Question 1: Describe the cardinal facets of Manufactured Homes’ concern. Does the company have a feasible concern?

•Manufactured Homes sells low-cost to the full furnished and carpeted nomadic places in the sou’-east of the United States of America. These Potential clients for Manufactured Homes include persons seeking a single-family primary abode but missing the ability to buy conventional lodging. retired persons. and those desiring a 2nd place for holiday intents. The company targets persons in the low-income class. which is a section of the manufactured places market in the company’s seven province country. The company’s clients are typically between the ages of 18 and 40. blue-collar workers in fabrication. service and agricultural industries. and earned about $ 20. 000 per twelvemonth. The company believes that its focal point on the lower terminal of the market has two advantages. First. since its clients are seeking to carry through an indispensable lodging demand. gross revenues are less affected by alterations in general economic conditions. Second. the company’s repossession rates are significantly lower than those of the industry since its clients are likely to work really hard to maintain their primary abodes even when times are bad.

•Most of Manufactured Homes’ gross revenues are recognition gross revenues where the client pays a down payment and enters into an installment gross revenues contract with the company to pay the staying sum over periods runing from 84 to 180 months. Manufactured Homes sells the bulk of this contracts to fiscal establishments. •The manufactured places industry is fragmented. There are about 10. 000 manufactured place retail merchants throughout the state. most of which autumn into the class of ‘’mom and pop’’ operations. The industry is undergoing a period of passage and consolidation. More and more of the smaller houses. lacking volume purchasing power and equal capitalisation. are vanishing of going a portion of a larger company.

The industry has ever been competitory coach has become more so in recent old ages. The go oning additions in the mean monetary value of conventional lodging have forced low-income households to seek other options. And more and more are turning to manufactured places. •I believe that the company has a feasible concern for several grounds. First. because the company focuses on the lower terminal of the market. and as stated above. this section is seeking options for conventional lodging. Second. because larger companies like Manufactured places have the fiscal advantages of volume purchasing. and that is why independent traders are actively seeking a working relationship with Manufactured Homes. Third. because Manufactured Homes’ grosss increases quickly in recent old ages. from $ 11 million in 1983 to $ 120 million in 1986.

Question 2: Describe and demo the diary entries exemplifying how the company accounts for its place gross revenues. Is this accounting intervention sensible? What are the cardinal premises made under this attack? Do you hold with these premises?

•Most of Manufactured Homes’ gross revenues are recognition gross revenues where the client pays a down payment ( of 5 to 10 per centum of the gross revenues monetary value ) and enters into an installment gross revenues contract with the company to pay the staying sum over periods runing from 84 to 180 months. •The journal entries are:

Dr. Accounts receivable
Dr. Cash
Cr. Net gross revenues
Dr. Cost of gross revenues
Cr. Inventories

•A sale is recognized when payment is received or. in the instance of recognition gross revenues. when a down payment ( by and large 10 % of the gross revenues monetary value ) is received and the company and the client enter into an installment contract. Installment contracts are usually collectible over periods runing from 120 to 180 months. •I believe this is aggressive type of gross acknowledgment. because all gross from the gross revenues is recognized when a client enters into an installment contract with the company. Therefore I don’t believe this accounting intervention is sensible. In this instance the aggregation of receivables involves a high degree or hazard and hence I believe that the company must postpone the acknowledgment of gross.

Question 3: Describe and demo the diary entries exemplifying how the company accounts for the transportation of its histories receivable to fiscal establishments. Is this accounting intervention sensible? What are the cardinal premises made under this attack? Do you hold with these premises?

•The company sells the bulk of its retail intstallment contracts to unrelated fiscal establishments on a recourse footing at an in agreement upon involvement rate which is below the contractual involvement rate of the installment contract. Under this understanding. Manufactured Homes is responsible for payment to the fiscal establishment if the client fails to do the payments specified in the installment contract. •At the clip of the sale. the company receives immediate payment for the stated chief sum of the installment contract and a part of the finance engagement ensuing from the involvement rate derived function. The balance of the involvement rate derived function is retained by the fiscal establishment as a security against recognition losingss and is paid to the company in proportion to client payments received by the fiscal establishment. •The journal entries are:

Dr. Cash
Cr. Histories receivable
Dr. Cash
Dr. Finance engagement receivable
Cr. Finance engagement income

•The company histories for these minutess as gross revenues in conformity with Statement of Financial Accounting Standards No. 77. ‘’Reporting by Transferors for Transportations of Receivables with Recourse’’ . Therefore I believe that this accounting intervention is sensible. Transportations of receivables that are capable to recourse must be reported as gross revenues if the undermentioned three conditions are satisfied: ( 1 ) The marketer unambiguously surrenders the receivable to the purchaser. ( 2 ) The seller’s staying duties to the purchaser under the recourse proviso must be capable to sensible appraisal on the day of the month of the transportation of the receivable. For this intent. the marketer should be able to gauge: ( a ) the sum of bad debts and related costs of aggregation and repossession. and ( B ) the sum of prepayments. If the marketer can non do these estimations moderately good. a transportation of the receivable can non be reported as a sale. And ( 3 ) the marketer can non be required to buy the receivable from the purchaser except in conformity with the resort proviso. If any of the above conditions is non satisfied. the marketer of the receivable must describe the returns from the transportation as a loan against the receivable. •The company recognizes finance engagement income equal to the difference between the contractual involvement rates of the installment contracts and the agreed upon rates to the fiscal establishments ; the part retained by the fiscal establishments is discounted for estimated clip of aggregation and carried at its present value.

