BA 202A Reuven LehavyFall 1999 Franco Wong2 16Write your answers in the space provided. Show all your work to receive partial creditQuestion 5: Cash Flow StatementQuestion 6: Accounts ReceivablesQuestion 7: Capitalization vs. ExpensingBA 202A Reuven LehavyFall 1999 Franco Wong Final ExaminationThursday, December 9, 1999Problem Points1 122 163 124 135 86 127 7 8 10 Total 90Write your answers in the space provided. Show all your work to receive partial creditTO: BA202AFROM: R. Lehavy/ F. WongRE: Posting of Final GradesA new campus policy precludes me from posting (either physically or electronically) final course grades identified by Student ID #, unless each student on the list submits a signed waiver. By signing and dating below, you are giving me permission to post outside my office door or electronically in late-December your final course grade -- identified only by your Student ID #.NAME (please print): _______________________________________COHORT (circle one): Oski Axe Blue GoldSIGNATURE: ____________________________________________DATE: _______________2Question 1: Marketable SecuritiesThe InvestSec Corp. started operations on January 1, 1998. Selected balance sheet data as of the end of 1998 and 1999 and selected income statement data for its first two years of operations follow:Balance Sheet 12/31/98 12/31/99Assets Marketable securities $17,000 ? Owners’ EquityUnrealized gain (loss) (3,000) 1,000 on marketable securitiesIncome Statement 1998 1999Unrealized gain (loss) on $3,000 ? marketable securitiesRealized gain (loss) on sale 1,000 ? of marketable securitiesYou are also given the following information about the firm’s marketable security purchases and sales during 1998 and 1999:1. The firm purchased three marketable securities during 1998, A, B, and C. Securities A and B are tradingsecurities, while security C is a security available for sale. Security A remained in the firm’s portfolio at theend of year 1998, at a market value of $12,000. Security C also remained in the firm’s portfolio at the end of year 1998, at a market value of $5,000. Security B was sold during the year, at a price of $8,000.2. During year 1999 the firm did not purchase any additional marketable securities. It sold security A during the year, at a price of $14,000. Security C remained in the portfolio at the end of the year.Required:a) What was the purchase price of security A?3b) What was the purchase price of security B?c) What was the purchase price of security C?d) What was the balance in the Marketable Securities account on 12/31/99?e) What was the amount of the unrealized gain (loss) on marketable securities on the firm’s income statement for 1999?f) What was the amount of the realized gain (loss) on marketable securities on the firm’s income statement for 1999?4Question 1 (...continued)Question 2: Shareholders EquityConsidering each of the following actions independently, state their effect on:(i) the firm's retained earnings and (ii) total owners' equity (assume that the firm's shares have a par value of $1 each).a) Issue a stock dividend of 10% at the time that the firm's shares are selling in the market for $20/share. Before the dividend, there were 100,000 shares of stock outstanding.b) Grant 1,000 stock options to executives at a time when the stock price was $15/share. The options have an exercise price of $15 each. c) Executives exercise 400 options with an exercise price of $15 each at a time when the stock is selling for $20/share.d) 4,000 shares of stock are repurchased for $18 each and are held as treasury stock.5Question 2 (...continued)e) 3,000 shares of treasury stock originally repurchased for $18 each are resold for $19 each.f) 10,000 warrants with an exercise price of $25 are issued for $8 per warrant.g) Declare and pay a cash dividend of $5,000.h) Declare a 2-for-1 stock split. Before the split, there were 100,000 shares of stock outstanding. On that day, the stock is traded for $20 per share.6Question 3: Inventory QuestionBelow is information taken from the financial statements of eFIFO Co. and eLIFO Co. for the year ended December 31, 1998: Net Income 120,000 Net Income 135,000 Total Assets 700,000 Total Assets 640,000 Shareholders' Equity 500,000 Shareholders' Equity 320,000 Merchandise Inventory 12/31/97 69,000 Merchandise Inventory 12/31/97 84,000 Merchandise Inventory 12/31/98 62,000 Merchandise Inventory 12/31/98 88,000 Tax Rate 0% Tax Rate 0%e FIFO Co.e LIFO Co.Inventories are computed using the periodic LIFO cost flow assumption. If the FIFO method of inventory valuation had been used instead of the LIFO method, merchandise inventory would have been greater by $9,000 at December 31, 1997, and $3,000 smaller at December 31, 1998.Additional Information:Additional Information:Inventories are computed using the periodic FIFO cost flow assumption.Required:a. Compute eFIFO and eLIFO's return on equity (net income/shareholders' equity) for 1998.7Question 3 (...continued)b. Suppose that you are interested in comparing the performance of eFIFO to that of eLIFO. Using the information above, compute eLIFO's return on equity for 1998 if it had been using the FIFO method of inventory valuation instead of the LIFO method.c. Suppose that on January 15, 1999 the following inventory valuation errors have been discovered for eFIFO Co.:- The 12/31/1997 inventory was overstated by $8000- The 12/31/1998 inventory was understated by $1000Compute eFIFO's return on equity for 1998 after correcting for the errors.8Question 4: Lease QuestionThe balance sheet as of December 31, 1999, for Taylor Laundry Inc. follows:Assets Liabilities and Stockholders' Equity________________________________________________________________________Current assets $10,000 Current liabilities $10,000Noncurrent assets 60,000 Long-term liabilities 20,000Stockholders' equity 40,000 Total liabilities and Total assets $70,000 stockholders' equity $70,000The $20,000 of long-term debt on the balance sheet represents a long-term note that requires Taylorto maintain a debt/equity ratio of less than 1:1. If the covenant is violated, the company will be required topay the