In a separate file named Kellogg (available on Canvas in the Exams folder), you are given Kellogg's 2016 Annual report.
Question 1 -
a. Describe, in no more than three lines, Kellogg's business.
b. Name three of Kellogg's brands. What is your favorite? Least favorite?
c. Write the accounting equation for Kellogg, for 2016 and 2015.
d. Position yourself inside the Business School, EMBA Americas Class of 2018, Financial Reports. Which line item are you? (For example, some claim that a professor is a long-term liability.) Explain in one sentence.
e. What was Kellogg's ratio of Current Assets to Current Liabilities for fiscal 2016?
f. Calculate and explain the ratio of Sales to Shareholder's Equity for Kellogg for 2016. (Use beginning balance data when appropriate).
g. By how much (in dollars and in percentages) did Revenue and Operating Profit change in fiscal year 2016, relative to 2015?
h. Did Comprehensive Income, as a percentage of Net Income, increase or decrease n 2016, relative to 2015? What is the main difference between Net and Comprehensive Income for 2016?
i. How many employees did Kellogg have in 2016? What were the average Sales per employee?
j. When will Kellogg adopt the new Revenue Recognition standard we discussed in class? Do they know the impact this change will have?
k. Does Kellogg have more PP&E or Intangible Assets, as a percentage of total assets? What are the percentages? Do you think this makes sense?
l. Over how many years does the company depreciate its office equipment? Ignoring the fact that the company has different types of property - based on their accounting estimates, if the company stopped investing in PP&E in how many years would their PP&E become obsolete (you can assume that PP&E has a salvage value of zero)? Does this have to be the case for economic purposes (production)?
m. Calculate the amount of cash used for purchases of properties (PP&E) as a percentage of cash generated by operations, in 2016.
n. Who is Kellogg's largest customer? What percentage of sales did this customer represent in 2016? Also, provide the journal entry to record Bad-debt Expense related to Kellogg's allowance for doubtful accounts.
o. Compare the balances of Net Accounts Receivable on the balance sheet for 2015 and 2016. Does it represent an apple-to-apple comparison? In no more than two sentences explain what is missing, and what does it imply on Kellogg's customer credit granting policies.
p. How much total Long-term Debt did Kellogg have in 2016? Does this debt represent loans from banks?
q. How does Kellogg interpret the change in the new ruling for Leases? For what fiscal year will Kellogg have to adopt the new rule? Assume all Operating Lease payments are made by the end of 2022, and that the discounting rate used by Kellogg is 10%: what would be the impact on Kellogg's reported Liabilities?
r. How many bonus points are required to have the picture of your most favorite accounting professor as your screen saver on all your electronic devices?
s. Provide the journal entry that summarizes Kellogg's Income Tax Expense for 2016. What was their Effective Tax Rate for 2016?
t. Why does Kellogg have a Valuation Allowance for Deferred Tax Assets in 2016? How much? What was the Allowance in 2015? What caused the change in the Allowance between 2015 and 2016?
u. What is the main reason for the difference between Kellogg's Statutory Tax Rate and its Effective Tax Rate in 2016?
v. How much money did Kellogg spend to repurchase its own Shares during 2016 and 2015? What is the amount of Dividends paid by Kellogg during 2016?
w. A Judgment Question. After reading Kellogg's 2016 annual report, do you observe any irregularity or a reason to be concerned regarding its financial reporting policies? Any comment on Kellogg's quality of reporting? (Only a short answer is required here - up to 10 lines.)
Question 2 -
Following are comparative Balance Sheets, an Income Statement for 2017, and supplementary notes of N. Mandela Inc.
