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Question #1
a) A company estimates that its total cost to send out invoices, receive
payments, deposit the
payments, and update accounting records was \$10 per sale in 2014. In 2014,
there were
10,000 sales and fixed costs of \$60,000. In 2015, the company expects total
fixed costs
and variable costs per unit to be the same as in 2014. If the company budgets
10,500 sales
in 2015, what are the expected total costs and expected costs per unit for
2015?
b) Assume the same facts as in part a, except the company expects 9,500 sales
in 2015.
What are the expected total costs and expected costs per unit for 2015?
Question #2
a) A company estimates that its total cost to acquire materials, set up
machines, and produce
products is \$25 per unit produced in 2014. In 2014, there were 50,000 units
produced and
variable costs per unit produced totaled \$15. In 2015, the company expects
total fixed
costs and variable costs per unit to be the same as in 2014. If the company
budgets to
produce 52,000 units in 2015, what are the expected total costs and expected
costs per
unit for 2015?
b) Assume the same facts as in part a, except the company expects to produce
49,000 units
in 2015. What are the expected total costs and expected costs per unit for
2015?
Question #3
The Bear Company collected the following monthly information on units produced
and
electricity costs:
Month
January
February
March
April
May
June

Units Produced
50,000
48,000
47,000
54,000
58,000
53,000

Electricity Costs
\$78,000
\$74,500
\$72,000
\$81,000
\$86,000
\$79,500

Using the high-low method, prepare an estimate of electricity costs for July,
assuming 53,500
units are expected to be produced in July.

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# accounting problems

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# accounting problems

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Problem 5-1:
Your Company, Inc. has determined that its planned production for the upcoming
fiscal year is:
Units
to be produced; First Quarter = 6,000
Second
Quarter = 7,000
Third
Quarter = 5,000
Fourth
Quarter = 4,000
Beginning raw materials inventory for the first quarter is 2,400 pounds.
Beginning accounts payable for the first quarter is \$2,520. Each unit requires
4 pounds of raw material that costs \$0.70 per pound. Management desires to end
each quarter with an inventory equal to 10% of the following quarterâ€™s
production needs. The desired ending inventory for the fourth is 2,600 pounds.
Management plans to pay 80% of the raw material purchases in the quarter
acquired and 20% in the following quarter. Each unit requires 0.70 direct labor
hours and the labor rate is \$16.00 per hour.

Required:
1] Prepare the companyâ€™s direct
materials budget and schedule of expected cash disbursements for purchases of
raw materials for the upcoming fiscal year.
2] Prepare the companyâ€™s direct labor
budget for the upcoming fiscal year, assuming that the direct labor workforce
is adjusted each quarter to match the number of hours required to produce the
forecasted number of units produced.

Problem 5-2:
My Company, Inc. has determined that its planned production for the upcoming
fiscal year is:
Units
to be produced: First Quarter
= 6,000
Second
Quarter = 7,000
Third
Quarter = 6,500
Fourth
Quarter = 5,500
Each unit requires 1.4 direct labor hours and workers are paid \$12.50 per hour.
The variable manufacturing overhead rate is \$0.75 per direct labor hour. The
fixed manufacturing overhead is \$90,000 per quarter. The only non-cash element
of manufacturing overhead is depreciation, which is \$20,000 per quarter. All labor
costs and manufacturing overhead is paid in the quarter incurred.

Required:
1] Prepare the companyâ€™s direct labor
budget for the upcoming fiscal year, assuming that the direct labor work force
is adjusted each quarter to match the number of hours required to produce the
forecasted number of units produced.
2] Prepare the companyâ€™s manufacturing

Problem 5-3:
You will be required to prepare a December cash budget. You are provided with
the following information:
a] Cash balance on December 1 is
\$60,000.
b] Actual sales for October and
November and expected sales for December are as follows:
October November December
Cash
sales \$95,000 \$105,000 \$125,000
Sales
on account \$600,000 \$785,000 \$900,000
Sales on account are collected over
a three month period as follows:
Month
of sale: 15%
Month
following sale: 60%
Second month following sale: 20%
Five percent of sales on account
are uncollectible.
c] Purchases of inventory for December
will total \$420,000. Forty percent of a monthâ€™s inventory purchases are paid in
the month of purchase. The accounts payable remaining from November inventory
purchases total \$205,000, all of which will be paid in December.
are budgeted at \$440,000 for December; of this amount \$50,000 is for
depreciation.
e] A new machine will be purchased for
cash, in December, at a cost of \$205,000; dividends totaling \$25,000 will be
paid in December.
f] The company maintains a minimum
cash balance of \$60,000. An open line of credit is available from the companyâ€™s
bank to bolster the cash position as needed.

Required:
1] Prepare a schedule of cash
collections for December.
2] Prepare a schedule of cash
disbursements for merchandise purchases for December.
3] Prepare a cash budget for December.
Indicate in the financing section any borrowing that will be needed during the
month. Assume that no interest payments are due or will be paid before January.

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# accounting problems

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Problem 1
Your Company, Inc. manufactures widgets. The company has not been meeting its
projected net operating income. The contribution income statement for the month
of April is shown below:
Budgeted Actual
Sales (20,000) \$600,000 \$600,000
Variable expenses
Variable
cost of goods sold1 240,000 261,122
Variable
selling expense 27,000 27,000
Total variable expenses 267,000 288,122
Contribution margin 333,000 311,878
Fixed expenses
Manufacturing
Selling
Total fixed expense 287,000 287,000
Net operating income \$ 46,000 \$ 24,878

Based upon a review of the income statement, upper management has determined
the major problem lies with variable cost of goods sold. The standard cost per
widget is:
Standard
Quantity Standard Price Standard
or hours or rate cost
Direct Materials 3.0 pounds \$2.00/lb. \$6.00
Direct Labor 0.8 hour \$6.00/hr. 4.80
Variable Manufacturing Overhead 0.4 hour2 \$3.00/hr. 1.20
Total Standard Cost \$12.00

1Contains direct material, direct labor, and variable manufacturing
2Based on machine hours.

Given: During the month of April:
a] 20,000 units were produced.
b] 65,000 pounds of material was
purchased at a cost of \$1.90 per pound.
c] 65,000 pounds of material was
usedâ€”there were no beginning or ending inventories.
d] 15,730 direct labor hours were
worked at a cost of \$7.20 per hour.
e] \$24,366 of variable manufacturing
costs was incurred. A total of 7,860 machine hours was recorded. It is the
policy to close all variances to cost of goods sold on a monthly basis.

Required:
1] Compute the following for the month
of April:
a)
Direct materials price and quantity variances,
b)
Direct labor rate and efficiency variances, and
c)
Variable overhead rate and efficiency variances.
2] Summarize the variances that you
computed by showing the net favorable or unfavorable variance for the month.
What impact did this figure have on the companyâ€™s income statement? Please show
3] Pick out the two most significant
variances that you computed.

Problem 2
My Company, Inc. produces table cloths. The company has a standard cost system
in use for its table cloths. The plant should work 3,000 hours to produce 2,000
type â€œAâ€ table cloths. The standard costs for type â€œAâ€ table cloths are:
Total Per table cloth
Direct
materials \$89,600 \$44.80
Direct
labor \$18,000
9.00
Variable
(based on direct labor hours) \$ 7,500 3.75
Total \$57.55
During the month of April, the plant worked only 2,850 direct labor hours and
produced 2,200 type â€œAâ€ table cloths. The following actual costs were recorded
in April:
Total Per table cloth
Direct
materials (12,010 yards) \$95,480 \$43.40
Direct
labor \$18,525
8.42
Variable
3.50
At standard, each table cloth should require 5.6 yards of material. All of the
materials purchased during the month were used in production.

Required:
Compute the following for the month of April (ignore rounding errors):
1] The direct materials price and
quantity variances,
2] The direct labor rate and
efficiency variances, and
3] The variable overhead rate and
efficiency variances.

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1.(TCO F) Wahr Corporation bases its predetermined overhead rate on the estimated labor hours for the

upcoming year. At the beginning of the most recently completed year, the company estimated the labor
hours for the upcoming year at 32,000. The estimated variable manufacturing overhead was \$7.17 per
labor hour and the estimated total fixed manufacturing overhead was \$584,320. The actual labor hours for
the year turned out to be 33,300.
Required:
Compute the company’s predetermined overhead rate for the recently completed year.

2.(TCO C) Enciso Corporation is preparing its cash budget for November. The budgeted beginning cash

balance is \$31,000. Budgeted cash receipts total \$135,000 and budgeted cash disbursements total
\$141,000. The desired ending cash balance is \$50,000. The company can borrow up to \$100,000 at any
time from a local bank, with interest not due until the following month.
Required:
Prepare the company’s cash budget for November in good form.

ActualcostsStatic
Incurredbudget
Activitylevel(inunits)800750
Variablecosts:
Indirectmaterials\$6,850\$6,600
Electricity\$1,312\$1,275
Fixedcosts:
Rent\$3,320\$3,200
Required:Constructaflexiblebudgetperformancereportthatwouldbeusefulinassessinghowwellcosts
werecontrolledinthisdepartment.

2.(TCOD)LindonCompanyuses5,000unitsofPartXeachyearasacomponentintheassemblyofone

ofitsproducts.ThecompanyispresentlyproducingPartXinternallyatatotalcostof\$80,000asfollows:
Directmaterials………………………………………..\$18,000
Directlabor………………………………………………20,000
Totalcosts……………………………………………….80,000
AnoutsidesupplierhasofferedtoprovidePartXatapriceof\$13perunit.IfLindonstopsproducingthe
theoutsidesupplier’soffer.

3.(TCOE)HanksCompanyproducesasingleproduct.Operatingdataforthecompanyanditsabsorption

costingincomestatementforthelastyearispresentedbelow.

Unitsinbeginninginventory……………………………..0
Unitsproduced………………………………………..9,000
Unitssold………………………………………………8,000
Sales…………………………………………………\$80,000
Lesscostofgoodssold:
Beginninginventory……………………………………….0
Goodsavailableforsale………………………….54,000
Lessendinginventory………………………………6,000
Costofgoodssold………………………………..48,000
Grossmargin……………………………………….32,000
Netoperatingincome…………………………..\$ 4,000

unitsold.
Required:Prepareanewincomestatementfortheyearusingvariablecosting.Commentonthe
differencesbetweentheabsorptioncostingandthevariablecostingincomestatements.

