ACCTG 331: Final Case Spring 2023 Information: TFD, Inc. recently applied for a loan from BNB Credit Union . The large loan received considerable scrutiny, but based on the recommendation of the loan officer and the bank manager it looked like BNB was going to approve the loan. Unfortunately, the day before the loan was to be approved, TFD's owner discovered some mistakes in the financial records. She has asked you to help her find and correct any mistakes as quickly as possible so that they can send the updated financial statements to the credit union before a final decision is made. After careful review, you have determined the following issues need to be corrected: 1. A lease on a new set of equipment was inappropriately recorded as a debit to rent expense and credit to cash. The lease was signed at the beginning of 2022 and requires annual payments made at the beginning of each period. The market value of the leased asset was $1,336,000 and it had an estimated useful life of 5 years with no salvage value. The lease is for 3 years with annual payments of $183,456. TFD's marginal borrowing rate is 5.%. 2. A customer paid $180,000 for a special order on 9/22/2022. The cash receipt was appropriately recorded (debit to cash and credit to unearned revenue), but no entry was made on 12/31/2022 when the order was shipped. The inventory cost $140,400 to produce. 3. Members of the sales force are paid commissions twice a year. Commissions on sales from January - June are paid on July 10th and commissions from July - December are paid on January 10th. No entry has been made for the commissions earned during the last half of 2022. Total sales from July to December were $3,439,800, but only 25.% of those sales were subject to the 7.5% commission. Commissions are reported with Sales Force Salaries. In addition to an updated set of financial statements, BNB Credit Union's underwriting team requires the following ratios. For comparison purposes, please calculate each ratio before and after making the corrections listed above. + Current Ratio + ROA + ROE + Debt to Equity Ratio + Asset Turnover + Profit Margin Assignment: Calculations 1. Make the appropriate journal entries, if any, to correct the mistakes listed above. Please ignore the effects of income taxes for this assignment. 2, Make any necessary changes to the financial statements. 3. Calculate each of the required ratios using the original values (before any changes) and the updated values (after your changes). Critical Thinking 4. If you were the loan officer at BNB Credit Union, would you approve the loan? Defend your answer. 5. TFD's owner had to make a difficult decision: to report the mistakes to the bank or not. The decision might have negative results for her company if BNB's underwriting team decides not to approve the loan. Why do you think TFD's owner decided to be honest in this situation? Provide at least THREE (3) factors that would motivate someone to make the right choice in this difficult situation. M Q R w X TFD , Inc. TFD , Inc. Multi-Step Income Statement TFD , Inc. Balance Sheet Ratio Analysis Statement of Cash Flows Correcting Entries For the Year Ended December 31.2023 As of December 31 For the Year Ended December 31.2023 Original Ratios Updated Ratios 2023 2022 Cash Flow from Operations Sales Revenue Current Ratio $7,644,000 Assets Net Income $527,406 Cost of Goods Sold $5,304,936 Current Assets Current Assets Adjustments: Gross Profit Current Liabilities $2,339,064 Cash $114,660 $145,236 Change in A/R ($152,880) A/R $305,760 $229,320 Change in Inventory $76,440 Operating Activities ROA Allowance for Bad Debts ($38,220) ($114,660) Depreciation $152,880 Net Income 0 Selling Expenses Inventory $993, 720 $1,070, 160 Change in A/P ($68, 766) Advertising Expense Average Total Assets $143,325 Total Current Assets $1,375,920 $1, 330,056 Change in Salaries Payable $57,330 Bad Debt Expense $119,000 $410, 865 PPE Change in Unearned Revenue $76,440 $141,444 ROE 13 Sales Force Salaries Expense Land $840, 840 $535,080 Net Cash Flow from Operations $668,850 14 Net Income Shipping Expense 15 $62.585 Building $611,520 $611,520 Total Selling Expenses $735,775 Equipment 2, 140, 320 Average Total Equity $993, 720 16 Cash Flow from Investments Administrative Expenses Accumulated Depreciation ($917,280) ($764,400) Purchase of Land Debt to Equity Ratio 17 Executive Salaries Expense Total PPE ($305, 760) $489,216 $2,675,400 $1,375,920 18 Insurance Expense Purchase of Equipment ($1, 146,600) Total Liabilities $11.466 Total Assets 19 $4 051.320 $2.705.976 Net Cash Flow from Investments ($1,452,360) Total Equity Depreciation Expense $152,88 20 Miscellaneous Admin. Expenses $7,644 Liabilities and Stockholders' Equity Cash Flow from Financing 21 Rent Expense 183,456 Asset Turnover Current Liabilities Repayment of Loans $382,200 Utilities Expense $30.576 Sales Revenue Accounts Payable $458,640 Total Administrative Expenses $875,238 $1,611,013 $389,874 Issuance of Notes Payable $458,640 Salaries Payable 133,770 $76,440 Average Total Assets Income from Operations $728,051 $114,66 Payments of Dividends ($87,906) Unearned Revenue $191, 100 Net Cash Flow from Financing $752,934 Total Current Liabilities $714,744 Profit Margin $649, 740 Other Gains and Losses Long-term Debt Net Income ($30,576) $23,888 Net Increase (Decrease) in Cash Sales Revenue Rent Revenue Interest Expense Count Payable $611,520 $229,320 Cash, January 1, 2024 $145,236 $48,731) ($24,843) Income from Continuing Operations before Taxes $703,208 votes Payable $1.070, 160 $611,520 Cash, December 31, 2024 $114.660 Total Long-term Debt $1,681,680 $840,840 Critical Thinking #1 Income Tax Expense $175,802 Total Liabilities $2, 396,424 $1,490,580 Net Income $527 406 Stockholders' Equity 33 EPS $1. 10 Common stock $960,000 $960,000 ($2 par, 1,200,000 authorized, 480,000 outstanding) Additional Paid-In capital $229,320 $229,320 Retained Earnings $465,576 Total Stockholders' Equity $1,654,896 $1,215,396 Total Liabilities and Stockholder's Equity $4.051.320 $2.705.976 Critical Thinking #2