JED Capital Inc. makes investments in trading securities. Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows:

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Income Statement Items}\\ \textbf{For the Years Ended December 31, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lcc} \hline &\textbf{2014}&\textbf{2015}\\ \hline \text{Operating income}&&\\ \text{Unrealized gain (loss)}&&\$(11,000)\\ \text{Net income}&&28,000\\ \end{array}$$

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Balance Sheet Items}\\ \textbf{For the Years Ended December 31, 2013, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lccc} \hline & \textbf { Dec. 31, 2013 } & \textbf { Dec. 31, 2014 } & \textbf { Dec. 31, 2015 } \\ \hline \text { Trading investments, at cost } & \$ 144,000 & \$ 168,000 & \$ 205,000 \\ \text { Valuation allowance for trading investments } & (12,000) & 17,000 & g. \\ \text { Trading investments, at fair value } & & &\\ \text { Retained earnings } & \$ 210,000 & \$ 245,000 & \end{array}$$

There were no dividends. Determine the missing lettered items.

Markley Foods completed the following selected transactions.

2018

Oct 31 - Sold goods to Basic Foods, receiving a $30,000, three-month, 5.25% note. (You do not need to make the cost of goods sold journal entry for this transaction.)

Dec 31 - Made an adjusting entry to accrue interest on the Basic Foods note.

2019

Jan 31 - Collected the Basic Foods note.

Nov 11 - Loaned$15,800 cash to Strafford Shops, receiving a 90-day, 10.0% note.

Dec 31 - Accrued the interest on the Strafford Shops note.

Requirements

1. Record the transactions in Markley Foods’ journal. Assume that no sales returns are expected. Round all amounts to the nearest dollar. Explanations are not required.

2. Show what Markley Foods will report on its comparative classified balance sheet at December 31, 2019, and December 31, 2018, for Notes Receivable and Interest Receivable.

Does increasing the amount of calcium in our diet reduce blood pressure? Researchers designed a randomized comparative experiment to find out. The subjects were 21 healthy Black men who volunteered to take part in the experiment. They were randomly assigned to two groups: 10 of the men received a calcium supplement for 12 weeks, while the control group of 11 men received a placebo pill that looked identical. The experiment was double-blind. The response variable is the decrease in systolic (top number) blood pressure for a subject after 12 weeks, in millimeters of mercury. An increase appears as a negative number. Here are the data.

$$\begin{array}{|l|r|r|r|r|r|r|r|r|r|r|r|} \hline \begin{array}{l} \text { Group 1 } \\ \text { (calcium) } \end{array} & 7 & -4 & 18 & 17 & -3 & -5 & 1 & 10 & 11 & -2 & \\ \hline\begin{array}{l} \text { Group 2 } \\ \text { (placebo) } \end{array} & -1 & 12 & -1 & -3 & 3 & -5 & 5 & 2 & -11 & -1 & -3 \\ \hline \end{array}$$

Researchers want to know if a calcium supplement reduces blood pressure more than a placebo, on average, for healthy Black men like these.

Check that the conditions for performing the test are met.

William Corporation’s income statement for the year ended December 31, 2014, and its comparative balance sheets as of December 31, 2014 and 2013, follow.

$$\begin{array}{c} \textbf{William Corporation}\\ \textbf{Income Statement}\\ \textbf{For the Year Ended December 31, 2014}\\ \end{array}$$

$$\begin{array}{lrr} \text{Sales} && \$1,609,000\\ \text{Cost of goods sold} && \underline{1,127,800}\\ \text{Gross margin} && \$\hspace{9pt} 481,200\\ \text{Operating expenses (including depreciation}\\ \text{$\quad$expense of \$46,800)} && \underline{449,400}\\ \text{Income from operations} && \$\hspace{14pt} 31,800\\ \text{Other income (expenses)}\\ \text{Gain on sale of furniture and fixtures} & \$\hspace{9pt}7,000\\ \text{Interest expense} & \underline{(23,200)} & \underline{(16,200)}\\ \text{Income before income taxes} && \$\hspace{14pt} 15,600\\ \text{Income taxes expense} && \underline{4,600}\\ \text{Net income} && \underline{\underline{\$\hspace{14pt} 11,000}}\\ \end{array}$$

