Question

Can somebody please explain to me how to do T Accounts for this case:

By 2009, Mr. Cardell decided to acquire another office furniture company. On July 1, 2009, the Holton-Central bankruptcy judge accepted Belmont’s $4,765,000 offer for Holton-Central’s assets and accounts payable. The $4,765,000 purchase price equaled the market value of the tangible assets, minus $875,000 of accounts payable, plus $265,000, which Mr. Cardell considered goodwill:

Raw material inventory                                         $175,000

Work-in-process inventory                                   $220,000

Finished goods inventory                                     $115,000

Equipment (5-year life)                                         $450,000

Building (20-year life)                                         $3,600,000

Land                                                                       $815,000

     Total tangible assets                                         $5,375,000

Less: Accounts payable                                         $875,000

     Net tangible assets                                            $4,500,000

Goodwill                                                                  $265,000

     Total purchase price                                           $4,765,000

July 1, 2009, the acquisition was completed as follows:

1. Belmont Office Furniture formed Holton-Central Holdings and paid $3.9 million for all 3,900,000 shares of Holton-Central Holdings’ $.01 par value common stock.

2. Holton-Central Holdings borrowed $6,000,000 to help Holton-Central exit from bankruptcy; the principal would be repaid in six $1 million payments each July 1, beginning July 1,2010. Also, due each July 1, beginning July 1,2010, was 10% interest on the unpaid balance as of the previous July 1.

3.   Holton-Central Holdings paid $4,765,000 cash for the assets of Holton-Central Inc., ans assumed the firm’s $875,000 of accounts payable.

July 2, 2009–December 31, 2009

Mr. Cardell’s first action was to close four furniture showrooms in Chicago, Los Angeles, New York and Atlanta, because the leases had been cancelled in bankruptcy. These closures would save $950,000 annually; Mr. Cardell believed sales would decline only marginally. He also negotiated a more favorable labor contract with former employees, which would save another $750,000 annually. On July 2, 2009, the firm reopened for business. The following is a summary of Holton-Central’s activity for the second half of 2009:

1. Paid the $875,000 of accounts payable.

2. Paid $154,500 for utilities, professional services and other administrative expenses.

3. Paid $1,408,000 for office wages and related payroll taxes and benefits.

4. Paid $2,785,000 for selling and marketing expenses.

5. Paid $900,000 for production machinery. The machinery was purchased October 1, 2009. The machinery had a useful life of five years with no salvage value.

6. Paid $228,000 for various one-year insurance policies.

7. Purchased $5,345,000 of raw material; $835,000 was unpaid as of December 31, 1998.

8. Manufacturing records showed $4,935,000 of raw material transferred to work in process.

9. Paid $7,878,000 in cash for production wages and charged the costs to work-in- process inventory.

10. Charged $6,662,000 to work-in-process inventory for manufacturing overhead items, including $6,400,000 paid in cash and $262,000 for depreciation on manufacturing facilities.

11. Manufacturing records showed $19,123,000 of work-in-process inventory transferred to finished goods inventory.

12. Sold chairs for $25,563,000. Of that, $4,587,000 had not been paid as of December 31, 2008.

13. Manufacturing records showed cost of goods sold of $18,593,000.

14. Recorded depreciation expense of $86,000.

15. Recorded accrued interest expense.

16. Recorded insurance expense of $95,000.

17. In late December, Mr. Cardell received a call from Holton-Central’s largest customer. To cut costs, previous management had substituted a low-grade fabric on 1,800 chairs that the customer purchased in 2008 and 2009. Repairing those chairs would cost $360,000. Mr. Cardell estimated that customers would request repairs to another several thousand chairs, which would cost another $560,000. Although that liability was discharged in bankruptcy, Mr. Cardell believed failure to repair the chairs would irreparably damage the firm’s reputation. He notified customers that Holton-Central would repair the chairs at no cost.