4.(TCOA)Thefollowingdata(inthousandsofdollars)havebeentakenfromtheaccountingrecordsof

KarmanaCorporationforthejustcompletedyear.

Sales……………………………………………………….\$950
Rawmaterialsinventory,beginning………………….\$10
Rawmaterialsinventory,ending……………………..\$30
Purchasesofrawmaterials………………………….\$120
Directlabor………………………………………………\$180
Sellingexpenses………………………………………..\$140
Workinprocessinventory,beginning………………\$70
Workinprocessinventory,ending………………….\$40
Finishedgoodsinventory,beginning………………\$100
Finishedgoodsinventory,ending……………………\$80

Usethesedatatoprepare(inthousandsofdollars)ascheduleofCostofGoodsManufacturedanda
schedulesastheyrelatetotheflowofproductcostsinamanufacturingcompany.
1.(TCOF)LoxhamCorporationusestheweightedaveragemethodinitsprocesscostingsystem.Data

concerningthefirstprocessingdepartmentforthemostrecentmontharelistedbelow:
Workinprocess,beginning:
Unitsinbeginningworkinprocessinventory400
Materialscosts\$6,900
Conversioncosts\$2,500
Percentcompleteformaterials80%
Percentcompleteforconversion15%
Unitsstartedintoproductionduringthemonth6,000
Unitstransferredtothenextdepartmentduringthemonth5,400

Endingworkinprocess:
Unitsinendingworkinprocessinventory1,000
Percentagecompleteformaterials80%
Percentagecompleteforconversion30%

Required:Calculatetheequivalentunitsformaterialsforthemonthinthefirstprocessingdepartment.

2.(TCO B) Heckaman Corporation produces and sells a single product. Data concerning that product

appear below.
Sellingpriceperunit
Variableexpenseperunit
Fixedexpensepermonth

\$230.00
\$112.70
\$239,292

Required:
Determine the monthly break-even in unit sales. Show your work!

3.(TCOG)(Ignore income taxes in this problem.) Bill Anders retires in 8 years. He has \$650,000 to

invest and is considering a franchise for a fast food outlet. He would have to purchase equipment costing
\$500,000 to equip the outlet and invest an additional \$150,000 for inventories and other working capital
needs. Other outlets in the fast food chain have an annual net cash inflow of about \$160,000. Mr. Anders
would close the outlet in 8 years. He estimates that the equipment could be sold at that time for about
10% of its original cost. Mr. Anders’ required rate of return is 16%.
Required:
Part A: What is the investment’s net present value when the discount rate is 16%?
Part B: Refer to your calculations. Is this an acceptable investment? Why or why not?

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# Accounting problems

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1.)
Omega Company pays its employees twice a month, on the 7th
and the 21st. On June 21, Omega Company paid employee salaries of
\$4,000. This transaction would

 increase owner’s equity by \$4,000.

 be recorded by a \$4,000 debit to Salaries Payable and a \$4,000 credit to Salaries Expense.

 decrease the balance in Salaries Expense by \$4,000.

 decrease net income for the month by \$4,000.

2.)
On August 13, 2010, Merrill Enterprises purchased office equipment
for \$1,000 and office supplies of \$200 on account. Which of the following
journal entries is recorded correctly and in the standard format?

 Office Equipment 1000 Account Payable 1,200 Office Supplies 200

 Office Equipment 1,000 Office Supplies 200 Accounts Payable 1,200

 Accounts Payable 1,200 Office Equipment 1,000 Office Supplies 200

 Office Equipment 1,000 Office Supplies 200 Accounts Payable 1,200

3.)
Adjusting entries are not necessary if the trial balance debit and
credit columns balances are equal.

 True

 False

4.)
The book value of a depreciable asset is always equal to its
market value because depreciation is a valuation technique.

 True

 False

5.)
The time period assumption is also referred to as the

 cyclicity assumption.

 calendar assumption.

 periodicity assumption.

 fiscal assumption

6.)
Adjusting entries can be classified as

 accruals and deferrals.

 deferrals and postponements.

7.)
Bee-In-The-Bonnet Company purchased office supplies costing \$6,000
and debited Office Supplies for the full amount. At the end of the accounting
period, a physical count of office supplies revealed \$2,400 still on hand. The
appropriate adjusting journal entry to be made at the end of the period would
be

 Debit Office Supplies, \$2,400; Credit Office Supplies Expense, \$2,400.

 Debit Office Supplies Expense, \$3,600; Credit Office Supplies, \$3,600.

 Debit Office Supplies Expense, \$2,400; Credit Office Supplies, \$2,400.

 Debit Office Supplies, \$3,600; Credit Office Supplies Expense, \$3,600.

8.)
The balance in the Prepaid Rent account before adjustment at the
end of the year is \$15,000, which represents three months’ rent paid on
December1. The adjusting entry required on December 31 is to

 debit Rent Expense, \$5,000; credit Prepaid Rent, \$5,000.

 debit Rent Expense, \$10,000; credit Prepaid Rent \$10,000.

 debit Prepaid Rent, \$10,000; credit Rent Expense, \$10,000.

 debit Prepaid Rent, \$5,000; credit Rent Expense, \$5,000.

9.)
The income statement and balance sheet columns of Reed Company’s
worksheet reflect the following totals:

 Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals \$58,000 \$48,000 \$34,000 \$44,000

The net income (or loss) for the period is

 \$48,000 income.

 \$10,000 income.

 not determinable.

 \$10,000 loss.

10.) The income statement and
balance sheet columns of Reed Company’s worksheet reflect the following totals:

 Income Statement Balance Sheet Dr. Cr. Dr. Cr. Totals \$58,000 \$48,000 \$34,000 \$44,000

To enter the net income (or loss) for the period into the above worksheet
requires an entry to the

 income statement debit column and the income statement credit column.

 income statement debit column and the balance sheet credit column.

 income statement credit column and the balance sheet debit column.

 balance sheet debit column and the balance sheet credit column.

11.) The income statement for
the month of June, 2010 of Ramirez Enterprises contains the following
information:

 Revenues \$7,000 Expenses: Wages Expense \$2,000 Rent Expense 1,000 Supplies Expense 300 Advertising Expense 200 Insurance Expense 100 Total expenses 3,600 Net income \$3,400

The entry to close the revenue account includes a

 credit to Income Summary for \$7,000.

 debit to Income Summary for \$3,400.

 credit to Income Summary for \$3,400.

 debit to Income Summary for \$7,000.

12.) The income statement for
the month of June, 2010 of Ramirez Enterprises contains the following
information:

 Revenues \$7,000 Expenses: Wages Expense \$2,000 Rent Expense 1,000 Supplies Expense 300 Advertising Expense 200 Insurance Expense 100 Total expenses 3,600 Net income \$3,400

The entry to close the expense accounts includes a

 debit to Wages Expense for \$2,000.

 debit to Income Summary for \$3,400.

 credit to Rent Expense for \$1,000.

 credit to Income Summary for \$3,600.

13.) The income statement for
the month of June, 2010 of Ramirez Enterprises contains the following
information:

 Revenues \$7,000 Expenses: Wages Expense \$2,000 Rent Expense 1,000 Supplies Expense 300 Advertising Expense 200 Insurance Expense 100 Total expenses 3,600 Net income \$3,400

The entry to close Income Summary to Ramirez, Capital includes

 a credit to Income Summary for \$3,400.

 a credit to Ramirez, Capital for \$3,400.

 credits to Expenses totalling \$3,600.

 a debit to Revenue for \$7,000.

14.) The income statement for
the year 2010 of Poole Co. contains the following information:

 Revenues \$70,000 Expenses: Wages Expense \$45,000 Rent Expense 12,000 Advertising Expense 6,000 Supplies Expense 6,000 Utilities Expense 2,500 Insurance Expense 2,000 Total expenses 73,500 Net income (loss) \$(3,500)

The entry to close the revenue account includes a

 credit to Revenues for \$70,000.

 credit to Income Summary for \$3,500.

 debit to Revenues for \$70,000.

 debit to Income Summary for \$3,500.

15.)The income statement for
the year 2010 of Poole Co. contains the following information:

 Revenues \$70,000 Expenses: Wages Expense \$45,000 Rent Expense 12,000 Advertising Expense 6,000 Supplies Expense 6,000 Utilities Expense 2,500 Insurance Expense 2,000 Total expenses 73,500 Net income (loss) \$(3,500)

The entry to close the expense accounts includes a

 debit to Wages Expense for \$2,500.

 credit to Income Summary for \$3,500.

 debit to Income Summary for \$3,500.

 debit to Income Summary for \$73,500.

16.) The income statement for
the year 2010 of Poole Co. contains the following information:

 Revenues \$70,000 Expenses: Wages Expense \$45,000 Rent Expense 12,000 Advertising Expense 6,000 Supplies Expense 6,000 Utilities Expense 2,500 Insurance Expense 2,000 Total expenses 73,500 Net income (loss) \$(3,500)

The entry to close Income Summary to Poole, Capital includes

 a credit to Income Summary for \$3,500.

 credits to Expenses totalling \$73,500.

 a credit to Poole, Capital for \$3,500.

 a debit to Revenue for \$70,000.

17.) Geran Company purchased
merchandise inventory with an invoice price of \$5,000 and credit terms of 2/10,
n/30. What is the net cost of the goods if Geran Company pays within the
discount period?

 \$4,900

 \$4,600

 \$4,500

 \$5,000

18.) Reese Company purchased
merchandise with an invoice price of \$2,000 and credit terms of 2/10, n/30.
Assuming a 360 day year, what is the implied annual interest rate inherent in
the credit terms?