$$\begin{array}{c} \textbf{William Corporation}\\ \textbf{Comparative Balance Sheets}\\ \textbf{December 31, 2014 and 2013}\\ \end{array}$$

$$\begin{array}{lrr} & \textbf{2014} & \textbf{2013}\\ \textbf{Assets}\\ \text{Cash} & \$164,800 & \$\hspace{5pt} 50,000\\ \text{Accounts receivable (net)} & 165,200& 200,000\\ \text{Merchandise inventory} &350,000& 450,000\\ \text{Prepaid rent} & 2,000& 3,000\\ \text{Furniture and fixtures} & 148,000& 144,000\\ \text{Accumulated depreciation—furniture and fixtures} & \underline{(42,000)} & \underline{(24,000)}\\ \text{Total assets} & \underline{\underline{\$788,000}} & \underline{\underline{\$823,000}}\\ \\ \textbf{Liabilities and Stockholders’ Equity}\\ \text{Accounts payable} & \$143,400 & \$200,400\\ \text{Income taxes payable} &1,400 &4,400\\ \text{Notes payable (long-term)} &40,000 &20,000\\ \text{Bonds payable} & 100,000& 200,000\\ \text{Common stock, \$20 par value} & 240,000& 200,000\\ \text{Additional paid-in capital} &181,440& 121,440\\ \text{Retained earnings} & \underline{81,760} & \underline{76,760}\\ \text{Total liabilities and stockholders’ equity} & \underline{\underline{\$788,000}} & \underline{\underline{\$823,000}}\\ \end{array}$$

During 2014, William engaged in these transactions:

a. Sold at a gain of $7,000 furniture and fixtures that cost$35,600, on which it had accumulated depreciation of $28,800.

b. Purchased furniture and fixtures in the amount of$39,600.

c. Paid a $20,000 note payable and borrowed$40,000 on a new note.

d. Converted bonds payable in the amount of $100,000 into 4,000 shares of common stock.

e. Declared and paid$6,000 in cash dividends.

Required

1. Using the indirect method, prepare a statement of cash flows for William. Include a supporting schedule of noncash investing transactions and financing transactions.

2. What are the primary reasons for William’s large increase in cash from 2013 to 2014, despite its low net income?

3. Compute and assess cash flow yield and free cash flow for 2014. (Round to one decimal place.) Compare and contrast what these two performance measures tell you about William’s cash-generating ability.

Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statements for the 2 most recent years.

$$\begin{array}{lcc} \textbf{Kepler Company}\\ \textbf{Comparative Balance Sheets}\\ \hline &\textbf{This Year}&\textbf{Last Year}\\ \hline \textbf{Assets}\\ \text{Current assets:}&&\\ \text{Cash}&\$50,000\$ 100,000\\ \text{Accounts receivable, net}&300,000&150,000\\ \text{Inventory}&600,000&400,000\\ \text{Prepaid expenses}&25,000&30,000\\ \text{Total current assets}&\$ 975,000&\$ 680,000\\ \text{Property and equipment, net}&125,000&150,000\\ \text{Total assets}&\$1,100,000&\$ 830,000\\ \textbf{Liabilities and Stockholders’ Equity}\\ \text{Current liabilities:}&&\\ \text{Accounts payable}&\$ 400,000&\$290,000\\ \text{Short-term notes payable}&200,000&60,000\\ \text{Total current liabilities}&\$ 600,000&\$350,000\\ \text{Long-term bonds payable, 12\\\%}&100,000&150,000\\ \text{Total liabilities}&\$ 700,000&\$500,000\\ \text{Stockholders’ equity:}&&\\ \text{Common stock (100,000 shares)}&200,000&200,000\\ \text{Retained earnings}&200,000&130,000\\ \text{Total liabilities and stockholders’ equity}&\$1,100,000&\$ 830,000\\ \hline \end{array}$$

