Success systems – serial problem (please read the questions carefully



1)    Adria Lopez created Success Systems on October 1, 2013. The company has been successful, and Adria plans to expand her business. She believes that an additional $ 86,000 is needed and is investigating three funding sources.


a. Adria’s sister Cicely is willing to invest $ 86,000 in the business as a common shareholder. Since Adria currently has about $ 129,000 invested in the business, Cicely’s investment will mean that Adria will maintain about 60% ownership, and Cicely will have 40% ownership of Success Systems.


b. Adria’s uncle Marcello is willing to invest $ 86,000 in the business as a preferred shareholder. Marcello would purchase 860 shares of $ 100 par value, 7% preferred stock.


c. Adria’s banker is willing to lend her $ 86,000 on a 7%, 10- year note payable. She would make monthly payments of $ 1,000 per month for 10 years.


Required 1. Prepare the journal entry to reflect the initial $ 86,000 investment under each of the options ( a), ( b), and ( c). 2. Evaluate the three proposals for expansion, providing the pros and cons of each option. 3. Which option do you recommend Adria adopt? Explain.


2)    While reviewing the March 31, 2014, balance sheet of Success Systems, Adria Lopez notes that the business has built a large cash balance of $ 77,845. Its most recent bank money market statement shows that the funds are earning an annualized return of 0.75%. Adria Lopez decides to make several in-vestments with the desire to earn a higher return on the idle cash balance. Accordingly, in April 2014, Success Systems makes the following investments in trading securities: April 16 Purchases 400 shares of Johnson & Johnson stock at $ 50 per share plus $ 300 commission. April 30 Purchases 200 shares of Starbucks Corporation at $ 22 per share plus $ 250 commission. On June 30, 2014, the per share market price ( fair value) of the Johnson & Johnson shares is $ 55 and the Starbucks shares is $ 19.


Required 1. Prepare journal entries to record the April purchases of trading securities by Success Systems.


2. On June 30, 2014, prepare the adjusting entry to record any necessary fair value adjustment to its portfolio of trading securities.


3)    Use the following selected data from Success Systems’ income statement for the three months ended March 31, 2014, and from its March 31, 2014, balance sheet to complete the requirements below: computer services revenue, $ 25,160; net sales ( of goods), $ 18,693; total sales and revenue, $ 43,853; cost of goods sold, $ 14,052; net income, $ 18,686; quick assets, $ 100,205; current assets, $ 105,209; total assets, $ 129,909; current liabilities, $ 875; total liabilities, $ 875; and total equity, $ 129,034.



Required 1. Compute the gross margin ratio ( both with and without services revenue) and net profit margin ratio ( round the percent to one decimal). 2. Compute the current ratio and acid- test ratio ( round to one decimal). 3. Compute the debt ratio and equity ratio ( round the percent to one decimal). 4. What percent of its assets are current? What percent are long term ( round the percent to one decimal)?


4) The computer workstation furniture manufacturing that Adria Lopez started in January is progressing well. As of the end of June, Success Systems’ job cost sheets show the following total costs accumulated on three furniture jobs.


[ Job 6.02 Job 6.03 Job 6.04


Direct materials . . . . . . . . . $ 1,500 $ 3,300 $ 2,700


Direct labor . . . . . . . . . . . . 800 1,420 2,100


Overhead . . . . . . . . . . . . . . 400 710 1,050 ]


Job 6.02 was started in production in May, and these costs were assigned to it in May: direct materials, $ 600; direct labor, $ 180; and overhead, $ 90. Jobs 6.03 and 6.04 were started in June. Overhead cost is applied with a predetermined rate based on direct labor costs. Jobs 6.02 and 6.03 are finished in June, and Job 6.04 is expected to be finished in July. No raw materials are used indirectly in June. ( Assume this company’s predetermined overhead rate did not change over these months).


Required 1. What is the cost of the raw materials used in June for each of the three jobs and in total? 2. How much total direct labor cost is incurred in June? 3. What predetermined overhead rate is used in June? 4. How much cost is transferred to finished goods inventory in June?


4)    Success Systems sells upscale modular desk units and office chairs in the ratio of 3: 2 ( desk unit: chair). The selling prices are $ 1,250 per desk unit and $ 500 per chair. The variable costs are $ 750 per desk unit and $ 250 per chair. Fixed costs are $ 120,000.



1. Compute the selling price per composite unit. 2. Compute the variable costs per composite unit. 3. Compute the break- even point in composite units. 4. Compute the number of units of each product that would be sold at the break- even point.


6) Adria Lopez expects second quarter 2014 sales of her new line of computer furniture to be the same as the first quarter’s sales ( reported below) without any changes in strategy. Monthly sales averaged 40 desk units ( sales price of $ 1,250) and 20 chairs ( sales price of $ 500).


[SUCCESS SYSTEMS Segment Income Statement* For Quarter Ended March 31, 2014


Sales† . . . . . . $ 180,000 Cost of goods sold‡ . . . . . . 115,000 Gross profit . . . . . . 65,000 Expenses Sales commissions ( 10%) . . . . . . 18,000 Advertising expenses . . . . . . 9,000 Other fixed expenses. . . . . . . 18,000 Total expenses . . . . . . . 45,000 Net income . . .. . . $ 20,000]


Adria Lopez believes that sales will increase each month for the next three months ( April, 48 desks, 32 chairs; May, 52 desks, 35 chairs; June, 56 desks, 38 chairs) if selling prices are reduced to $ 1,150 for desks and $ 450 for chairs, and advertising expenses are increased by 10% and remain at that level for all three months. The products’ variable cost will remain at $ 750 for desks and $ 250 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $ 10,000 and other fixed expenses will remain at $ 6,000 per month.


Required 1. Prepare budgeted income statements for each of the months of April, May, and June that show the expected results from implementing the proposed changes. Use a three- column format, with one column for each month. 2. Use the budgeted income statements from part 1 to recommend whether Adria Lopez should implement the proposed changes. Explain.


7) Adria Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $ 300,000 and to have a six- year life and no salvage value. It will be depreciated on a straight- line basis. Success Systems expects to sell 100 units of the equipment’s product each year. The expected annual income re-lated to this equipment follows.


Sales . . . . . $ 375,000


Costs Materials, labor, and overhead (except depreciation) . . . . . . 200,000


Depreciation on new equipment . . . . . . 50,000


Selling and administrative expenses . . . . . . 37,500


Total costs and expenses . . . . . . 287,500


Pretax income . . . . 87,500


Income taxes ( 30%) . . . . . . 26,250


Net income . . . . . $ 61,250.


Required Compute the ( 1) payback period and ( 2) accounting rate of return for this equipment. ( Record answers as percents, rounded to one decimal.)





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