 24%

 20%

 36%

 72%

19.) Rasner Co. returned
defective goods costing \$3,000 to Markum Company on April 19, for credit. The
goods were purchased March 10, on credit, terms 3/10, n/30. The entry by Rasner
Co. on April 19, in receiving full credit is:

 Accounts Payable 3,000 Merchandise Inventory 3,000

 Accounts Payable 3,000 Merchandise Inventory 90 Cash 2,910

 Accounts Payable 3,000 Purchase Discounts 90 Merchandise Inventory 2,910

 Accounts Payable 3,000 Merchandise Inventory 90 Cash 3,090

purchase of merchandise on credit from Underwood Company on August 8, for
\$9,000, terms 3/10, n/30. On August 17, Mather makes the appropriate payment to
Underwood. The entry on August 17 for Mather Company is:

 Accounts Payable 9,000 Merchandise Inventory 270 Cash 8,730

 Accounts Payable 9,000 Purchase Returns and Allowances 270 Cash 8,730

 Accounts Payable 9,000 Cash 9,000

 Accounts Payable 8,730 Cash 8,730

21.) On November 2, 2010,
Griffey Company has cash sales of \$4,200 from merchandise having a cost of
\$3,000. The entries to record the day’s cash sales will include:

 a \$4,200 credit to Cash.

 a \$3,000 credit to Cost of Goods Sold.

 a \$3,000 credit to Merchandise Inventory.

 a \$4,200 debit to Accounts Receivable.

22.) In a perpetual inventory
system, the Cost of Goods Sold account is used

 only when a cash sale of merchandise occurs.

 only when a credit sale of merchandise occurs.

 whenever there is a sale of merchandise or a return of merchandise sold.

 only when a sale of merchandise occurs.

23.) As a result of a
thorough physical inventory, Hastings Company determined that it had inventory
worth \$270,000 at December 31, 2010. This count did not take into consideration
the following facts: Carlin Consignment store currently has goods worth \$52,000
on its sales floor that belong to Hastings but are being sold on consignment by
Carlin. The selling price of these goods is \$75,000. Hastings purchased \$20,000
of goods that were shipped on December 27. FOB destination, that will be
received by Hastings on January 3. Determine the correct amount of inventory
that Hastings should report.

 \$290,000.

 \$345,000.

 \$322,000.

 \$342,000.

500 units on hand at January 1, costing \$18 each. Purchases and sales during
the month of January were as follows:

 Date Purchases Sales Jan. 14 375 @ \$28 17 250 @ \$20 25 250 @ \$22 29 250 @ \$32

Kershaw does not maintain perpetual inventory records. According to a physical
count, 375 units were on hand at January 31.

The cost of the inventory at January 31, under the LIFO method is:

 \$6,750.

 \$8,000.

 \$7,750.

 \$1,000.

25.) Ted’s Used Cars uses the
specific identification method of costing inventory. During March, Ted
purchased three cars for \$6,000, \$7,500, and \$9,750, respectively. During
March, two cars are sold for \$9,000 each. Ted determines that at March 31, the
\$9,750 car is still on hand. What is Ted’s gross profit for March?

 \$5,250.

 \$4,500.

 \$750.

 \$8,250.

26.) The cost of goods
available for sale is allocated to the cost of goods sold and the

 beginning inventory.

 cost of goods purchased.

 gross profit.

 ending inventory.

27.) Richmond’s Wholesale
uses a sales journal. An entry in this journal represents a

 debit to Cash; credit to Sales.

 debit to Sales Discounts; credit to Cash.

 debit to Accounts Payable; credit to Sales Returns and Allowances.

 debit to Accounts Receivable; credit to Sales.

28.) The process of totaling
the columns of a journal is termed

 footing.

 sizing.

 columnizing.

 ruling.

29.) Which of the following
would not be an appropriate heading for a column in the cash receipts
journal?

 Cash

 Sales Discounts

 Sales

 Accounts Payable

30.) If a company uses a
multi-column purchases journal, which of the following possible headings for
debit columns of the journal would not be appropriate?

 Store Supplies

 Merchandise Inventory

 Office Supplies

 Accounts Payable

31.) Which of the following
statements is incorrect?

 When an accounting system is designed, no consideration needs to be given to the needs and knowledge of the various users.

 A major consideration in developing an accounting system is cost effectiveness.

 The accounting system should be able to accommodate a variety of users and changing information needs.

 To be useful, information must be understandable, relevant, reliable, timely, and accurate.

32.) A highly automated
computerized system of accounting eliminates the need for internal control.

 False

 True

33.) In order to prevent a
transaction from being recorded more than once, a company should maintain only
one book of original entry.

 True

 False

34.) A \$100 petty cash fund
has cash of \$15 and receipts of \$80. The journal entry to replenish the account
would include a credit to

 Cash for \$80.

 Cash for \$85.

 Petty Cash for \$85.

 Cash Over and Short for \$5.

35.) A \$100 petty cash fund
has cash of \$18 and receipts of \$86. The journal entry to replenish the account
would include a

 credit to Petty Cash for \$86.

 credit to Cash Over and Short for \$4.

 credit to Cash for \$86.

 debit to Cash for \$86.

36.) A customer charges a
treadmill at Mike’s Sport Shop. The price is \$2,000 and the financing charge is
9% per annum if the bill is not paid in 30 days. The customer fails to pay the
bill within 30 days and a finance charge is added to the customer’s account.

What is the amount of the finance charge?

 \$6

 \$60

 \$15

 \$180

37.) Wright sells softball
equipment. On November 14, they shipped \$1,000 worth of softball uniforms to
Paola Middle School, terms 2/10, n/30. On November 21, they received an order
from Douglas High School for \$600 worth of custom printed bats to be produced in
December. On November 30, Paola Middle School returned \$100 of defective
merchandise. Wright has received no payments from either school as of month
end. What amount will be recognized as net accounts receivable on the balance
sheet as of November 30?

 \$900

 \$1,500

 \$1,600

 \$1,000

38.) An aging of a company’s
accounts receivable indicates that \$9,000 are estimated to be uncollectible. If
Allowance for Doubtful Accounts has a \$1,100 credit balance, the adjustment to
record bad debts for the period will require a

 credit to Allowance for Doubtful Accounts for \$9,000.

 debit to Bad Debts Expense for \$9,000.

 debit to Bad Debts Expense for \$7,900.

 debit to Allowance for Doubtful Accounts for \$7,900.

39.) During 2010, Hitchcock
Inc. had sales on account of \$132,000, cash sales of \$54,000, and collections
on account of \$84,000. In addition, they collected \$1,450 which had been
written off as uncollectible in 2009. As a result of these transactions, the
change in the accounts receivable balance indicates a

 \$48,000 increase.

 \$100,550 increase.

 \$46,550 increase.

 \$102,000 increase.

40.) Black Company provides
for bad debts expense at the rate of 2% of credit sales. The following data are
available for 2010:

 Allowance for doubtful accounts, 1/1/10 (Cr.) \$10,500 Accounts written off as uncollectible during 2010 6,500 Credit sales in 2010 1,500,000

The Allowance for
Doubtful Accounts balance at December 31, 2010, should be:

 \$30,000

 \$34,000

 \$25,000

 \$6,500

41.) From a liquidity
standpoint, it is more desirable for a company to have current

 assets equal current liabilities.

 liabilities exceed long-term liabilities.

 liabilities exceed current assets.

 assets exceed current liabilities.

agrees to lend Givens Brick Company \$200,000 on January 1. Givens Brick Company
signs a \$200,000, 8%, 9-month note. The entry made by Givens Brick Company on
January 1 to record the proceeds and issuance of the note is

 Interest Expense 12,000 Cash 188,000 Notes Payable 200,000

 Cash 200,000 Interest Expense 12,000 Notes Payable 212,000

 Cash 200,000 Notes Payable 200,000

 Cash 200,000 Interest Expense 12,000 Notes Payable 200,000 Interest Payable 12,000

agrees to lend Givens Brick Company \$200,000 on January 1. Givens Brick Company
signs a \$200,000, 8%, 9-month note. What is the adjusting entry required if
Givens Brick Company prepares financial statements on June 30?

 Interest Expense 8,000 Interest Payable 8,000

 Interest Expense 8,000 Cash 8,000

 Interest Payable 8,000 Interest Expense 8,000

 Interest Payable 8,000 Cash 8,000

44.) On October 1, Steve’s
Carpet Service borrows \$250,000 from First National Bank on a 3-month,
\$250,000, 8% note. What entry must Steve’s Carpet Service make on December 31
before financial statements are prepared?

 Interest Expense 5,000 Notes Payable 5,000

 Interest Payable 5,000 Interest Expense 5,000

 Interest Expense 5,000 Interest Payable 5,000

 Interest Expense 20,000 Interest Payable 20,000

45.) The interest charged on
a \$50,000 note payable, at the rate of 8%, on a 3-month note would be

 \$667.

 \$1,000.

 \$4,000.

 \$2,000.

of which \$14 is for sales tax. The journal entry to record the sale would
include a

 debit to Sales Tax Expense for \$14.

 debit to Sales Tax Payable for \$14.

 debit to Cash for \$174.

 debit to Sales for \$174.

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## Description

L & M Partners Provides consulting services for a variety of clients. The company has two producing divisions, one for retail companies and one for industrial companies, and two services department, personal and administrative. Until now the company has not allocated service department cost. However L&M has decided to allocate these costs to the producing departments using an activity-based allocation system

More info. The retail division has activity 1 and activity 2 and the industrial division has activity 3, activity 4 and activity 5. The company has decided to allocate personal costs on the basis of number of employees and administrative on the basis of the direct cost of the activity in each division. However administrative services are provided only to activity 2 and 3, so no administrative costs are allocated to activities 1,4 and 5
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Number of PersonnelÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Direct cost
PersonelÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  7Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  \$90,000
administrativeÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  6Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  130,000
Retial:
Activity 1Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  65000
activity 2Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  16Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  210000
Industrial:
Activity 3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  17Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  300000
Activity 4Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  0Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  110000
Activity 5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  9Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  90000

Requirements:
1.Determine the cost allocated to the retail and industrial divisions using the direct method
2.Determine the costs allocated to the retail and industrial divisions using the step-down method. The personnel department cost should be allocated first

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# Accounting problems

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## Description

1.(20 pts.)

The Smith Inc.produces a special kind of clay
that is widely used by professional sports trainers. The clay is produced in
three processes: Refining, Blending, and Mixing. Raw materials are introduced
at the beginning of the refining process. A “mountain-air scent”
material is added in the blending process when processing is 50% completed.
The following Work-in-Process account for the Refining Department
is available for the month of July. The July 1 Work-in-Process Inventory
contains \$1,500 in material costs.

.png”>

The following Work-in-Process account for the Blending Department
is available for the month of July. The July 1 Work-in-Process inventory
contains \$5,920 in material costs, and \$1.56/unit in costs transferred in from
the Refining Department.

