Question

Diversified Industries sells sump-pumps to home improvement retailers and commercial customers. Its most popular product is called the Super Soaker. Diversified had the following activities during the year. The company’s fiscal year ends on December 31. Assume all transactions are for cash unless told otherwise.

a) Diversified purchased 350 Super Soakers during the period, at a cost of $620 each.

b) Diversified sells the Super Soaker to home improvement retailers for $1,000 a unit. Diversified delivered 300 Super Soakers to Home Depot. Diversified has billed Home Depot but has not yet received the $300,000 payment due.

c) To encourage sales, Diversified offers Home Depot customers a $50 mail-in rebate. Historically, similar rebates had a 40% redemption rate. By December 31, Diversified has received 60 rebates.

d) Although the Super Soaker is its main source of revenue, Diversified also provides monthly maintenance services for the convenience of its commercial customers for $100 per unit per month. On April 1, Diversified received $18,000 from a commercial customer who owns five Super Soakers, in exchange for a 3-year monthly maintenance service plan.

e) Diversified outsources maintenance services to a third-party at a cost of $40 an hour. The contractor spends 1 hour per month maintaining each unit.

f) Diversified spent $25,000 performing market research and developing a new product during the year. The company spent another $3,000 patenting the product with the U.S. Patent and Trademark office on July 1. The patent has a useful life of 5 years. Diversified uses straight-line method to amortize its intangible assets and reduces the intangible asset for any amortization, rather than using an Accumulated Amortization account.

g) Diversified discovered that the technological process to manufacture Super Soakers was updated. As a result, the current replacement cost of Diversified’s stock of Super Soakers went down to $590 per unit by the end of the year.

h) Diversified’s tax rate is 30%. The tax return will not be filed, nor the taxes paid, until March 15 of the following year.

Please fill out the T-Accounts for transactions A-H.

ASSETS LIABILITIES EQUITY Cash

Answer 1

Net income for the first Quarter = $1,493,340.

Working:

Revenue from other products	9500000
Revenue from Super Soaker	54600
Consignment Sales Revenue (200*1200)	240000
Total Revenue (A)	9554600
Expenses:
Expenses for other products	7750000
Expenses for asuper Soaker (942*30) *	28260
Cost of consignment sales (200*540)	108000
Depreciation Expense	175000
Total Expenses    (B)	8061260
Net income (A - B)	1493340

Number of units sold	30
Sale value	54600
Price per unit	1820
Stand alone price	1200
Fair value of Installation per unit	200
Service plan charge for three year ($10 per month)	360
total	1760
Allocation of the price of $1,820
Sale price of the unit (1820/1760)*1200	1241
Installation revenue (1820/1760)*200	207
Service Plan Revenue (1820/1760)*360	372
	1820
Cost for the above activities
Unit cost price	540
Cost of the installation	150
Cost for the service plan (7*12*3)	252
Total Cost   *	942

Free Cash flow
Net income	1493340
Add: Depreciation Expense	175000
Less: Increase in working Capital	-250000
Net cash flow from operating activities	1418340
Les: Capital Expenses	-500000
Free cash flows	918340