Booker Jones

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1)Calculate the effect on the financial statements in Tables 1 and 2 if the accounting system were changed to incorporate the cost of barrels ($31.50 each) into the inventory accounts. a.What would pretax profit be in 1961?

Booker Jones “other operating costs” increased from 1960 to 1961 primarily because of the cost of the barrels used, the occupancy costs and the warehousing costs. This is understandable because Booker Jones decided to increase production which would require 20,000 more barrels. If the cost of barrels is $31.50, then these 20,000 barrels would have cost $630,000. This is precisely why the cost of barrels used went up from 1960 to 1961. If these barrels were not considered an “Other Operating Cost” but instead were considered to be inventory as an asset. It would be taken off the income statement and would only be put back on when the whisky was sold years later. Then, the barrels would be a cost of whisky sold rather than “other operating costs”. As a result of taking this off the income statement, the net profit before tax would be $630k-407k = $223k.

b.If the change were made retroactively as of July 1, 1959 (by adding the cost of barrels to all whiskey in inventory), what would be the effect on i.The balance sheet at the end of 1960?

If the change were made retroactively in 1959, then the 1960 balance sheet would look different. Basically, the balance sheet in 1959 wouldn’t show any inventory for barrels while the 1960 balance sheet would account for all the barrels in inventory. As of July 31, 1959 the number of barrels of whisky were 172,000 at a cost of $31.5 for a total inventory of $5.4M. Therefore, the 1960 balance sheet would see inventory go up by $5.4M. Since this asset class would go up with no corresponding increase in liabilities, shareholders equity would increase by the same amount.

ii.The balance sheet at the end of 1961?

In 1961, as discussed, Booker Jones would increase the number of...
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