Ch 13 activity

The following ratios have been computed for Reit Company for 2007.
Profit margin ratio
Times interest earned
Receivable turnover ratio

20%
12 times
5 times

Acid-test ratio
Current ratio
Debt to total assets ratio

1.4:1
2.5:1
24%

The 2007 financial statements for Reit Company with missing information follows:
REIT COMPANY
Comparative Balance Sheet
December 31,

Assets
2007
2006
Cash ........................................................................................ $ 25,000
$ 35,000
Marketable securities ...............................................................
15,000
15,000
Accounts receivable (net) ........................................................
?
(6)
50,000
Inventory .................................................................................
?
(8)
50,000
Property, plant, and equipment (net) ........................................ 200,000
160,000
Total assets ...................................................................... $
?
(9)
$310,000
Liabilities and stockholders' equity
Accounts payable .................................................................... $
?
(7)
Short-term notes payable ........................................................
35,000
Bonds payable .........................................................................
?
(10)
Common stock ........................................................................ 200,000
Retained earnings ...................................................................
47,000
Total liabilities and stockholders' equity ............................. $
?
(11)

$ 25,000
30,000
20,000
200,000
35,000
$310,000

REIT COMPANY
Income Statement
For the Year Ended December 31, 2007

Net sales .................................................................................

$200,000
Cost of goods sold ...................................................................
100,000
Gross profit ...............................................................................
100,000
Expenses:
Depreciation expense ........................................................
$ ?
(5)
Interest expense ................................................................
5,000
Selling expenses ................................................................
10,000
Administrative expenses ....................................................
15,000
Total expenses .............................................................
?
(4)
Income before income taxes ....................................................
?
(2)
Income tax expense ...........................................................
?
(3)
Net income ..............................................................................
$ ?
(1)
Instructions
Use the above ratios and information from the Reit Company financial statements to fill in the missing information
on the financial statements. Follow the sequence indicated. Show computations that support your answers.

Solution ACT CH 13
REIT COMPANY
Comparative Balance Sheet
December 31,

Assets
2007
2006
Cash ..................................................................................
$ 25,000
$ 35,000
Marketable securities .........................................................
15,000
15,000
Accounts receivable (net) ..................................................
30,000 (6)
50,000
Inventory ...........................................................................
55,000 (8)
50,000
Property, plant, and equipment (net) ..................................
200,000
160,000
Total assets ................................................................
$325,000 (9)
$310,000
Liabilities and stockholders' equity
Accounts payable ..............................................................
Short-term notes payable ..................................................
Bonds payable ...................................................................
Common stock ..................................................................
Retained earnings .............................................................
Total liabilities and stockholders' equity .......................

$ 15,000 (7)
35,000
28,000 (10)
200,000
47,000
$325,000 (11)

$ 25,000
30,000
20,000
200,000
35,000
$310,000

REIT COMPANY
Income Statement
For the Year Ended December 31, 2007

Net sales ...........................................................................

$200,000
Cost of goods sold .............................................................
100,000
Gross profit .........................................................................
100,000
Expenses
Depreciation expense ..................................................
$15,000 (5)
Interest expense ..........................................................
5,000
Selling expenses ..........................................................
10,000
Administrative expenses ..............................................
15,000
Total expenses .......................................................
45,000 (4)
Income before income taxes ..............................................
55,000 (2)
Income tax expense ..........................................................
15,000 (3)
Net income ........................................................................
$ 40,000 (1)
(1)

Net income = $40,000; ($200,000 20%).

(2)

Income before income taxes = $55,000.

Let X = Income before income taxes and interest expense.
X
= 12 times; X = $60,000; $60,000 - $5,000 = $55,000.
5,000

(3)

Income tax expense = $15,000; ($55,000 - $40,000).

(4)

Total operating expenses = $45,000; ($100,000 - $55,000).

(5)

Depreciation expense = $15,000; [$45,000 - ($5,000 + $10,000 + $15,000)].

(6)

Accounts receivable (net) = $30,000.

Let X = Average receivables.

$200,000
= 5 times; 5X = $200,000; X = $40,000.
X
Let Y = Accounts receivable at 12/31/07.
$50,000 + Y
= $40,000; $50,000 + Y = $80,000; Y = $30,000.
2
(7) Accounts payable = $15,000.
Let X = Current liabilities.
$25,000 + $15,000 + $30,000
= 1.4; 1.4X = $70,000; X = $ 50,000;
X
$50,000 - $35,000 = $15,000.
(8) Inventory = $55,000
Let X = Total current assets.
X
= 2.5; X = $125,000; $125,000 - ($25,000 + $15,000 + $30,000) = $55,000.
$50,000
(9) Total assets = $325,000

($25,000 + $15,000 + $30,000 + $55,000 + $200,000)

(10) Bonds payable = $28,000

Let X = Total debt
X
= 24%; X = $78,000; $78,000 - ($15,000 + $35,000) = $28,000.
$325,000
(11) Total liabilities and stockholders' equity = $325,000; same as total assetssee (9) above.