.png”>
Smith Inc. uses first-in, first-out (FIFO) costing for the
Refining Department and weighted-average costing for the Blending Department.
Required (use 4 decimal places
for computations):

Part 1: Refining Department
(a) Compute the equivalent units of production for July.
(b) Compute the material cost per unit and the conversion cost per
unit for July.
(c) Compute the costs transferred to the Blending Department for
July.
(d) Compute the July 31 Work-in-Process Inventory balance.
Part 2: Blending Department
(e) Compute the equivalent units of production.
(f) Compute the unit costs in the Blending Department for the
month of July. (HINT: There are three!!)
(g) Compute the costs transferred out for July.
(h) Compute the July 31 Work-in-Process Inventory balance.

2. (10
pts.)

William Corporation uses process costing. The following data
pertain to its Assembly Department for February.

.png”>

Required:

Determine the equivalent units of production for the Assembly
Department for February using the weighted-average method.

3. (20 pts.)

Max
Inc. is a manufacturer of boots. It produces all of its products in one
department. The information for the current month is as follows:

Beginning work in process 22,000
units

Units started 44,000
units

Units completed 55,000 units

Ending work in process 10,000
units

Spoilage 1,000
units

Beginning work-in-process direct materials \$15,000

Beginning work-in-process conversion \$ 6,000

Direct materials added during month \$70,800

Direct manufacturing labor during month \$37,400

Beginning
work in process was half complete as to conversion. Direct materials are added
at the beginning of the process. Factory overhead is applied at a rate equal to
50% of direct manufacturing labor. Ending work in process was 60% complete. All
spoilage is normal and is detected at end of the process.

Required:

Prepare a
production cost worksheet if spoilage is recognized and the weighted-average
method is used.

4. (10 pts.)

Johnston Incorporated manufactures and distributes small robotic tools.
Because most of its orders are via telephone or fax, numerous orders have to be
reworked. The average cost of the reworked orders is \$12.45: \$5 for labor,
\$5.15 for more materials, and \$2.30 for overhead. This ratio of costs holds for
the average original order. On a recent day, the shop reworked 80 orders out of
800. The original cost of the 80 orders totaled \$2,000. The average cost of all
orders is \$26.245, including rework, with an average selling price of \$35.

Required:

Prepare
the necessary journal entry to record the rework for the day if the shop charges
such activities to Johnston Department
Overhead Control. Prepare journal entries to record all relevant rework charges
as well as to transfer the reworked items finished goods to Finished Goods
Inventory.

5. (15
pts.)

Inc. has identified the following overhead costs and cost drivers for the
coming year:

.png”>

Budgeted direct labor cost was \$400,000 and budgeted direct
material cost was \$600,000. The following information was collected on three
jobs that were completed during the month:

.png”>

Required:

using direct labor cost, how much overhead cost should be assigned to Jobs 1,
2, and 3?
b. If the company uses activity-based costing (ABC), how much
overhead cost should be assigned to Jobs 1, 2, and 3?

6. (15 pts.)

Jason Company manufactures two models of
machinery, a standard and a deluxe model. The following activity and cost
information has been compiled:

.png”>

based on direct labor hours.

Required:

a. What is the total amount of overhead costs assigned to the
standard model?
b. What is the total amount of overhead costs assigned to the
deluxe model?
Assume an activity-based costing system is used and that the
number of setups and the number of components are identified as the
c. What is the total amount of overhead costs assigned to the
standard model?
d. What is the total amount of overhead costs assigned to the
deluxe model?

7.(20 pts.)

Jones plans to sell 90,000 units of a
certain product line at a price of \$16. There are 7,500 units of the product in
the inventory at January 1 and the inventory is to be increased 15% during the
year.
Two types of materials are used to make the product. Three units
of Material A, each costing 40 cents, are required for each unit of product,
and two units of Material B, each costing 36 cents, are required for each unit
of product. On January 1, there are 10,000 units of Material A in inventory and
5,000 units of Material B. Plans for the year indicate both Material A and B
inventories will increase 10%.
Each unit of product can be produced in 20 minutes of direct labor
time. Direct labor is paid at the rate of \$12.00 an hour. The variable
manufacturing overhead varies at the rate of \$2.60 per direct labor hour and
the fixed manufacturing overhead for the year is estimated at \$175,000.

Required:

a. Prepare a production budget for the year.
b. Prepare a materials purchases budget for the year.
c. Prepare a labor cost budget for the year.
d. Prepare a budget for manufacturing overhead for the year.

8.
(10 pts.) Fran is working on its direct labor budget for the next two
months. Each unit of output requires 0.07 direct labor-hours. The direct labor
rate is \$8.50 per direct labor-hour. The production budget calls for producing
4,800 units in June and 5,300 units in July.

Required:

Construct the direct labor budget for the next two months,
assuming that the direct labor work force is fully adjusted to the total direct
labor-hours needed each month.

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# Accounting problems

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## Description

Problems
Section â€“
Show all work Questions 1 through 7

Problem

1. The following is a list of various costs of
producing sweatshirts. Classify each cost as either a variable, fixed, or mixed
cost for units produced and sold.

 (a) Lubricants used to oil machinery. (b) Warehouse rent of \$6,000 per month plus \$.50 per square foot of storage used. (c) Thread. (d) Electricity costs of \$.025 per kilowatt-hour. (e) Janitorial costs of \$2,000 per month. (f) Advertising costs of \$10,000 per month. (g) Sales salaries. (h) Color dyes for producing different colors of sweatshirts. (i) Salary of the production supervisor. (j) Straight-line depreciation on sewing machines. (k) Patterns for different designs. Patterns typically last many years before being replaced. (l) Hourly wages of sewing machine operators (m) Property taxes on factory, building, and equipment. (n) Cotton and polyester cloth. (o) Maintenance costs with sewing machine company. The cost is \$2,000 per year plus \$.001 for each machine hour of use.

2. On October 31, the end of the first month of
operations, Morristown & Co. prepared the following income statement based
on absorption costing:

 Morristown & Co. Income Statement For Month Ended October 31, 20- Sales (2,600 units) \$104,000 Cost of goods sold: Cost of goods manufactured \$85,500 Less ending inventory (400 units) 11,400 Cost of goods sold 74,100 Gross profit \$ 29,900 Selling and administrative expenses 21,500 Income from operations \$ 8,400 ========

If the fixed manufacturing costs were \$42,900 and the variable
selling and administrative expenses were \$14,600, prepare an income statement
in accordance with the variable costing concept.

3. Based on the following production and sales
data of Shingle Co. for March of the current year, prepare (a) a sales budget
and (b) a production budget.

 Product T Product X Estimated inventory, March 1 28,000 units 20,000 units Desired inventory, March 31 32,000 units 15,000 units Expected sales volume: Area I 320,000 units 260,000 units Area II 190,000 units 130,000 units Unit sales price \$6 \$14

4. Door & Window Co. was organized on August
1 of the current year. Projected sales for the next three months are as
follows:

 August \$120,000 September 200,000 October 230,000

The company expects to sell 40% of its merchandise for cash. Of
the sales on account, 25% are expected to be collected in the month of the sale
and the remainder in the following month.

Prepare a schedule indicating total cash collections for August,
September, and October.

5. For the current year ending April 30, Hal
Company expects fixed costs of \$60,000, a unit variable cost of \$70, and a unit
selling price of \$105.

 (a) Compute the anticipated break-even sales (units). (b) Compute the sales (units) required to realize an operating profit of \$8,000.

6. The Filling Department of Rose Petal Lotion
Company had 2,300 ounces in beginning work in process inventory (70% complete).
During the period 46,500 ounces were completed. The ending work in process
inventory was 1,800 ounces (25% complete). What are the equivalent units for
both direct materials and conversion costs (if materials are
added at the beginning of the process)?

7. Give me examples of the following costs for
an automobile manufacturer (fill in the appropriate blanks).

Direct Materials

1.______________________________________________________________

2.______________________________________________________________

Direct Labor

1. _____________________________________________________________

1. Indirect Materials
________________________________________________

2. Indirect Labor
__________________________________________________

3. Other _________________________________________________________

Period Costs

1. ______________________________________________________________

2. ______________________________________________________________

Question
1

For which of the following businesses would a process cost system
be appropriate?

An oil refinery

Custom
electronics manufacturer

Yacht builder

Specialty
furniture company

Question
2

Department A had 4,000 units in work in process that were 60%
completed as to labor and overhead at the beginning of the period, 29,000 units
of direct materials were added during the period, 31,000 units were completed
during the period, and 2,000 units were 80% completed as to labor and overhead
at the end of the period. All materials are added at the beginning of the
process. The first-in, first-out method is used to cost inventories.

The number of equivalent units of production for conversion costs
for the period was:

33,000

33,800

29,800

30,200

Question
3

Department A had 4,000 units in work in process that were 60%
completed as to labor and overhead at the beginning of the period, 29,000 units
of direct materials were added during the period, 31,000 units were completed
during the period, and 2,000 units were 80% completed as to labor and overhead
at the end of the period. All materials are added at the beginning of the
process. The first-in, first-out method is used to cost inventories.

The number of equivalent units of production for material costs
for the period was:

32,000

33,000

29,800

29,000

Question
4

Which of the following costs is an example of a cost that remains
the same in total as the number of units produced changes?

Salary of a factory supervisor

Direct materials

Units of
production depreciation on factory equipment

Direct labor

Question
5

Which of the following describes the behavior of the fixed cost
per unit?

Decreases with
decreasing production

Remains constant
with changes in production

Increases with
increasing production

Decreases with increasing
production

Question
6

If sales are \$820,000, variable costs are 58% of sales, and
operating income is \$260,000, what is the contribution margin ratio?

62%

42%

53.1%

32%

Question
7

If fixed costs are \$250,000, the unit selling price is \$125, and
the unit variable costs are \$73, what is the break-even sales (units)?

4,808 units

3,425 units

2,000 units

2,381 units

Question
8

If fixed costs are \$1,400,000, the unit selling price is \$240, and
the unit variable costs are \$110, what is the amount of sales required to
realize an operating income of \$200,000?

12,308 units

10,769 units

12,000 units

1,538 units

Question
9

If fixed costs are \$500,000, the unit selling price is \$55, and
the unit variable costs are \$30, what is the break-even sales (units) if fixed
costs are increased by \$80,000?

