Calculations balance sheet of Success Systems

While reviewing the March 3!, 2014, balance sheet of Success Systems, Adria Lopez notes that

the business has built a large cash balance of $77,345. Its most recent bank money ntarltet statement

shows that the funds are earning an annualized return of 0.75%. Adria Lopez decides to make several in-

vestments with the desire to earn a higher return on the idle cash balance. Accordingly, in April 2014,

Success Systems inaites the following investments in trading securities:

April 16 Purchases 400 shares of Johnson & Johnson stocl-: at $50 per share plus $300 commission.

April 30 Purchases 200 shares of Starbucks Corporation at $22 per share plus $250 commission.

On June 30, 2014, the per share market price {fair value) of the Johnson :34. Johnson share.s is $55 and the

Starbucks shares is $19.

Required

1. Prepare journal entries to record the April purchases of trading securities by Success Systems.

2. On June 30, 2oM, prepare the adjusting entry to record any necessary fair value adjustment to it.s port-

folio of trading securities.

Adria Lopez expects second quarter 2014 sales of her new line of eort1pute1? furniture to be me
same as the first qurLrI:e1?‘s sales [_1’epc-ned below} v.-‘1thm1tat1}-‘ clmnges in st1’ateg’_v.’. Monthly sales averaged
41} desk units {sales price of $1,250) and 20 elmire [sales price of $500].
Segment Income Statement‘
For Quarter Ended March 31,2014
Salas*…………………….. $100.00!)
Costof,goodsso1d*…………… ll5.000
Grossprofrt………………… 65.000
Expenses
Salas commissions (10%). . . . .. …. . 13.000
Advertisi=ngexpensas………….. 9.000
oI:harfi)oedaxpenees………….. 13.000
To12!axpenees………………. 45.000
Netincome………………… $10000
R1.-sflcets rm-‘emu-e and expense nelivity only rclarcazl to the computer fumitunc segrncnt.
‘R1:-wnuc: 1120 desks II==I. $1.250?! + 160 chairs .3=*i. 3500?) = T-150.000 + $30.00? = 3130.000
C’crstc-1? goods 501-:1: 1-120 dc:-‘.k~s ‘:==2? $750) + (50 chairs :==:’ $3501 1- 310.0130 = $1 15.000

“tdria L-ope: believes that sales will increase each month for the next three ntonths (April, 48 desl-ts,

32 chairs; May, 52 dt‘:Sl’.’-3, ’35 chairs; June, 56 desl-ts, ’38 chairs] if selling prices are reduced to Slit ,150

for desks and $450 for chairs, and advertising expenses a.re increased by 10% and remain at that level

for all three months. The products” variable cost will remain at $750 for desks and $250 for chairs.

The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per ntonth will

remain at $10,000 and other fixed expenses will remain at $6,000 per month.

Required

1. Prepare budgeted income statements for each of the months of April, May, and June that show the Check I213 E-udgetecl income ‘IlossI’:
expected results from implementing the proposed changes. Use a three-colt1mn format, with one col- !1pril..$’I66DII:Pv*lar:. $945
ttmn for each month.

2. Use the budgeted income statements front part I to recommend whether Adria Lopez should imple-
ment the proposed changes. Explain.

Adria Lopez is considering the purchase of equipment for Success Systents that would allow the
company to add a new product to its computer furniture line. The equipment is expected to cost $300,000
and to have a six-;.rear life and no salvage value. It will be depreciated on a straight-line basis. Success
Systerns expects to sell [00 units of the equipn1ent”s product each year. The expected annual income re-
lated to this equipment follows.
$315,000
Costs
Hatartais. labor. and warhead {except depreciation) . . . . . . . . . 100.000
Dopraciattononnewrguipmont 50.000
Seiiirigandadmtntstrativeoxpensas 31500
Totaicostsandexpenses 287.500
Incomew-res 16.250
Netincorne 5 I5-L150
Required
Compute the { I] payback period and {2} accounting rate of return for this equiptnent. [Record answers as
percents, rounded to one decimal.)