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N. Mandela Inc. Balance Sheets as of December 31 (in millions)
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2016
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2017
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Assets:
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Cash
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$ 25,700
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$ 31,500
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Accounts Receivable (gross)
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120,000
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130,000
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Allowance for Uncollectibles
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(2,400)
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(3,200)
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Inventory
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175,000
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210,000
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Property Plant and Equipment (at cost)
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247,300
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290,200
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Accumulated Depreciation
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(78,000)
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(95,000)
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Patents
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75,000
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Accumulated Amortization
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(15,000)
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$ 487,600
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$ 623,500
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Liabilities and Shareholders' Equity:
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Accounts Payable
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$ 55,000
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$ 72,000
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Dividend Payable
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5,000
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10,000
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Long-term Debt
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100,000
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110,000
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Common Stock
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100,000
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173,900
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Retained Earnings
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227,600
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257,600
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$ 487,600
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$ 623,500
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Income Statement For the Year Ended December 31, 2017 (in millions)
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Net Sales
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$ 1,000,000
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Gain on Sale of Patent
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113,000
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Gain on Bond retirement
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12,000
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1,125,000
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Cost of Goods Sold
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750,000
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Selling and Administrative
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185,000
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Bad Debt Expense
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20,000
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Interest Expense
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8,000
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Depreciation Expense
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39,000
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Amortization Expense
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15,000
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Impairment of Equipment
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10,000
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Loss on sale of Equipment
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8,000
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Income Tax Expense
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30,000
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Net income
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$ 60,000
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Notes:
1. During 2017, N. Mandela acquired property, plant and equipment as follows: For cash $62,900 and, in addition, by issuing Common Stock $30,000.
2. During 2017, N. Mandela sold a patent on a device developed internally by its research staff for $113,000 and purchased a patent for cash totaling $75,000.
3. A bond with book value of $50,000 was retired during the year.
Required: Prepare the 2017 Statement of Cash Flows for N. Mandela Inc. Include all relevant Supplemental Schedules.
Question 3 -
You have been engaged by the Rooney Construction Company to advise it on the proper accounting for a series of long-term contracts. Rooney was established in 2016 and construction activities for the first year of operations are shown below. All contract costs are with different customers and any work remaining at December 31, 2016 is expected (correctly), to be completed in 2017.
Rooney's accounting policy includes: (i) If a loss is anticipated for a certain project, it is recorded immediately; and (ii) revenues are recognized using the percentage-of-completion method.
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Project
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Total Contract Price
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Billings Through Dec 31, 2016
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Cash Collections Through Dec 31, 2016
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Contract Costs Incurred and Paid Through Dec 31, 2016
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Estimated Additional Costs to Complete
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A
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$ 300,000
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$200,000
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$180,000
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$248,000
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$67,000
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B
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350,000
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110,000
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105,000
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67,800
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271,200
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C
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280,000
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280,000
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255,000
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186,000
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0
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D
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200,000
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35,000
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25,000
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123,000
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87,000
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E
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240,000
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205,000
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200,000
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185,000
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15,000
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$1,370,000
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$830,000
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$765,000
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$809,800
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$440,200
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Required:
a. What is the profit (loss) to be reported by Rooney in 2016 for each of the projects?
b. What is the balance to be reported by Rooney on the 2016 Balance Sheet for each of the projects? Make sure you clearly distinguish between an asset and a liability. No need for a full balance sheet - just the project account.
c. If Rooney has used the completed contracts method (that is changing the accounting policy item (ii) above), what would be the profit (loss) reported in 2016 on each project?
d. Consider the end of 2017. Would a switch to the completed contracts method yield higher or lower Retained Earnings relative to the method currently used by Rooney?
Question 4 -
The following data is taken from the December 31, 2016 annual report of The GoT, Inc.: Accounts Receivable:
Accounts receivable on December 31 consisted of:
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2016
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2015
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US Government
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$4,620,073
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$3,978,492
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Other
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638,972
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2,664,310
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Total
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$5,259,045
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$6,642,802
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Accounts receivable on December 31, 2016 and 2015 are net of allowance for uncollectible accounts of $250,000 and $427,000, respectively.
Bad debt expense amounted to $624,000, $1,789,000, and $374,000 for the years 2016, 2015, and 2014, respectively.
In September 2015, The GoT, Inc. learned of the initiation of bankruptcy proceedings by Stark Corporation. Accordingly, The GoT, Inc. elected to write off an account receivable from Stark, which equaled $1,407,000 on September 14, 2015.
All accounts correctly reflect complete effects of all the transactions.