25,000 units

23,200 units

10,545 units

19,333 units

Question
10

Which of the following conditions would cause the break-even point
to decrease?

Total fixed costs
increase

Unit selling
price decreases

Unit variable cost decreases

Unit variable
cost increases

Question
11

Which of the following conditions would cause the break-even point
to increase?

Total fixed costs
decrease

Unit selling
price increases

Total fixed costs increase

Unit variable
cost decreases

Question
12

The amount of income under absorption costing will be more than
the amount of income under variable costing when units manufactured:

are equal to or
greater than units sold

are less than
units sold

exceed units sold

equal units sold

Question
13

A business operated at 100% of capacity during its first month and
incurred the following costs:

Production costs (10,000 units):

Direct materials \$140,000

Direct labor \$40,000

\$204,000

Operating expenses:

Variable operating expenses \$
34,000

Fixed operating expenses 2,000

\$36,000

If 2,000 units remain unsold at the end of the month and sales
total \$300,000 for the month, what would be the amount of income from
operations reported on the variable costing income statement?

\$114,800

\$100,800

\$100,000 -??????

\$140,000

Question
14

A business operated at 100% of capacity during its first month and
incurred the following costs:

Production costs (10,000 units):

Direct materials \$140,000

Direct labor \$40,000

\$204,000

Operating expenses:

Variable operating expenses \$
34,000

Fixed operating expenses 2,000

\$36,000

If 2,000 units remain unsold at the end of the month and sales
total \$300,000 for the month, what is the amount of the manufacturing margin
that would be reported on the variable costing income statement?

\$140,000

\$106,000

\$104,000

\$114,800

Question
15.

A business operated at 100% of capacity during its first month and
incurred the following costs:

Production costs (5,000 units):

Direct materials \$70,000

Direct labor \$20,000

\$102,000

Operating expenses:

Variable operating expenses \$17,000

Fixed operating expenses \$1,000

\$18,000

If 1,000 units remain unsold at the end of the month and sales
total \$150,000 for the month, what is the amount of the contribution margin
that would be reported on the variable costing income statement?

\$53,000

\$51,400

\$54,000

\$52,000

Question
16

For March, sales revenue is \$1,000,000; sales commissions are 4%
of sales; the sales manager’s salary is \$80,000; advertising expenses are
\$75,000; shipping expenses total 1% of sales; and miscellaneous selling
expenses are \$2,100 plus 1% of sales. Total selling expenses for the month of
March are:

\$187,550

\$217,100

\$194,100

\$192,100

Question
17

Nuthatch Corporation began its operations on September 1 of the
current year. Budgeted sales for the first three months of business are
\$260,000, \$350,000, and \$400,000, respectively, for September, October, and
November. The company expects to sell 30% of its merchandise for cash. Of sales
on account, 80% are expected to be collected in the month of the sale and 20%
in the month following the sale.

The cash collections in October from accounts receivable are:

\$337,400

\$210,000

\$232,400

\$240,000

Question
18

Finch Company began its operations on March 31 of the current
year. Finch Co. has the following
projected costs:

April May June

Manufacturing costs (1) \$156,800 \$195,200 \$217,600

Insurance expense (2) 1,000 1,000 1,000

Depreciation expense 2,000 2,000 2,000

Property tax expense (3) 500 500 500

(1) 3/4 of the
manufacturing costs are paid for in the month they are incurred. 1/4 is paid in the following month.

(2) Insurance expense
is \$1,000 a month, however, the insurance is paid four times yearly in the
first month of the quarter, i.e. January, April, July, and October.

(3) Property tax is
paid once a year in November.

The cash payments for Finch Company in the month of April are:

\$123,100

\$120,600

\$121,100

\$122,600

Question
19

Which of the following is false in regards to direct materials for
an auto manufacturer?

Oil to lubricate
factory machines would not be a direct material.

Upholstery fabric
would probably be a direct material

Steel would
probably be a direct material.

Small plastic clips to hold on
door panels, that become part of the auto, must be accounted for as direct materials.

Question
20

Which of the following is an example of direct labor cost for an
airplane manufacturer?

Cost of jet
engines

Cost of wages of assembly worker

Cost of oil
lubricants for factory machinery

Salary of plant
supervisor

Question
21

Prime costs are

period costs and

direct labor and

direct materials

direct materials
and direct labor

Question
22

Product costs

are expensed as costs are
incurred for direct labor, direct material and factory overhead

appear on both
the income statement and balance sheet

appear only on
the balance sheet

appear only on
the income statement

Question
23

A plant managerâ€™s salary may be referred to as:

an indirect cost

a direct cost

either a direct
cost or an indirect cost since managerial accounting is not restricted by GAAP

a period cost

Question
24

An example of a period cost is:

depreciation on
factory equipment

indirect
materials

property taxes

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# Accounting problems

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## Description

Problem 8-1A Plant asset costs;
depreciation methods LO C1, P1

 Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2013, at a total cash price of \$830,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, \$514,250; land, \$299,200; land improvements, \$28,050; and four vehicles, \$93,500. The companyâ€™s fiscal year ends on December 31.
 Required: 1.1 Prepare a table to allocate the lump-sum purchase price to the separate assets purchased.
 1.2 Prepare the journal entry to record the purchase.
 2. Compute the depreciation expense for year 2013 on the building using the straight-line method, assuming a 15-year life and a \$29,000 salvage value.
 3. Compute the depreciation expense for year 2013 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Problem 8-2A Asset cost allocation;
straight-line depreciation LO C1, P1

[The following information applies to
the questions displayed below.]

 In January 2013, Mitzu Co. pays \$2,750,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at \$720,000, with a useful life of 20 years and an \$85,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at \$510,000 that are expected to last another 17 years with no salvage value. Without the buildings and improvements, the tract of land is valued at \$1,770,000. The company also incurs the following additional costs:

 Cost to demolish Building 1 \$ 344,400 Cost of additional land grading 185,400 Cost to construct new building (Building 3), having a useful life of 25 years and a \$398,000 salvage value 2,202,000 Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 173,000 Total costs 7,937,299

.mheducation.com/” title=”Reference Information”>references

2.

value:
5.00 points

Problem
8-2A Part 1

 Required:

 1. Allocate the costs incurred by Mitzu to the appropriate columns and total each column.

check my work.mheducation.com/” title=”Reference Information”>referencesebook
& resources

3.

value:
5.00 points

Problem
8-2A Part 2

 2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.

Problem 8-2A Part 3

 3 Using the straight-line method, prepare the December 31 adjusting entries to record depreciation for the 12 months of 2013 when these assets were in use.

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# Accounting problems

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## Description

1. A manufacturing company has a small production line dedicated to the production of a
particular product. The line has four stations in serial. Inputs arrive at station 1 and the
output from station 1 becomes the input to station 2. The output from station 2 is the input
to station 3 and so on. The output from station 4 is the fi nished product. Station 1 can
process 2,700 units per month, station 2 can process 2,500/month, station 3 can process
2,300/month, and station 4 can process 2,100/month. What station sets the maximum possible
output from this system? What is that maximum output number?

4. You are in a line at the bank drive-through and 10 cars are in front of you. You estimate
that the clerk is taking about fi ve minutes per car to serve. How long do you expect to wait
in line?

10. An enterprising student has set up an internship clearinghouse for business students. Each
student who uses the service fi lls out a form and lists up to 10 companies that he or she
would like to have contacted. The clearinghouse has a choice of two methods to use for processing
the forms. The traditional method requires about 20 minutes to review the form and
arrange the information in the proper order for processing. Once this setup is done, it takes
only two minutes per company requested to complete the processing. The other alternative
uses an optical scan/retrieve system, which takes only a minute to prepare but requires fi ve
minutes per company for completing the processing. If it costs about the same amount per
minute for processing with either of the two methods, when should each be used?
11. Rockness Recycling refurbishes rundown business students. The process uses a moving
belt, which carries each student through the fi ve steps of the process in sequence. The fi ve
steps are as follows:
Time Required
Step Description per Student
1 Unpack and place on belt 1.0 minute
2 Strip off bad habits 1.5 minutes
3 Scrub and clean mind 0.8 minute
4 Insert modern methods 1.0 minute
5 Polish and pack 1.2 minutes
One faculty member is assigned to each of these steps. Faculty members work a
40-hour week and rotate jobs each week. Mr. Rockness has been working on a contract
from General Eclectic, which requires delivery of 2,000 refurbished students per
week. A representative of the human resources department has just called complaining
that the company hasnâ€™t been receiving the agreed-upon number of students. A check
of fi nished goods inventory by Mr. Rockness reveals that there is no stock left. What
is going on?

13. A local market research fi rm has just won a contract for several thousand small projects
involving data gathering and statistical analysis. In the past, the fi rm has assigned each
project to a single member of its highly trained professional staff. This person would both
gather and analyze the data. Using this approach, an experienced person can complete an
average of 10 such projects in an eight-hour day.
The fi rmâ€™s management is thinking of assigning two people to each project in order to
allow them to specialize and become more effi cient. The process would require the data
290 section 2 MANUFACTURING AND SERVICE PROCESSES
gatherer to fi ll out a matrix on the computer, check it, and transmit it to the statistical
analysis program for the analyst to complete. Data can be gathered on one project while
the analysis is being completed on another, but the analysis must be complete before the
statistical analysis program can accept the new data. After some practice, the new process
can be completed with a standard time of 20 minutes for the data gathering and 30 minutes
for the analysis.
a. What is the production (output per hour) for each alternative? What is the productivity
(output per labor hour)?
b. How long would it take to complete 1,000 projects with each alternative? What
would be the labor content (total number of labor hours) for 1,000 projects for each
alternative?