$$\begin{array}{lcc} \textbf{Kepler Company}\\ \textbf{Comparative Income Statements}\\ \hline &\textbf{This Year}&\textbf{Last Year}\\ \hline \text{ Sales}&\$950,000&\$900,000\\ \text{Less: Cost of goods sold}&500,000&490,000\\ \text{Gross margin}&\$450,000&\$410,000\\ \text{Less: Selling and administrative expenses}&275,000&260,000\\ \text{Operating income}&\$175,000&\$150,000\\ \text{Less: Interest expense}&12,000&18,000\\ \text{Income before taxes}&\$163,000&\$132,000\\ \text{Less: Income taxes}&65,200&52,800\\ \text{Net income}&\$ 97,800&\$79,200\\ \text{Less: Dividends}&27,800&19,200\\ \text{Net income, retained}&\$ 70,000&\$ 60,000\\ \hline \end{array}$$

Note: Round all percentages to one decimal place.

1. Compute the percentage change for each item in the balance sheet and income statement.

2. CONCEPTUAL CONNECTION Comment on any significant trends.

A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8 % (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30 -year maturity 6 % coupon bond making annual coupon payments also selling at a yield to maturity of 8 % has nearly identical modified duration-11.79 years-but considerably higher convexity of 231.2.

a. Suppose the yield to maturity on both bonds increases to 9 %. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule?

b. Repeat part (a), but this time assume the yleld to maturity decreases to 7 %.

c. Compare the performance of the two bonds in the two scenarios, one involving an increase in rates, the other a decrease. Based on their comparative investment performance, explain the attraction of convexity.

d. In view of your answer to (c), do you think it would be possible for two bonds with equal duration, but different convexity, to be priced initially at the same yield to maturity if the yields on both bonds always increased or decreased by equal amounts, as in this example? Would anyone be willing to buy the bond with lower convexity under these circumstances?

JED Capital Inc. makes investments in trading securities. Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows:

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Income Statement Items}\\ \textbf{For the Years Ended December 31, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lcc} \hline &\textbf{2014}&\textbf{2015}\\ \hline \text{Operating income}&&\\ \text{Unrealized gain (loss)}&&\$(11,000)\\ \text{Net income}&&28,000\\ \end{array}$$

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Balance Sheet Items}\\ \textbf{For the Years Ended December 31, 2013, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lccc} \hline & \textbf { Dec. 31, 2013 } & \textbf { Dec. 31, 2014 } & \textbf { Dec. 31, 2015 } \\ \hline \text { Trading investments, at cost } & \$ 144,000 & \$ 168,000 & \$ 205,000 \\ \text { Valuation allowance for trading investments } & (12,000) & 17,000 & \\ \text { Trading investments, at fair value } & & &h.\\ \text { Retained earnings } & \$ 210,000 & \$ 245,000 & \end{array}$$

There were no dividends. Determine the missing lettered items.

Data for Thornton Company is shown as follows:

$$\begin{array}{c} \textbf{THORNTON COMPANY}\\ \textbf{Income Statement}\\ \textbf{For the Year Ended December 31, 2014}\\ \end{array}$$

$$\begin{array}{lrr} \text{Service revenue}&&\text{\$\hspace{1pt}970,000}\\ \text{Operating expenses, excluding depreciation}&\text{\$\hspace{1pt}614,000}\\ \text{Depreciation expense}&\text{\hspace{1pt}55,000}\\ \text{Loss on disposal of plant assets}&\underline{\text{\hspace{11pt}16,000}}&\underline{\text{\hspace{6pt}685,000}}\\ \text{Income before income taxes}&&\text{\hspace{1pt}285,000}\\ \text{Income tax expense}&&\underline{\text{\hspace{11pt}56,000}}\\ \text{Net income}&&\underline{\underline{\text{\$\hspace{1pt}229,000}}}\\ \end{array}$$

Thornton’s balance sheet contained the comparative data at December 31.

$$\begin{array}{lcc} &\underline{\textbf{2014}}&\underline{\textbf{2013}}\\[5pt] \text{Accounts receivable}&\text{\$\hspace{1pt}70,000}&\text{\$\hspace{1pt}60,000}\\ \text{Accounts payable }&\text{\hspace{5pt}41,000}&\text{\hspace{5pt}32,000}\\ \text{Income taxes payable}&\text{\hspace{5pt}13,000}&\text{\hspace{10pt}7,000}\\ \end{array}$$

Accounts payable pertain to operating expenses.

