Engineering E2261: Introduction to Accounting and Finance COLUMBIA UNIVERSITY, School of Engineering and Applied Science Homework 3 - Readings,...

Engineering E2261: Introduction to Accounting and Finance

COLUMBIA UNIVERSITY, School of Engineering and Applied Science

Homework 3 - Readings, Problems and Cases

0. Reading (Optional):

Purchase "Introduction to Accounting and Finance E2611."

Robert Higgens, Richard Brealey, Stewart Myers.

See Courseworks for purchasing details. This text is recommended.

1. Lennar Corporation (LEN).

Lennar is a homebuilder that competes with Centex and APO. Here is some pertinent economic

and accounting data:

LEN Balance Sheet As of 12/31/2010

Assets

Cash $10,000

AR $3,000

Inventory $4,000

Misc assets held for sale $2,000

PPE $12,000

- Accum. Deprec. - $6,000

= PPE book value $6,000

Total Assets $25,000

Liabilities

AP $4,000

Loan Payable $6,000

Land $5,000

Total Liabilities $15,000

Equity

PIC $6,000

RE $4,000

Total Equity $10,000

Liabilities+Equity $25,000

Notes at BOY 2011:

• LEN's inventory write down policy is to use "inventory write down expense," instead of

"COGS" expense.

• LEN uses linear depreciation.

• LEN's PPE has average useful life of 10 years, with $2,000MM salvage value.

• The loan carries an annual interest rate of 5% (compounded annually).

• Principal on the loan is due in January 2012.

• Cumulative net income of the company is $5,000.

LEN experienced the following events in 2011:

1. Noted $1,000 of inventory was destroyed and useless as inventory but retained $400 in

salvage value.

2. Paid its owners a dividend of $500.

3. Purchased inventory (homes) costing $20,000 on account

(ie: was invoiced at time of purchase).

4. Received $35,000 in payments on previously-submitted invoices.

5. Sold/invoiced $38,000 of homes to customers (LEN 'matches' certain expenses to

revenue at the end of each accounting period, rather than with each sale).

6. Received $2,000 in cash prepayment for services it promises to deliver in 2012.

7. Paid $2,000 of outstanding vendor invoices.

8. Noted need to pay and paid $5,000 to rent office space for the year and for other

administrative costs.

9. Prepaid $3,000 for 2012 office space rent.

10. Noted depreciation on all its PPE assets.

11. Noted but did not pay 2011 interest on its loan payable.

12. Took out a (long term) loan for $5,000 and used this cash to purchase 100% of

NicheRealty. NicheRealty's balance sheet at the time of sale (last day of year) was:

Cash: $2,000, AR: $1,000, PPE: $6,000, AP: $6,000, Equity $3,000

13. Sold all its 'misc asset held for sale' for $1,500 cash.

14. Noted that its cost of goods sold for the year was $20,000.

15. Estimated (noted) its 2011 taxes at $500.

Find:

a) A list of journal entries corresponding to the above events, using the Dr, Cr sign convention.

b) Sorted lists of the journal entries, grouped first by Assets, Liabilities, and Equity, then by

individual accounts.

c) Prepare an EOY 2011 BS. Show that duality is satisfied, and report Equity as PIC + retained

earnings.

d) Prepare an IS and an OES for 2011.

e) Prepare a direct-method CFS for the year.

f) As of 1/1/2012, is LEN in trouble with any of its stakeholders? Why or why not?