18. I-mart is a discount optical shop that can fi ll most prescription orders in around 1 hour.
The management is analyzing the processes at the store. There currently is one person
assigned to each task below. The optometrist assigned to task B takes an hour off for
lunch and the other employees work the entire day.
A. Greet/register the patient 2 minutes/patient
B. Optometrist conducts eye exam 25 minutes/patient
C. Frame/lenses selection 20 minutes/patient
D. Glasses made (process can run 6 pairs of
glasses at the same time) 60 minutes/patient
E. Final fi tting 5 minutes/patient
For a typical 10-hour retail day (10 a.m.â€“8 p.m.), the manager would like to calculate the
following:
a. What is the current maximum output of the process per day (assuming every patient
requires glasses)?
b. If another person were added, where would be the logical place?
c. What effect would a mail order lab (where the glasses are made off-site and returned in
5â€“7 days) have on the process?
( Each sheet done separate in Excel only please)

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CHAPTER
18 HW 12 Problems

 The following costs result from the production and sale of 4,550 drum sets manufactured by Vince Drum Company for the year ended December 31, 2011. The drum sets sell for \$305 each. The company has a 40% income tax rate.
 Variable production costs Plastic for casing \$ 127,400 Wages of assembly workers 423,150 Drum stands 168,350 Variable selling costs Sales commissions 118,300 Fixed manufacturing costs Taxes on factory 9,500 Factory maintenance 19,000 Factory machinery depreciation 79,000 Fixed selling and administrative costs Lease of equipment for sales staff 19,000 Accounting staff salaries 69,000 Administrative management salaries 149,000
 Required:

 1 Prepare a contribution margin income statement for the company.(Input all amounts as positive values. Omit the “\$” sign in your response.)
 VINCE DRUM COMPANY Contribution Margin Income Statement For Year Ended December 31, 2011 (4,550 units) (Click to select) Cost of goods sold Sales commissions Sales equipment lease Sales Plastic for casing \$ Variable costs (Click to select) Factory maintenance Plastic for casing Sales Sales equipment lease Administrative expense \$ (Click to select) Assembly worker wages Cost of goods sold Factory maintenance Taxes on factory Sales equipment lease (Click to select) Sales Accounting staff salaries Wages payable Drum stands Admin. mgmt. salaries (Click to select) Taxes on factory Cost of goods sold Sales commission Factory maintenance Sales equipment lease (Click to select) Contribution margin Gross margin Fixed costs (Click to select) Cost of goods sold Taxes on factory Drum stands Plastic for casing Sales (Click to select) Wages of assembly workers Factory maintenance Sales Drum stands Sales commissions (Click to select) Factory machinery deprec. Sales Cost of goods sold Salaries Sales commissions (Click to select) Plastic for casing Drum stands Sales equipment lease Sales commissions Sales (Click to select) Sales Factory maintenance Cost of goods sold Drum stands Accounting staff salaries (Click to select) Admin. mgmt. salaries Wages payable Plastic for casing Cost of goods sold Assembly worker wages (Click to select) Pretax income Income tax expense Income tax Taxes on factory Factory maintenance (Click to select) Drum stands Income tax Pretax income Cost of goods sold Taxes on factory (Click to select) Net income Net loss \$
 2.1 Compute its contribution margin per unit.(Input all amounts as positive values. Omit the “\$” sign in your response.)
 VINCE DRUM COMPANY Contribution Margin Income Statement For Year Ended December 31, 2011 Per unit (Click to select) Plastic for casing Cost of goods sold Sales equipment lease Sales commissions Sales \$ Variable costs (Click to select) Sales equipment lease Administrative expense Plastic for casing Sales Factory maintenance \$ (Click to select) Wages payable Assembly worker wages Taxes on factory Factory maintenance Wages expense (Click to select) Wages payable Accounting staff salaries Drum stands Admin. mgmt. salaries Sales (Click to select) Sales equipment lease Wages payable Sales commissions Wages expense Taxes on factory (Click to select) Contribution margin Gross margin \$
 Contribution margin ratio %

 Edge Equipment Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next yearâ€™s plans call for a \$180 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be \$154,800, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are \$144 per 100 yards of XT rope.

.mheducation.com/” title=”Reference Information”>references

 Section Break Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-P3 Graph costs and sales for a single product company.

2.

value:
10.00 points

 1(a) Estimate Product XTâ€™s break-even point in terms of sales units. (1 unit = 100 yards.)
 Break-even in sales units units
 Break-even in sales dollars \$

check my workeBook Links (2).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-P3 Graph costs and sales for a single product company.

3.

value:
10.00 points

 3 Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.(Leave no cells blank – be certain to enter “0” wherever required. Input all amounts as positive values. Omit the “\$” sign in your response.)
 EDGE EQUIPMENT CO. Contribution Margin Income Statement (at Break-Even) â€” Product XT (Click to select) Sales Pretax income Fixed costs Variable costs Contribution margin \$ (Click to select) Fixed costs Variable costs Contribution margin Pretax income Sales (Click to select) Fixed costs Variable costs Pretax income Contribution margin Sales (Click to select) Sales Contribution margin Fixed costs Variable costs Pretax income Net income \$ Jetson Co. sold 20,700 units of its only product and incurred a \$83,778 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2012â€™s activities, the production manager notes that variable costs can be reduced 50% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by \$157,000. The maximum output capacity of the company is 40,000 units per year.
 JETSON COMPANY Contribution Margin Income Statement For Year Ended December 31, 2011 Sales \$ 790,740 Variable costs 553,518 Contribution margin 237,222 Fixed costs 321,000 Net loss \$ (83,778 )

rev: 02_07_2012

.mheducation.com/” title=”Reference Information”>references

 Section Break Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

4.

value:
10.00 points

 Required: 1. Compute the break-even point in dollar sales for year 2011. (Round your intermediate calculations to 2 decimal places and final answer to nearest dollar amount. Omit the “\$” sign in your response.)
 Break-even point in dollar sales for year 2011 \$

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

5.

value:
10.00 points

 2 Compute the predicted break-even point in dollar sales for year 2012 assuming the machine is installed and there is no change in the unit sales price. (Round your intermediate calculations to 2 decimal places and final answer to nearest dollar amount. Omit the “\$” sign in your response.)

 Break-even point in dollar sales for year 2012 \$

rev: 02_07_2012

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

6.

value:
10.00 points

 3 Prepare a forecasted contribution margin income statement for 2012 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold (20,700 units) will not change, and no income taxes will be due.(Input all amounts as positive values. Omit the “\$” sign in your response.)
 JETSON COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2012 (Click to select) Sales commissions Sales Rent on factory Income before taxes Income taxes \$ (Click to select) Income before taxes Variable costs Income taxes Taxes on factory Factory maintenance (Click to select) Gross profit Contribution margin (Click to select) Taxes on factory Fixed costs Sales comissions Rent on factory Factory maintenance Net income \$

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

7.

value:
10.00 points

 4 Compute the sales level required in both dollars and units to earn \$189,000 of after-tax income in 2012 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30%.(Round your intermediate calculations to 2 decimal places and always round up (ceiling rounding) your final answers to the next whole number. Omit the “\$” sign in your response.)
 Sales level required in dollars \$ Sales level required in units units

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P2 Compute the break-even point for a single product company. Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

8.

value:
10.00 points

 5 Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%.(Use the units in your answer from Part 4 in your calculation of Sales and Variable Cost. Your Net Income might be higher than required amount due to rounding. Input all amounts as positive values. Round your “Sales level required in units” to nearest whole number. Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number. Omit the “\$” sign in your response.)
 JETSON COMPANY Forecasted Contribution Margin Income Statement For Year Ended December 31, 2012 (Click to select) Rent on factory Income taxes Sales Factory maintenance Sales commissions \$ (Click to select) Variable costs Income taxes Sales commissions Income before taxes Factory maintenance (Click to select) Contribution margin Gross profit (Click to select) Sales commissions Office equipment lease Factory maintenance Sales Fixed costs (Click to select) Factory maintenance Income before income taxes Sales commissions Taxes on factory Office equipment lease (Click to select) Office equipment lease Rent on factory Taxes on factory Income taxes Sales comissions (Click to select) Net income Net loss \$ Letter Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 44,000 units of each product. Sales and costs for each product follow.

 Product T Product O Sales \$ 774,400 \$ 774,400 Variable costs 464,640 154,880 Contribution margin 309,760 619,520 Fixed costs 187,760 497,520 Income before taxes 122,000 122,000 Income taxes (32% rate) 39,040 39,040 Net income \$ 82,960 \$ 82,960

.mheducation.com/” title=”Reference Information”>references

 Section Break Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Difficulty: Hard Learning Objective: 18-P4 Compute the break-even point for a LP22 multiproduct company

9.

value:
10.00 points

 Required: 1. Compute the break-even point in dollar sales for each product.(Round your contribution margin ratio to 1 decimal place, other intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount. Omit the “\$” sign in your response.)
 Product T \$ Product O \$

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P4 Compute the break-even point for a LP22 multiproduct company Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

10.

value:
10.00 points

 2 Assume that the company expects sales of each product to decline to 27,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.(Round your contribution margin ratio to 1 decimal place, other intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount. Input all amounts as positive values except losses and tax savings on losses, which should be indicated by a minus sign. Omit the “\$” sign in your response.)
 LETTER CO. Forecasted Contribution Margin Income Statement Product T Product O (Click to select) Taxes on factory Sales Sales commissions Factory maintenance Office equipment lease \$ \$ (Click to select) Variable costs Rent on factory Office equipment lease Sales comissions Taxes on factory (Click to select) Contribution margin Gross profit (Click to select) Sales comissions Rent on factory Factory maintenance Office equipment lease Fixed costs (Click to select) Income before taxes Sales comissions Office equipment lease Rent on factory Taxes on factory (Click to select) Office equipment lease Taxes on factory Sales comissions Rent on factory Income taxes Net income/loss \$ \$

check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references

 Worksheet Learning Objective: 18-A1 Compute the contribution margin and describe what it reveals about a companyâ€™s cost structure. Learning Objective: 18-P4 Compute the break-even point for a LP22 multiproduct company Difficulty: Hard Learning Objective: 18-C2 Describe several applications of costvolume- profit analysis.