Instructions

Prepare the operating activities section of the statement of cash flows using the direct method.

Garrett Meals completed the following selected transactions:

2018

Oct 31 - Sold goods to Rose Foods, receiving a $32,000, three-month 5.5% note. (You do do not need to make the cost of goods sold journal entry for this transaction.)

Dec 31 - Made an adjusting entry to accrue interest on the Rose Foods note.

2017

Jan 31 - Collected the Rose Foods note.

Nov 11 - Loaned$15,800 to Franklin Shops, receiving a 90-day, 9.75% note.

Dec 31 - Accrued the interest on the Franklin Shops note.

Requirements

1. Record the transactions in Garrett Meals’ journal. Assume that no sales returns are expected. Round all amounts to the nearest dollar. Explanations are not required.

2. Show what Garrett Meals will report on its comparative classified balance sheet at December 31, 2019, and December 31, 2018, for Notes Receivable and Interest Receivable.

Data for Mosley Company is shown as follows:

$$\begin{array}{c} \textbf{MOSLEY COMPANY}\\ \textbf{Income Statement}\\ \textbf{For the Year Ended December 31, 2014}\\ \end{array}$$

$$\begin{array}{lrr} \text{Service revenue}&&\text{\$\hspace{1pt}850,000}\\ \text{Operating expenses, excluding depreciation}&\text{\$\hspace{1pt}506,000}\\ \text{Depreciation expense}&\text{\hspace{1pt}56,000}\\ \text{Loss on disposal of plant assets}&\underline{\text{\hspace{15pt}4,000}}&\underline{\text{\hspace{6pt}566,000}}\\ \text{Income before income taxes}&&\text{\hspace{1pt}284,000}\\ \text{Income tax expense}&&\underline{\text{\hspace{11pt}80,000}}\\ \text{Net income}&&\underline{\underline{\text{\$\hspace{1pt}204,000}}}\\ \end{array}$$

Mosley’s balance sheet contained the comparative data at December 31, below.

$$\begin{array}{lcc} &\underline{\textbf{2014}}&\underline{\textbf{2013}}\\[5pt] \text{Accounts receivable}&\text{\$\hspace{1pt}72,000}&\text{\$\hspace{1pt}65,000}\\ \text{Accounts payable }&\text{\hspace{5pt}27,000}&\text{\hspace{5pt}35,000}\\ \text{Income taxes payable}&\text{\hspace{5pt}23,000}&\text{\hspace{5pt}18,000}\\ \end{array}$$

Accounts payable pertain to operating expenses.

Instructions

Prepare the operating activities section of the statement of cash flows using the direct method.

JED Capital Inc. makes investments in trading securities. Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows:

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Income Statement Items}\\ \textbf{For the Years Ended December 31, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lcc} \hline &\textbf{2014}&\textbf{2015}\\ \hline \text{Operating income}&&\\ \text{Unrealized gain (loss)}&b.&\$(11,000)\\ \text{Net income}&&28,000\\ \end{array}$$

$$\begin{array}{c} \textbf{JED Capital Inc.}\\ \textbf{Selected Balance Sheet Items}\\ \textbf{For the Years Ended December 31, 2013, 2014 and 2015}\\ \end{array}$$

$$\begin{array}{lccc} \hline & \textbf { Dec. 31, 2013 } & \textbf { Dec. 31, 2014 } & \textbf { Dec. 31, 2015 } \\ \hline \text { Trading investments, at cost } & \$ 144,000 & \$ 168,000 & \$ 205,000 \\ \text { Valuation allowance for trading investments } & (12,000) & 17,000 & \\ \text { Trading investments, at fair value } & & &\\ \text { Retained earnings } & \$ 210,000 & \$ 245,000 & \end{array}$$

There were no dividends. Determine the missing lettered items.

