QUESTION 1:
(Points 35)
Louisville Farms, a breeder of racehorses, paid \$432,000 cash for a prize-winning stallion on January
1, 2013. The stallion is depreciated on a straight-line basis, with depreciation for partial years rounded
to the nearest month. Estimated useful life was nine years, with no residual value. After owning the
animal for six years and five months, Louisville Farms sold the stallion on May 31, 2019, for cash of
\$85,000. Depreciation had last been recorded on December 31, 2018.
1.1. Compute to the nearest full month depreciation for the fractional period from January 1, 2019
to May 31 of 2019. \$______________ (Show your calculations).
1.2. Compute the book value of the stallion at May 31, 2019, the date of sale.
1.3. Compute the gain or loss on the sale of the stallion. \$______________ [gain/loss] (Show
1.4. In the space provided below, prepare the journal entry to record the sale of the stallion on
May 31, 2019. [Use Breeding Stock as the title of the asset account. Assume that depreciation
2009 General Journal
May 31
QUESTION 2:
(Points 15)
2.1. Define bonds and explain the type of bonds you think the CEO, Mr. Carter should look at and
why?
2.2. Explain the income tax advantage of raising capital by issuing bonds rather than by selling
capital stock.
2.3. There is a business saying that “You shouldn’t be in business if your company doesn’t earn
higher than bank rates.” This means that if a company is to succeed, its return on assets should
be significantly higher than its cost of borrowing. Explain this saying to Mr. Carter and tell him why is
this so important?
QUESTION 3:
(Points 35)
3.1. Why is noncumulative preferred stock often considered an unattractive form of investment?
3.2. State the balance sheet or income statement classification (asset, liability, stockholders’ equity,
revenue, or expense) of each of the following accounts:
A. Cash (received from the issuance of capital stock).
B. Organization Costs.
C. Preferred Stock.
D. Retained Earnings.
F. Income Taxes Payable.
3.3. Louisville Farms, sold 10,000 shares of common stock, which has a par value of \$8, for \$13 per
share. The company’s balance in retained earnings is \$75,000. Prepare the stockholders’ equity
section of the company’s balance sheet.
QUESTION 4
(15 Points)
Analysing Statements
The statements of Woody Woodpecker Corp. contain the following information:
2019 2018
Cash & Cash Equivalents \$ 65,000.00 \$ 42,000.00
Accounts Receivable \$ 44,000.00 \$ 51,000.00
Inventory \$ 129,000.00 \$ 102,000.00
Prepaid Expenses \$ 12,000.00 \$ 9,200.00
Other Current Assets \$ 9,500.00 \$ 8,400.00
Total Assets \$ 450,000.00 \$ 390,000.00
Non-Current Liabilities \$ 180,000.00 \$ 180,000.00
Total Liabilities \$ 270,000.00 \$ 210,000.00
Income from Operations \$ 550,000.00 \$ 490,000.00
Interest Expense \$ 95,000.00 \$ 86,000.00
Instruction: (show your calculations and round to 2 decimal places)
From the above information calculate:
Current Ratio 2019

Quick Ratio 2019

Debt Ratio 2019

Working Capital 2019

Percentage Change in Working Capital
Percentage Change in Total Liabilities
Time-Interest-Earned Ratio 2019

Sample Solution