18. Computed income tax expenses of $365,000 for 2009, payable in 2010.

Answer 1

Date	Account Title	Debit	Credit
2009
1-Jul	Cash	3900000
	Common stock(3900000*0.01)		39000
	APIC-Common stock		3861000
	Cash	6000000
	Debt		6000000
	Raw materials inventory	175000
	WIP Inventory	220000
	Finished goods inventory	115000
	Equipment	450000
	Building	3600000
	Land	815000
	Goodwill	265000
	Accounts payable		875000
	Cash		4765000
1	Accounts payable	875000
	Cash		875000
2	Utilities ,etc.	154500
	Cash		154500
3	Wages expense	1408000
	Cash		1408000
4	Selling expense	2785000
	Cash		2785000
5	Production machinery	900000
	Cash		900000
6	Insurance expense	228000
	Cash		228000
7	Raw materials inventory	5345000
	Cash		4510000
	Accounts payable		835000
8	WIP inventory	4935000
	Raw materials inventory		4935000
9	WIP inventory	7878000
	Cash		7878000
10	WIP Inventory	6662000
	Cash		6400000
	Accumulated depreciation		262000
11	Finished goods inventory	19123000
	WIP Inventory		19123000
12	Cash	20976000
	Accounts receivables	4587000
	Sales Revenue		25563000
13	COGS	18593000
	Finished goods inventory		18593000
14	Depreciation expense	86000
	Accumulated depreciation		86000
15	Interest expense	300000
	Interest payable		300000
	(6000000*10%/2)
16	Prepaid Insurance	133000
	Insurance expense		133000
	(228000-95000)
17	Repair expenses	920000
	Liability for repair		920000
	(360000+560000)
18	Income tax expense	365000
	Income tax payable		365000
		111793500	111793500

