interest on its debts.

17-25
(a)
Entries on the balance sheet for plant and equipment:
Plant = $5 million
Equipment = $3 million
Therefore:
Total plant and equipment without depreciation = $15 million+ $3 million = $18 million
(b)
Accumulated depreciation:
Depreciation on plant = $8 million
Depreciation on equipment = $2 million
Total accumulated depreciation = $8 million + $2 million = $10 million
(c)
Retained earnings (RE):
REend = REbegin + Net income or loss + New stock Dividends
REbegin = $60 million
From question 1722:
Net income = Total revenues Total expenses
= ($81 million + $5 million) ($70 million + $7 million)
= $9 million
(Note: the question does not refer to any new stock being bought; therefore,
new stock = $0)
REend = $60 million + $9 million
= $69 million

17-29
(a)
Using direct-labour cost to allocate indirect cost:
Cost Component
Direct labour cost
Direct material cost
Indirect cost**
Total cost

Standard
$50,000.00
$35,000.00
$15,217.39
$100,217.39

Amount
Deluxe
$65,000.00
$47,500.00
$19,782.61
$132,282.61

Units produced
1,800.00
1,400.00
Per unit cost
(A)
$55.68
$94.49
Per unit selling price
(B)
$60.00
$95.00
Net revenue per unit
$4.32
$0.51
(BA)
**
For standard: $35,000 $50,000/($50,000 + $65,000) = $15,217.39
For deluxe: $35,000 $65,000/($50,000 + $65,000) = $19,782.61
(b)
Using direct-materials cost to allocate indirect cost:
Cost Component
Direct labour cost
Direct material cost
Indirect cost **
Total cost

Standard
$50,000.00
$35,000.00
$14,848.48
$99,848.48

Amount
Deluxe
$65,000.00
$47,500.00
$20,151.52
$132,651.52

Units produced
1,800.00
1,400.00
Per unit cost
(A)
$55.47
$94.75
Per unit selling price
(B)
$60.00
$95.00
$4.53
$0.25
Net revenue per unit
(BA)
**
For standard: $35,000 $35,000/($35,000 + $47,500) = $14,848.48
For deluxe: $35,000 $47,500/($35,000 + $47,500) = $20,151.52