BA 270 - Final Exam
Fall, 2003
Name: __________________________________________________
(Please Print)
Honor Code Signature: ___________________________________
PID Number: ___________________________________
Part
Topic
Points
I.
II.
III.
IV.
Receivables, etc.
Valuation
Manufacturing
Intercompany Investments
24
21
38
18
101
SHOW YOUR WORK FOR PARTIAL CREDIT. If you feel that you need to make
an assumption on a problem, please state it. If you are really confused by a question, I
will be in the hall to answer questions. All numbers are in $ thousands. Please round to
the nearest thousand. WATCH THE TIME—IF YOU GET STUCK ON A
QUESTION, MOVE ON AND COME BACK TO IT.
The Steinway Music Company, through its wholly-owned subsidiaries, The Steinway
Piano Company and Conn-Selmer, Inc., is engaged in the design, manufacture, marketing
and distribution of high quality musical instruments. They are organized into two
segments—pianos and band and orchestra instruments. Their piano division concentrates
on the high-end grand piano market, handcrafting Steinway pianos in New York and
Germany. They also offer upright pianos as well as two mid-priced lines of pianos under
the Boston and Essex brand names. They are also the largest domestic producer of band
and orchestral instruments and offer a complete line of brasswind, woodwind, percussion
and stringed instruments and related accessories with well known brand names such as
Bach, C.G. Conn, King and Ludwig. All questions pertain to 2002 unless noted
otherwise; 2002 results are noted in bold in the financial statements.
I. Receivables, etc. (24 points)
1.
What journal entries did Steinway record that explain the change in gross
accounts receivable and the allowance for bad debts in 2002? Assume all sales
were on credit. (15 points)
Bad Debt Expense
Allowance for Bad Debts
2,590
Allowance for Bad Debts
Accounts Receivable
2,353
Accounts Receivable
Allowance for Bad Debts
2,590
2,353
243
243
Accounts Receivable
Sales Revenue
332,297
Cash
334,474
332,297
Accounts Receivable
Accounts Receivable
BB=93,097
Cr. Sales
Writeoffs
332,297
2,353
Recoveries
Collections
243
(plug)
334,474
Allowance for Bad Debts
BB=10,909
Writeoffs
Bad Debt
2,353
Expense
2,590
Recoveries
243
EB=88,810
EB=11,389
334,474
Defining accounts receivable turnover as collections/average net accounts
receivable, estimate how many days receivables were outstanding on average in
2002. (3 points)
334,474/((82,188+77,421)/2) = 4.19; 365/4.19 = 87.0 days
2.
Steinway offers warrantees with its product. Assume that Steinway satisfies all
warrantee claims in cash (e.g., by paying workers to fix the instruments). What
journal entries did Steinway record with respect to its warrantees in 2002? (6
points)
Warrantee Expense
Warrantee Liability
950
Warrantee Liability
Cash
814
950
814
STEINWAY FINAL SOLUTIONS
II. Valuation and Evaluation (21 points)
1.
Assume that you believe that Steinway’s balance sheet is fairly recorded except as
follows. The internally-developed Steinway brands are worth $40,000, their
property plant and equipment is worth $124,011 and the reserve which was
established for environmental liabilities discussed in the footnotes should be
$10,610.
Estimate a fair stock price per share for Fleetwood (they have 8.9 million shares
outstanding). (6 points)
Fair value of equity = Book value of equity + fair value of intangible assets not
on the balance sheet because internally developed + (fair value of PP&E – book
value) – (fair value of liabilities – book value)
$135,806 + $40,000 + ($124,011 – 102,567) – ($10,610 - $610) = $187,250
$187,250/8,900 = $21.04
2.
You estimate that Steinway will have net income of $9,345 and $12,905 in 2003
and 2004, respectively. Also, noncash working capital (operating current assets
minus operating current liabilities) will increase by $1,610 in 2003 (relative to
2002) and decrease by $511 in 2004 (relative to 2003). Capital expenditures and
interest expense (all paid in cash) and depreciation and amortization in both 2003
and 2004 will be the same as in 2002. Existing interest bearing debt is $202,469.
Steinway faces a tax rate of 35%. Assume a discount rate of 10% and that the
sum of all years’ adjusted cash flows 2005 and beyond total $332,000 when
present valued to December 31, 2002.
Estimate the fair value of a share of Steinway’s stock as of December 31, 2002
using a discounted cash flow approach (they have 8.9 million shares outstanding).
(8 points)
Net Income
+ Depreciation
- Working Capital
- Capital Expenditures
+ After-tax interest
(.65 x 15,171)
9,345
+ 11,037
- 1,610
- 5,604
12,905
+ 11,037
+ 511
- 5,604
+ 9,861
23,029
+ 9,861
28,720
Value = 23,029/1.1 + 28,720/1.21 + 332,000 – 202,469 = $174,202
$174,202/8,900 = $19.57
3.
Steinway has two major segments—pianos, and band and orchestral. Suppose
you were evaluating each division (in doing so, just focus on the “Total” amount
for each division) from the perspective of Economic Value Added on their assets.
Compute the EVAAssets for both divisions for 2002 using operating profit (which
is before interest). Assume a cost of capital of 10%. Taken at face value, what do
these EVA numbers tell you about whether the divisions should be closed down
or retained? (7 points)
Piano EVA: 21,336 – 10% x (203,620 + 213,478)/2 = $481
Band EVA: 11,988 – 10% x (396,575 + 403,031)/2 = -$27,992
The band division clearly does not cover cost of capital and should therefore be
closed down. The piano division does (barely) cover cost of capital and should be
retained. (Of course, in reality other factors would have to be considered like
Steinway’s moral obligation to abet the persecution of children by providing the
instruments of their torture).