11.

value:
10.00 points

 3 Assume that the company expects sales of each product to increase to 58,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate).(Round your contribution margin ratio to 1 decimal place, other intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount. Input all amounts as positive values except losses and tax savings on losses, which should be indicated by a minus sign. Omit the “\$” sign in your response.)
 LETTER CO. Forecasted Contribution Margin Income Statement Product T Product O (Click to select) Taxes on factory Rent on factory Sales comissions Sales Office equipment lease \$ \$ (Click to select) Factory maintenance Rent on factory Taxes on factory Variable costs Office equipment lease (Click to select) Contribution margin Gross profit (Click to select) Rent on factory Taxes on factory Factory maintenance Fixed costs Office equipment lease (Click to select) Income before taxes Factory maintenance Taxes on factory Rent on factory Sales commissions (Click to select) Taxes on factory Income taxes Office equipment lease Factory maintenance Sales comissions (Click to select) Net loss Net income \$ \$ National Co. manufactures and sells three products: red, white, and blue. Their unit sales prices are red, \$65; white, \$95; and blue, \$120. The per unit variable costs to manufacture and sell these products are red, \$50; white, \$70; and blue, \$90. Their sales mix is reflected in a ratio of 2:2:1 (red:white:blue). Annual fixed costs shared by all three products are \$160,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by \$7; white, by \$17; and blue, by \$7. However, the new material requires new equipment, which will increase annual fixed costs by \$30,000.

 Required: 1. Assume if the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.(Always round your composite units up (ceiling rounding) to next whole unit. Then use the Sales Units to calculate Sales Dollars. Round up your composite units to whole number. Omit the “\$” sign in your response.)

 Break-Even Points Sales Units Sales Dollars Red at break-even \$ White at break-even \$ Blue at break-even \$

 2 Assume if the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.(Always round your composite units up (ceiling rounding) to next whole unit. Then use the Sales Units to calculate Sales Dollars. Round up your composite units to whole number. Omit the “\$” sign in your response.)

 Break-Even Points Sales Units Sales Dollars Red at break-even \$ White at break-even \$ Blue at break-even \$

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12-4
Financial Data

Salary of vice president of production
division \$180,000

Salary of supervisor Department M 76,000

Salary of supervisor Department N 56,000

Direct materials cost Department M 300,000

Direct materials cost Department N 420,000

Direct labor cost Department M 240,000

Direct labor cost Department N 680,000

Direct utilities cost Department M 120,000

Direct utilities cost Department N 24,000

General factorywide utilities 36,000

Production supplies
36,000

Fringe benefits
138,000

Depreciation
720,000

Nonfinancial
Data

Machine hours department M 5,000

Machine hourâ€™s department N 1,000

A. Identify the costs that are (1) direct
costs of department M, (2) direct costs of department N and (3) indirect costs.

B. Select the appropriate cost drivers for
the indirect costs and allocate these costs to departments M and N.

C. Determine the total estimated cost of
the products made in departments M and N. Assume that Maller produced 2,000
units of products M and 4,000 of prouduct N during the year. If Maller prices
its products M and for N?

12- 15

The Vest school of Vocational Technology
has organized the school training programs
into three departments. Each department provides training in a different area
as follows: nursing assistant, dental hygiene, and office technology. The
schools owner, Candice Vest, wants to know how much it cost to operate each of
the three departments. To accumulate the total cost for each department, the
accountant has identified several indirect costs that must be allocated to
each. These costs are \$10,080 of telephone expense, \$ 2,016 of supplies
expense, \$720,000 of office rent, \$144,000 of janitorial services, and \$150,000
of salary paid to the dean of students. To provide a reasonably accurate
allocation of costs, the accountant has identified several possible cost
drivers. These drivers and their association with each department follow.

Cost Driver Department
1 Department
2
Department 3

Number of telephones 28
16 19

Numbers of faculty members 20
16
12

Square footage of office space 28,000 16,800
12,000

Number of secretaries 2
2
2

A. Identify the appropriate cost objects.

B. Identify the appropriate cost driver for
each indirect cost and compute the allocation rate for assigning each indirect
cost to the cost objects.

C. determine the amount of telephone
expense that should be allocated to each of the three departments.

D. Determine the amount of office expense
that should be allocated to department 3

F.
Determine the amount of office expense that should be allocated to
department 2.

G. Identify two cost drivers not listed
here that could be used to allocate the cost of the deaths salary to the three
departments.

13- 23

Materials cost (\$ 25 per unit X 20,000) \$
500,000

Labor cost (\$22 per unit X 20,000) \$ 440,000

Batch level costs (20 batches at \$4,000per
batch) 80,000

Product level cost 160,000

Total cost 1,510,000

Cost per unit = 1, 510,000 / 20,000 =
\$75.50

A. Kent Motels has offered to buy a batch
of 500 blankets for \$51 each. Ellis normal selling price is \$90 per unit. Based
on the preceding quantitative data, should Kent accept the special order? Support

change if Kent offered to buy a batch of 1,000 blankets for \$ 51 per unit? Support

C. Describe the qualitative factors that
Ellis Quilting Company should consider before accepting a special order to sell
blankets to Kent Motels.

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following 4 problems in a single Microsoft Word Document. Make sure that you
clearly label each problem/part.

Problems

1. In each of the following independent
situations involving transfers of tangible property, determine which transfer
pricing methods applies and compute a transfer price using the appropriate
method. Show all of your computations.

a.Dougco, a domestic corporation, owns
100% of Thaico, a Thailand corporation. Dougco manufactures top-of-the-line
offi ce chairs at a cost of \$300 per unit and sells them to Thaico, which
resells the goods (without any further processing) to unrelated foreign
customers for \$450 each. Independent foreign distributors typically earn
commissions of 20% (expressed as a percentage of the sales price) on the
purchase and resale of products comparable to those produced by Dougco

b.Clairco, a domestic corporation,
owns 100% of Shuco, a foreign corporation that manufactures womenâ€™s running
shoes at a cost of \$30 each and sells them to Clairco. Clairco attaches its
trade name to the shoes (which has a significant effect on their resale price),
and resells them to unrelated customers in the United States for \$80 each.
Independent foreign manufacturers producing similar running shoes typically
earn a gross profit mark-up (expressed as a percentage of the manufacturing
costs) of 15%.

c. Tomco, a domestic corporation, owns
100% of Swissco, a Swiss corporation. Tomco manufactures riding lawn mowers at
a cost of \$2,500 per unit, and sells them to unrelated foreign distributors at
a price of \$3,750 per unit. Tomco also sells the equipment to Swissco, which
then resells the goods to unrelated foreign customers for \$4,250 each. The
conditions of Tomcoâ€™s sales to Swissco are essentially equivalent to those of
the sales made to unrelated foreign distributors.

2. USAco, a domestic corporation, forms
sells widgets to CANco for resale in Canada, provides CANco with USAcoâ€™s unique
distribution software, and provides the use of USAcoâ€™s collections staff to
collect receivables from delinquent accounts.

What are the intercompany transactions that USAco must price
at armâ€™s length?

What compliance techniques may USAco employ to minimize the
risk of a transfer pricing penalty?

3. Erica is a citizen of a foreign
country, and is employed by a foreign-based computer manufacturer. Ericaâ€™s job
is to provide technical assistance to customers who purchase the companyâ€™s
mainframe computers. Many of Ericaâ€™s customers are located in the United
States. As a consequence, Erica consistently spends about 100 working days per
year in the United States. In addition, Erica spends about 20 vacation days per
year in Las Vegas, since she loves to gamble and also enjoys the desert
climate. Erica does not possess a green card. Assume that the United States has
entered into an income tax treaty with Ericaâ€™s home country that is identical
to the United States Model Income Tax Convention of November 15, 2006.

How does the United States tax Ericaâ€™s activities?

change if Erica were a self-employed technician rather than an employee?

4. Finco is a wholly owned Finnish
manufacturing subsidiary of Winco, a domestic corporation that manufactures and
markets residential window products throughout the world. Winco has been
Fincoâ€™s sole shareholder since Finco was organized in 1990. At the end of the
current year, Winco sells all of Fincoâ€™s stock to an unrelated foreign buyer
for \$25 million. At that time, Finco had \$6 million of post-1986 undistributed
earnings, and \$2 million of post-1986 foreign income taxes that have not yet
been deemed paid by Winco. Wincoâ€™s basis in Fincoâ€™s stock was \$5 million
immediately prior to the sale.

Assume Wincoâ€™s capital gain on the sale of Fincoâ€™s stock is
not subject to any foreign taxes, and that the U.S. corporate tax rate is 35%.
What are the U.S. tax consequences of this sale for Winco?

Now assume that instead of selling the stock of Finco, Winco
completely liquidates Finco, and receives property with a market value of \$25
million in the transaction. As in the previous scenario, at the time of the
liquidation, Finco had \$6 million of accumulated earnings and profi ts, and \$2
million of foreign income taxes that have not yet been deemed paid by Winco.
Assume that Wincoâ€™s basis in Fincoâ€™s stock was \$5 million immediately prior to
the liquidation, and that the U.S. corporate tax rate is 35%. What are the U.S.
tax consequences of this liquidation for Winco?

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1. (10 pts)Jackson Inc. is a management consulting firm that specializes in management training programs. Max Manufacturing Inc. has approached Jackson to contract for management training for a one-year period. Last year’s income statement for Jackson is as follows:

To satisfy the Max contract, another part-time trainer will need to be hired at \$44,000. Supplies will increase by 14% and other costs will increase by 16%. In addition, new equipment will need to be leased at a cost of \$2,500.

a. What are the differential costs that would be incurred if the Max contract is signed?
b. If Max will pay \$55,000 for one year, should Jackson accept the contract? Explain your answer.

2. (10 pts) The management of Wenny Corporation is considering dropping product YE3. Data from the company’s accounting system appear below:

All building expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that \$42,000 of the building expenses and \$48,000 of the selling and administrative expenses will not be incurred if product YE3 is discontinued.

a. According to the company’s accounting system, what are the operating profits earned by product YE3?
b. What would be the impact on the company’s overall operating profits if product YE3 is dropped? Should the product be dropped?

3. (10 pts) Walters INC. produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: materials, labor, and support costs. Total support costs for January were \$300 million, and were allocated to each product on the basis of labor costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Sharon, was:

a. Compute the manufacturing cost per unit for each product produced in January.
b. Suppose production will be reduced to 30,000 units in February. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January; it is not necessary to calculate the exact February unit cost. Briefly explain your reasoning.

4. (15 pts)The following cost and inventory data were taken from the records of the Jones Company for the year:
Costs incurred:

Required:

(a) Compute the cost of goods manufactured.
(b) Prepare a cost of goods sold statement.

5. (15 pts) The Mussell Company provided you with the following information for the fiscal year ended December 31.

