MBA 5850 Spring 2018 Block 2

Case Study #1

PMD Corporation was formed by three shareholders on January 1, 2016. After a difficult first year (the company has reported retained earnings as of December 31, 2016 of negative $65,000), the company believes they need to obtain a line of credit to expand the business. The bank has requested financial statements for the nine months ended September 30, 2017 in order to determine eligibility for the line of credit. Although none of the shareholders have any accounting experience, one of them has taken on the role of bookkeeper and has prepared the following financial statements for year-to-date operations through September 30, 2017.

 

PMD CORPORATION
Income Statement
For 2017
Product revenue       250,000
Deferred revenue          4,000
Cost of goods sold         45,000
Depreciation expense          7,500
Income Tax Expense         34,370
Interest expense          1,800
Meeting expense         13,500
Office expense          4,000
Salary expense         80,000
Net income         67,830

 

 

PMD CORPORATION

Balance Sheet

For 2017
Accounts receivable  $     10,000 Accounts payable  $(18,000)
Cash  $       9,000 Income tax payable  $  34,370
Inventory  $     16,000 Interest payable  $    1,800
Prepaid expense  $     (2,000) Note payable – current portion  $    5,000
Property, plant and equipment  $     50,000 Note payable – long term  $  25,000
Total current assets Payroll taxes payable  $    4,500
 $     83,000 Accumulated Depreciation  $  17,500
Common stock  $    6,000
Additional paid in capital  $    4,000
Retained earnings  $  (1,170)
 $  79,000

 

 

You have been hired by PMD Corporation to review the financial statements. During your review, you have discovered that in addition to multiple presentation issues, there are some adjustments that must be made to the financial statements.

 

  1. On September 27, the bookkeeper paid a $25,000 deposit for a November 2017 meeting. She debited Accounts Payable and credited Cash. This amount had not previously been entered as an accounts payable.
  2. The bookkeeper received a $5,000 refund for a meeting held in August 2017. She credited Prepaid Meetings although the only amounts in the Prepaid Meetings account were for the November 2017 meeting.
  3. On August 15, 2017, the bookkeeper deposited a $3,000 check for product to be shipped in September. All the product was shipped as of September 30, 2017.
  4. On January 1, 2016, the company borrowed $40,000 at a 6% annual rate. The loan is to be paid back to the bank annually on December 31st in four equal installments. The first installment was paid on December 31, 2016. Interest on the balance owed is also paid annually on December 31st. The interest for the year is expensed evenly throughout the year. (Hint: there are two adjustments to be made)
  5. Income tax expense must be re-calculated after all adjustments have been recorded. The income tax rate is 35%.

 

Requirements:

  1. Prepare a trial balance spreadsheet. Reference each adjustments with the letter used above. You must use exhibit 4.5 in the text as a reference point for your trial balance spreadsheet.
  2. Prepare a properly formatted income statement and balance sheet based on the adjusted balances from your trial balance spreadsheet. List each account separately in your statements (for example, do not have one amount on your income statement labeled “operating expenses”). See the demonstration case at the end of Chapter 4 for examples of properly formatted financial statements. Per share information is not given so you do not need to include Earnings Per Share on your income statement.
  3. Calculate the net profit margin and current ratio for the revised financial statements.
  4. Prepare a memo to the shareholders explaining the errors you discovered during your review and why you made the entry you did to correct each error. Keep in mind that none of the three shareholders have any accounting experience and, therefore, have no understanding of GAAP. Also, include a brief description explaining the results of your ratio analysis from requirement (3).
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