III. Manufacturing and Absorption Costing (38 points)
1. What journal entries did Steinway record for inventory obsolescence in 2002?
Assume that the allowance for obsolescence pertains to finished goods inventory;
there are no proceeds on obsolete inventory disposed of (i.e., they destroy it) and
obsolescence expense is included in other operating expenses on the income
statement. (6 points)
Other Expenses
Allowance for Obsolescence
1,644
1,644
Allowance for Obsolescence
Finished Goods Inventory
2.
892
892
Assume that Steinway’s production process involves 40% raw materials, 40%
labor and 20% overhead (i.e., those are the proportions of costs which go into
work in process). Assume all purchases are on credit (accounts payable), salaries
are paid in cash and all overhead is depreciation. What were all of the journal
entries (other than the obsolescence journal entry above) that explain the change
in each of the inventory accounts (your entries along, with those in question 1.,
should explain the changes in raw materials, work-in-process and finished goods
accounts). Note that you will need to use the answer to question 1. to solve the
problem. (19 points)
Cost of Goods Sold
Finished Goods Inventory
235,146
Finished Goods Inventory
Work In Process
234,332
235,146
234,332
Work In Process
Cash
94,954
Work In Process
Accumulated Depreciation
47,477
Work In Process
Raw Material Inventory
94,954
Raw Materials Inventory
Accounts Payable
95,574
Raw Materials Inv.
BB=20,948
Purchases
Transfers
95,574
to WIP
94,954
EB=21,568
Work-In-Process Inv.
BB=52,967
Transfers
Transfers
from RM
to FG
94,954
234,332
Salaries
94,954
Depr.
47,477
EB=56,019
94,954
47,477
94,954
95,574
Fin. Goods Inv.
BB=87,209
Transfers
CGS
from WIP
235,146
234,332
Obs
892
EB=85,503
3. Recall that the turnover in an account can be computed based on amounts coming
out of that account divided by its average balance. How long on average do raw
materials remain in the warehouse before being moved to the production floor? (3
points)
94,954/((20,948+21,568)/2) = 4.47; 365/4.47 = 81.7 days
Estimate how long on average product remains in process on the production plant
floor. (2 points)
234,332/((52967+56019)/2) = 4.30; 365/4.30 = 84.9 days
Estimate how long on average inventory remains in finished goods inventory
before it is sold or disposed of (i.e., base your answer on gross finished goods
inventory and include all of the inventory leaving finished goods inventory
including obsolete inventory disposed of). (2 points).
(235,146+892)/((85,503+87,209)/2) = 2.73; 365/2.73 = 133.5
Estimate how long on average elapses between when Steinway purchases raw
materials and when it sells or disposes of the final product. (2 points)
81.7 + 84.9 + 133.5 = 300.1 days
Based on the preceding including the analysis of accounts receivable in Part I.
above, and assuming that Steinway takes 35 days on average to pay its accounts
payable, how long does it take from when Steinway pays cash to purchase raw
materials and when they collect cash from customers? (2 points)
300.1 + 87.0 – 35.0 = 352.1 days
Assume that an instrument ties up $1,000 on average over the time between when
cash is paid to suppliers and when it is collected from customers and that
Steinway’s cost of capital is 10%. Estimate the cost to Steinway of the capital
tied up in the average instrument. (2 points)
352.1/365 x 10% x $1,000 = $96.5
IV. Intercompany Investment (18 points)
1.
In 2000, Steinway acquired 100% of UMI for $84,227 cash. Prior to acquisition,
UMI had inventories of $30,041, receivables of $41,734, property, plant and
equipment of $17,510 and accounts payable of $18,622 on its books. Steinway
estimated that all of the assets and liabilities were on UMI’s books at fair value
except for inventory which was worth $10,000 more than book value. Assuming
purchase accounting treatment (not a merger of equals), what journal entry would
Steinway have recorded for the transaction? (6 points)
Inventories
Accounts Receivable
Property, Plant and Equipment
Goodwill
Accounts Payable
Cash
40,041
41,734
17,510
3,564
18,622
84,227
What would the journal entry have been if Steinway had only bought 80% of UMI
and paid $67,382? (3 points)
Inventories
Accounts Receivable
Property, Plant and Equipment
Goodwill
Accounts Payable
Cash
Minority Interest
2.
40,041
41,734
17,510
3,564
18,622
67,382
16,845
On December 31, 2002 Steinway had available-for-sale marketable securities with
a cost of $1,080, fair value of $1,299 and unrealized gains of $219.
What was the carrying amount of the securities on Steinway’s books? (1 point)
$1,299
What would the carrying amount have been had the securities been trading
securities? (1 point)
$1,299
What would the carrying amount have been if the securities had been debt held to
maturity? (1 point)
$1,080
3.
Suppose Steinway holds the same marketable securities through the end of 2003
and that they increased in value to $1,312 by the end of 2003.
What effect (direction and amount) would the securities have had on Steinway’s
2003 pretax income if they were securities available for sale? (1 point)
None
What effect (direction and amount) would the securities have had on Steinway’s
2003 pretax income if they were trading securities? (1 point)
Increase by $13.
4.
Instead of holding them on December 31, 2003, suppose Steinway sold the
securities on December 31, 2003 for $1,312.
What effect (direction and amount) would the securities have had on Steinway’s
2003 pretax income if they were securities available for sale? (2 point)
Increase by $1,312 - $1,080 = $232
What effect (direction and amount) would the securities have had on Steinway’s
2003 pretax income if they were trading securities? (2 point)
Increase by $13.