	LEDGER ACCOUNTS			Net Ledger bal.
2009		Debit	Credit	Debit	Credit
10	Accumulated depreciation		262000
14	Accumulated depreciation		86000		348000
1-Jul	Accounts payable		875000
1	Accounts payable	875000
	Accounts payable		835000		835000
12	Accounts receivables	4587000		4587000
1-Jul	APIC-Common stock		3861000		3861000
1-Jul	Building	3600000		3600000
1-Jul	Cash	3900000
1-Jul	Cash	6000000
1-Jul	Cash		4765000
1-Jan	Cash		875000
2	Cash		154500
3	Cash		1408000
4	Cash		2785000
5	Cash		900000
6	Cash		228000
7	Cash		4510000
9	Cash		7878000
10	Cash		6400000
12	Cash	20976000		972500
13	COGS	18593000		18593000
1-Jul	Common stock(3900000*0.01)		39000		39000
1-Jul	Debt		6000000		6000000
14	Depreciation expense	86000		86000
1-Jul	Equipment	450000		450000
1-Jul	Finished goods inventory	115000
11	Finished goods inventory	19123000
13	Finished goods inventory		18593000	645000
1-Jul	Goodwill	265000		265000
18	Income tax expense	365000		365000
18	Income tax payable		365000		365000
6	Insurance expense	228000
16	Insurance expense		133000	95000
15	Interest expense	300000		300000
15	Interest payable		300000		300000
1-Jul	Land	815000		815000
17	Liability for repair		920000		920000
16	Prepaid Insurance	133000		133000
5	Production machinery	900000		900000
1-Jul	Raw materials inventory	175000
7	Raw materials inventory	5345000
8	Raw materials inventory		4935000	585000
17	Repair expenses	920000		920000
12	Sales Revenue		25563000		25563000
4	Selling expense	2785000		2785000
2	Utilities ,etc.	154500		154500
3	Wages expense	1408000		1408000
1-Jul	WIP Inventory	220000
8	WIP inventory	4935000
9	WIP inventory	7878000
10	WIP Inventory	6662000
11	WIP Inventory		19123000	572000
		111793500	111793500	38231000	38231000
	TRIAL BALANCE
	Cash	972500
	Accounts receivables	4587000
	Prepaid Insurance	133000
	Finished goods inventory	645000
	WIP Inventory	572000
	Raw materials inventory	585000
	Land	815000
	Building	3600000
	Goodwill	265000
	Equipment	450000
	Production machinery	900000
	Accumulated depreciation		348000
	Accounts payable		835000
	Income tax payable		365000
	Interest payable		300000
	Liability for repair		920000
	Common stock(3900000*0.01)		39000
	APIC-Common stock		3861000
	Debt		6000000
	Sales Revenue		25563000
	COGS	18593000
	Depreciation expense	86000
	Insurance expense	95000
	Repair expenses	920000
	Selling expense	2785000
	Utilities ,etc.	154500
	Wages expense	1408000
	Interest expense	300000
	Income tax expense	365000
	Total	38231000	38231000
	Income statement (July-Dec.)
	Sales Revenue		25563000
	Less:COGS		18593000
	Gross profit		6970000
	Less: Operating expenses:
	Depreciation expense	86000
	Insurance expense	95000
	Repair expenses	920000
	Selling expense	2785000
	Utilities ,etc.	154500
	Wages expense	1408000
	Interest expense	300000	5748500
	Income before tax		1221500
	Less:Income tax expense		365000
	Net income after tax		856500
	Balance sheet as at Dec.31
	Assets
	Current assets
	Cash	972500
	Accounts receivables	4587000
	Prepaid Insurance	133000
	Finished goods inventory	645000
	WIP Inventory	572000
	Raw materials inventory	585000
	Total current assets		7494500
	Fixed assets
	Land	815000
	Building	3600000
	Goodwill	265000
	Equipment	450000
	Production machinery	900000
	Accumulated depreciation	-348000
	Total fixed assets		5682000
	Total assets		13176500
	Liabilities & Equity
	Liabilities
	Current Liabilities
	Accounts payable	835000
	Income tax payable	365000
	Interest payable	300000
	Liability for repair	920000
	Total Current Liabilities		2420000
	Long-term liabilities
	Debt		6000000
	Total Liabilities		8420000
	Equity
	Common stock(3900000*0.01)	39000
	APIC-Common stock	3861000
	Retained Earnings	856500
	Total Equity		4756500
	Total Liabilities & Equity		13176500

Cash flow statement for July-Dec.
Operating activities
Net income after tax		856500
Add back depn.(86000+262000)		348000
Adj. net income		1204500
Changes to working capital:
Increase in a/cs. Receivables	-4587000
Increase in prepaid insurance	-133000
Increase in fin.gds.inv.(115000-645000)	-530000
Increase in WIP inv.(220000-572000)	-352000
Increase in Raw mat.inv.(175000-585000)	-410000
Decrease in a/cs.payables(875000-835000)	-40000
Inc.in Income tax payable	365000
Inc.in Interest payable	300000
Inc.in Liability for repair	920000
Net change in working capital		-4467000
Cash used in operations		-3262500
Investing activities
Purchase of Production machinery	-900000
Business acquisition	-4765000
Cash used in Investing activities		-5665000
Financing activities
Issue of common stock	3900000
Issue of debt	6000000
Cash generated from financing activities		9900000
Net cash generated		972500
Ending balance of cash		972500

Evaluation:
The company has generated positive net income &
overall positive cash flow due to the financing by equity & debt
Collection of receivables will improve the operating cash position

Figures for Ratios:
Total current assets		7494500
Total Current Liabilities		2420000
Total assets		13176500
Debt		6000000
Total Liabilities		8420000
Total Equity		4756500
Cash +receivables		5559500

Current ratio= Total Current assets/Tot.Current laibilities	3.10	Above normal --Mainly because of excess reveivables
Quick ratio=(cash+rec)/C.liab.	2.30	Above normal --Mainly because of excess reveivables
Debt ratio= Tot.liab./Tot.assets	0.64	indicates more debt funding of assets than equity
Debt/equity=	1.26	Confirms the above