Question 4: The company’s income statement shows that it has two beginnings of net incomes: place gross revenues and finance engagement income. What is the gross border ( gross net income ratio ) in each of these two countries presuming that the costs associating to finance participation income are non material? What do these ratios Tell you about the importance of each to the company’s reported net incomes?

•Gross net income is defined as the difference between Gross saless and Cost of Gross saless. The gross border ( or gross net income ratio ) expresses the gross net income as a proportion of net gross revenues. The gross net income border ratio measures how expeditiously a company uses its resources. stuffs. and labor in the production procedure by demoing the per centum of net gross revenues staying after deducting the cost of doing and selling a merchandise or service. It indicates the profitableness of a concern before operating expense costs. The higher the per centum. the more the concern retains of each dollar of gross revenues. So: the higher the gross net income border ratio. the better.

•The ground for the high gross net income ratio for the finance engagement income is that there are small to no costs associating to this income. The sum of gross net income for the place gross revenues is higher than the gross net income for the finance engagement income. These ratios tell you. that the involvement rate ‘‘spread’’ is more profitable than the sale of places. Therefore. the income from the finance engagement is really of import for the company.

Question 5: Manufactured Homes significantly increased its proviso for losingss on recognition gross revenues. ( See Note 7. on page 209 of the instance ) What economic factors underlie this addition? Do you believe the company has been able to gauge the losingss on recognition gross revenues on a timely footing?

•During the first three quarters of 1986. the proviso for recognition losingss was about 1 % of net gross revenues. Due to recent 4th one-fourth charges. direction increased the proviso for losingss for 1987 to 1? % of net gross revenues as a precautional step against future repossession and early pay-off. •There are several economic factors that underlie the recent 4th one-fourth charges. First. the industry of manufactured lodging has been significantly impacted by the slow economic growing of the economic system coupled with an drawn-out period of low involvement rates. These factors are reflected by a year-to-year lessening in 1986 of 15 % in manufactured places sold throughout the company’s market country.

Besides. in late 1986. the prepayments of place mortgages became a recognized concern. Prepayment mortgages caused direction to reassess certain premises ensuing in a important addition in the modesty for recognition losingss. And eventually. during the 4th one-fourth of 1986. about $ 2. 000. 000 of repossession disbursal and involvement chargebacks were experienced and charged away. One of the causes of the $ 2. 000. 000 charge was the refusal of some unrelated fiscal establishments to refinance the repossession that occurred in their portfolio. and a 2nd cause was that the company had to finance them through MANH Financial Services thereby holding an immediate charge in finance engagement on the pay-off and non acknowledging the finance engagement income of the resale. Therefore. a charge to net incomes for both prepayments and repossessions was made and the modesty for recognition losingss was increased to $ 3. 000. 000 at December 31. 1986. •I think that the company has been able to gauge the losingss on recognition gross revenues on a timely footing. because the estimated losingss are based on historical loss experience and current economic conditions.

Question 6: What is the entire sum of receivables ‘’sold’’ by Manufactured Homes for which the company has a contingent liability in instance of default? If the hard currency from the sale of these receivables was recorded as debt ( instead than as a decrease of receivables ) . what would be the company’s debt to equity ratio? How does it compare with the debt to equity ratio calculated from the company’s reported Numberss? Which ratio better reflects the company’s fiscal hazard?

Contract returns receivable from fiscal establishments $ 11. 496. 078 Net finance engagement receivable – current portion1. 889. 986 Net finance engagement receivable – noncurrent portion12. 205. 621 Entire sum of receivables ‘‘sold’’25. 591. 685

If the hard currency from the sale of these receivables was recorded as debt. the debt to equity ratio is:

Entire liabilities $ 78. 706. 762
[ $ 67. 210. 684 + $ 11. 496. 078 ]
Entire shareholders’ equity 14. 167. 119

Debt to equity ratio5. 56

Debt to equity ratio calculated from the company’s reported Numberss:
1986
Entire liabilities $ 67. 210. 684
Entire shareholders’ equity14. 167. 119

Debt to equity ratio4. 74
[ $ 67. 210. 684 ? $ 14. 167. 119 ]

•When the hard currency from the sale of the receivables is recorded as debt ( instead than as a decrease of receivables ) . the company’s debt to equity ratio is higher compared to the debt to equity ratio calculated from the company’s reported Numberss. The first ratio reflects the company’s fiscal hazard better. because the company besides bears hazard for these ‘sold’ receivables.