Required:
a. What is the journal entry that The GoT, Inc. recorded for the recognition of bad debt expense for the fiscal year ended December 31, 2016?
b. What is the journal entry that The GoT, Inc. recorded for the decision to write-off the Stark Corporation account in 2015?
c. The GoT, Inc. allowance for uncollectible accounts had a balance of $273,000 for the fiscal year ended December 31, 2014. What were total write-offs that The GoT, Inc. recorded in the fiscal year ended December 31, 2015?
d. Can you speculate why The GoT, Inc. allowance for uncollectible accounts decreased in 2015?
Question 5 -
The Almost Symmetric Corporation (ASC) has two almost identical products: Uris and Warren. The plans for 2017 are to produce and sell 1,000 units of each, Uris at $75 per unit and Warren at $60 per unit. Both products require labor (at $10 per hour) and machine time (at $20 per hour). In particular, production of one unit of Uris requires one labor hour and two machine hours, while a unit of Warren requires two labor hours and one machine hour. Overhead for the year (set-up of production batches and quality control) is estimated at $33,000. Assume that both labor and machine costs are considered as direct costs and thus are allocated in all cases directly to Uris and Warren.
Required:
a. Assume the overhead is allocated based on labor dollars. What is the overhead allocation rate? The per-unit cost and gross margin for each of the products? Any recommendations for ASC based on your findings?
b. Assume the overhead is allocated based on machine hours. What is the overhead allocation rate? The-per unit cost and gross margin for each of the products? Any change in your recommendations from part a above?
c. An expensive consultant, MacK-ABC, was hired and after a long investigation suggested ASC use an ABC costing system. Further analysis revealed that all overhead should be classified as a batch level cost, and that Uris is planned to be produced in 100 batches while Warren is planned to be produced in 10 batches. Given ABC is implemented, what is the per-unit cost and gross margin for each of the products? What are your final recommendations for the Almost Symmetric Corporation (ASC)?
d. Do you believe a PwC's Accountant can distinguish between Uris and Warren and arrive at the correct location (or provide the host with the correct envelope)?
Question 6 -
THIS IS NOT YOUR MOTHER'S COUPON BOND
The answer to part b, the second requirement of this question is: "The bond related interest expenses of the Jeopardy Company were: $200 in year 1, $160 in year 2 and $160 in year 3." The proceeds of Jeopardy from issuing this bond were $600.
Hint: The above bond does not have a face value or a coupon: it is just a stream of future payments: CF1, CF2, CF3.
Required:
a. What was the market yield when Jeopardy issued the bonds?
b. Question: What were the interest expenses of a bond issued by the Jeopardy Company with the following stream of (end of the year) payments:
CF1 in year 1, CF2 in year 2, CF3 in year 3?
Answer: "The bond related interest expenses of the Jeopardy Company were: $200 in year 1, $160 in year 2 and $160 in year 3." (You need to provide the question, i.e., the payments: CF1, CF2, CF3.)
c. Assume Jeopardy purchased (and retired) the bond on the first day of year 3 (from Alex Trebek) for $500. Provide the journal entry.
Question 7 -
The Barber of Seville was established in 2017 and has adopted a program of purchasing a new hair-cutting machine on the first day of each year. It uses a prescribed method of depreciation on its income tax return (where the tax rate is 40%) and straight-line depreciation on its financial statements. Each machine costs $12,000 installed and has an economic life of three years for financial reporting purposes (and no salvage value). The Barber of Seville Company depreciates this equipment for tax purposes using the following percentages of acquisition cost each year: 75%, 25% and 0% of cost in each of the three years, respectively.
Required:
a. Calculate the total depreciation deduction on the tax return for each of the first four years (2017 through 2020) and the total depreciation for each year (2017-2020) using the straight- line method of depreciation.
b. Calculate: (i) the annual difference in depreciation charges from the results in part a above; (ii) for each year (2017-2020) the year-end balances and the annual increase in the Deferred Tax Liability account.
c. If the Barber of Seville continues to follow its policy of buying a new hair-cutting machine every year for $12,000, what will happen to the balance in the Deferred Tax Liability account on the balance sheet in 2030?
d. If the Barber purchased one hair-cutting machine in 2017, two machines in 2018, three in 2019 and four in 2020, what would be the balance in the Deferred Tax Liability account on the balance sheet in 2020?
Attachment:- Kellogg Company 2016 Annual Report.rar