The Organic Soda Company reported the following comparative information at December 31, 2016, and December 31, 2015 (amounts in millions and adapted):

$$\begin{array}{lcc} &2016 & 2015\\ \text{Current assets}&\$20,900 & \$16,700\\ \text{Total assets}&72,800 & 46,500\\ \text{Current liabilities}&18,300 & 12,900\\ \text{Total stockholders’ equity}&30,500 & 26,100\\ \text{Net sales}&35,700 & 30,400\\ \text{Net income}&11,312 & 6,510 \end{array}$$

1. Calculate the following ratios for 2016 and 2015:
   a. Current ratio
   b. Debt ratio

2. During 2016, The Organic Soda Company issued $1,840 million of long-term debt that was used to retire short-term debt. What would the current ratio and debt ratio have been if this transaction had not been made?

3. The Organic Soda Company reports that its lease payments under operating leases will total$940 million in the future and $250 million will occur in the next year (2017). What would the current ratio and debt ratio have been in 2016 if these leases had been capitalized?

Project 2. You are the owner of a company that is about to “go public,” that is, issue its stock to outside investors. You wish to make your company look as attractive as possible to raise $1 million of cash to expand the business. At the same time, you want to give potential investors a realistic picture of your company.

1. Design a booklet to portray your company in a way that will enable outsiders to reach an informed decision as to whether to buy some of your stock. The booklet should include the following:

a. Name and location of your company.

b. Nature of the company’s business (be as detailed as possible).

c. How you plan to spend the money you raise.

d. The company’s comparative income statement, statement of retained earnings, balance sheet, and statement of cash flows for two years: the current year and the preceding year. Make the data as realistic as possible with the intent of receiving$1 million.

2. Create your booklet using Word, Pages, or other similar tool. Do not exceed five pages.

3. If directed by your professor, make a copy for each member of your class. Distribute copies to the class and present your case with the intent of interesting your classmates in investing in the company. Limit your presentation to 10 to 15 minutes.

Mosley Company’s income statement contained the condensed information below.

$$\begin{array}{c} \textbf{MOSLEY COMPANY}\\ \textbf{Income Statement}\\ \textbf{For the Year Ended December 31, 2014}\\ \end{array}$$

$$\begin{array}{lrr} \text{Service revenue}&&\text{\$\hspace{1pt}850,000}\\ \text{Operating expenses, excluding depreciation}&\text{\$\hspace{1pt}506,000}\\ \text{Depreciation expense}&\text{\hspace{1pt}56,000}\\ \text{Loss on disposal of plant assets}&\underline{\text{\hspace{15pt}4,000}}&\underline{\text{\hspace{6pt}566,000}}\\ \text{Income before income taxes}&&\text{\hspace{1pt}284,000}\\ \text{Income tax expense}&&\underline{\text{\hspace{11pt}80,000}}\\ \text{Net income}&&\underline{\underline{\text{\$\hspace{1pt}204,000}}}\\ \end{array}$$

Mosley’s balance sheet contained the comparative data at December 31, below.

$$\begin{array}{lcc} &\underline{\textbf{2014}}&\underline{\textbf{2013}}\\[5pt] \text{Accounts receivable}&\text{\$\hspace{1pt}72,000}&\text{\$\hspace{1pt}65,000}\\ \text{Accounts payable }&\text{\hspace{5pt}27,000}&\text{\hspace{5pt}35,000}\\ \text{Income taxes payable}&\text{\hspace{5pt}23,000}&\text{\hspace{5pt}18,000}\\ \end{array}$$

Accounts payable pertain to operating expenses.

Instructions

Prepare the operating activities section of the statement of cash flows using the indirect method.