Required:

(a) Compute the total manufacturing costs incurred during the year.
(b) Compute the total work-in-process during the year.
(c) Compute the cost of goods manufactured during the year.
(d) Compute the cost of goods sold during the year.
(e) Compute the total prime costs for the year.
(f) Compute the total conversion costs for the year.

6. (10 pts)

The Fox Corporation has budgeted fixed costs of \$120,000 and an estimated selling price of \$16.50 per unit. The contribution margin ratio is 40% and the company plans to sell 27,000 units in 2013.

Required:

(a) Compute the break-even point in dollars.
(b) Compute the margin of safety for 2013.
(c) Compute the expected operating profit for 2013.

7. (10 pts) You have been provided with the following information regarding the Gore Company:

This information is based on forecasted sales of 25,000 units.

Required:

(a) What are the expected operating profits for the upcoming year?
(b) What is the break-even point in units?
(c) What is the break-even point in dollars?
(d) If \$80,000 of operating profits is desired, how many units must be sold?
(e) How much in sales dollars is required to generate operating profits of \$75,000?
8. (10 pts) Beavis Manufacturing is considering the introduction of a new music player with the following price and cost characteristics:

Required:

(a) How many units must T-Tunes sell to break even?
(b) How many units must T-Tunes sell to make an operating profit of \$120,000 for the year?
(c) If projected sales are 7,500 units, what is the margin of safety in units?

9. (10 pts) Manson Corporation produces and sells a single product. In January, the company sold 1,700 units. Its total sales were \$153,000, its total variable costs were \$79,900, and its total fixed costs were \$56,800.

Required:

a. Construct the company’s contribution format income statement for January in good form.
b. Redo the company’s contribution format income statement assuming that the company sells 1,600 units.

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# accounting problems

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The information is condensed data taken from the balance
sheet at the end of the year:

Net income: \$300,000

Stockholder’s Equity

Preferred 7% stock, \$100 par \$100,000

Common stock, \$20 par \$200,000

Paid-in capital in excess of parâ€”common stock \$50,000

Retained earnings \$300,000

Cash Dividend paid on common stock \$ 40,000

Common stock was selling for \$56 at the end of the current
year.

I need: Dividend yield on common stock, earnings per share
on common stock and, price-earnings ratio on common stock.

Also,

What type of retail clothing store with the highest ratio of
net sales to assets is most likely?

A. Men’s clothing

B. Home Appliances

1. A company with working capital of \$500,000 receives cash
for the entire balance on a \$120,000 short-term note receivable (current
asset). The working capital immediately after the receipt is

A) \$380,000

B) \$500,000

2. If the acid-test ratio is 1.25, the receipt of cash from
the sale of marketable securities at their book value will cause the ratio to

A) decrease

B) not affected

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# Accounting Problems

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## Description

Meriden Company has a unit selling price of \$720, variable costs per unit of \$432, and fixed costs of \$173,376.

Compute the break-even point in units using the mathematical equation.

Break-even point units

For Turgo Company, variable costs are 57% of sales, and fixed costs are \$173,600. Managementâ€™s net income goal is \$113,339.

Compute the required sales in dollars needed to achieve managementâ€™s target net income of \$113,339.

Required sales
\$

or Kozy Company, actual sales are \$1,160,000 and break-even sales are \$765,600.

Compute the margin of safety in dollars and the margin of safety ratio.

Margin of safety
\$

Margin of safety ratio
%

Montana Company produces basketballs. It incurred the following costs during the year.

Direct materials \$14,800
Direct labor \$25,076
Selling costs \$21,297

What are the total product costs for the company under variable costing?

Total product costs
\$

or the quarter ended March 31, 2012, Maris Company accumulates the following sales data for its product, Garden-Tools: \$311,500 budget; \$335,000 actual.

Prepare a static budget report for the quarter.

MARIS COMPANY
Sales Budget Report
For the Quarter Ended March 31, 2012
Product Line Budget Actual Difference
Garden-Tools

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# Accounting Problems

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## Description

Source of Capital Market Value
Bonds \$3,500,000
Preferred Stock \$1,800,000
Common Stock \$5,900,000

To finance the purchase, Ranch manufacturing will sell 10 year bonds paying 6.6% per year at the market price of \$1031. Preferred stock paying a \$1.95 dividend can be sold for \$25.53. Common stock for Ranch Manufacturing is currently selling for \$54.38 per share and the firm paid a \$2.98 dividend last year. Dividends are expected to continue growing at a rate of 5.4% per year into the indefinite future. If the firm’s tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

Plan A is an all-common-equity structure in which \$2.3 million dollars would be raised by selling 80,000 shares of common stock.

Plan B: would involve issuing \$1.2 million dollars in long-term bonds with an effective interest rate of 11.7% plus \$1.1 million would be raised by selling 40,000 shares of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.

Abe and is partners plan to use a 34% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a. Find the EBIT indifference level associated with two financing plans.
b. Prepare a pre forma income statement for the EBIT level solved for in part a. that shows EPS will be the same regardless whether plan a or b is chosen.

“Plan A: is an all-common-equity capital structure. \$2.1 million dollars would be raised by selling common stock at \$10 per common share.

Plan B: involves the use of financial leverage. \$1.1 million dollars would be raised by selling bonds with an effective interest rate of 11.3% (per annum), and the remaining \$1.0 million would be raised by selling common stock at the \$10 price per share. The use of financial leverage is considered to be a permanent part of the firm’s capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.”
a. Find the EBIT indifference level associated with two financing plans.
B. A detailed financial analysis of the firm’s prospects suggest that the long-term EBIT will be above \$323,000 annually. Taking this into consideration, which plan will generate the higher EPS?

Crypton Electronics has a capital structure consisting of 44% common stock and 56% debt. A debt issue of \$1000 par value, 5.7% bonds that mature in 15 years and pay annual interest will sell for \$975. Common stock of the firm is currently selling for \$29.45 per share and the firm expects to pay a \$2.21 dividend next year. Dividends have grown at the rate of 5.1% per year and are expected to continue to do so for the foreseeable future. What is Cyrpton’s cost of capital where the firm’s tax rate is 30%.

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# Accounting problems

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## Description

Problem1. Using present value techniques to evaluate alternative investment opportunities.
Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Fast recently acquired approximately \$6 million of cash capital from its owners, and its president. Don Keenon, is trying to identify the most profitable way to invest these funds.
Clarence Roy, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of \$720,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by \$280,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of \$100,000. Operating the vans will require additional working capital of \$40,000, which will be recovered at the end of the fourth year.
In contrast, Patricia Lipa, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings with reductions in cash outflows as the following.
Year 1 Year 2 Year 3 Year 4
\$160,000 \$320,000 \$400,000 \$440,000
The large trucks are expected to cost \$800,000 and to have a four-year useful life and a \$80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to \$16,000. Fast Delivery’s management has established a 16 percent desired rate of return.
Required
a. Determine the net present value of the two investment alternatives.
b. Calculate the present value index for each alternative.
c. Indicate which investment alternative you would recommend. Explain your choice.

Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involved purchasing a machine that would enable Mr. Gallo to offer frozen yogurt to customers. The machine would cost \$8,100 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be \$5.940 and \$900, respectively.
Alternatively, Mr. Gallo could purchase for \$10,080 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be \$8,280 and \$2,430 respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative.
b. Indicate which investment alternative you would recommend. Explain your choice.

Problem 3Using net present value and internal rate of return to evaluate investment opportunities.
Veronica Tanner, the present of Tanner Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are \$100,000 and for Project B are \$40,000. The annual expected cash inflows are \$31,487 for Project A and \$13,169 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Tanner Enterprise’s cost of capital is 8 percent.
Required
a. Compare the net present value of each project. Which project should be adopted based on the net present value approach?
b. Compute the approximate internal rate of return on each project. Which one should be adopted based on the internal rate of return approach?
c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?

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# Accounting Problems

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## Description

1.) Henson produces a product that requires 10 standard
labor hours at \$5/hr. If Henson produces 1,000 units and used 10,000 direct
labor hours, the labor rate efficiency variance is:

a.) \$10,000

b.) \$50,000

c.) 0

d.) None of the above

2.) The present value of cash flow allows an individual
to assess.

a.) The value of a present cash flow

b.) The Value of a stream of cash flows in terms of the
best alternative

c.) Both A and B

d.) Neither A nor B

3.) The capital expenditures budget is tied closely to
the:

a.) Sales Budget

b.) Purchases budget

c.) Cash receipts budget

d.) Cash expenditures budget

4.) There is a fixed cost element in ending inventory
using the absorption costing approach.

True or False

5.) The labor efficiency variance is used in activity based
costing.

True or False

6.) If production equals sales and there are no beginning
or ending inventories:

a.) Variable costing gives a higher net income than
absorption costing

b.) Variable costing gives a lower net income than
absorption costing

c.) Net income is the same under each assumption

d.) None of the above

7.) Jeremiah pays for 50% of its purchases in the month
of purchase, 30% in the month after and 20% in the month after that. For a
\$100,000 purchase in January, what is the accounts payable with respect to this
purchase at the end of February?

a.) \$50,000

b.) \$30,000

c.) \$20,000

d.) None of the above

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# Accounting problems

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T account

#1 Consider the following account
starting balances and transactions involving these accounts.
Use T-accounts to record the starting balances and the offsetting entries for
the transactions.

The starting balance of Accounts Receivable is \$3,400
The starting balance of Cash is \$9,000
The starting balance of Inventory is \$5,100

1. Receive payment of \$10 owed by a customer
2. Buy \$16 worth of manufacturing supplies for cash
3. Sell product for \$40 with historical cost of \$40

What is the final amount in Cash?

#2 Consider the following account
starting balances and transactions involving these accounts.
Use T-accounts to record the starting balances and the offsetting entries for
the transactions.

The starting balance of Accounts Payable is \$1,900
The starting balance of Cash is \$9,100
The starting balance of Debt is \$2,400
The starting balance of Inventory is \$4,800

1. Buy \$18 worth of manufacturing supplies on credit
2. Borrow \$53 from a bank
3. Pay \$8 owed to a supplier

What is the final amount in Debt?

#3 Consider the following account
starting balances and transactions involving these accounts.
Use T-accounts to record the starting balances and the offsetting entries for
the transactions.

The starting balance of Cash is \$8,400
The starting balance of Inventory is \$4,200
The starting balance of Retained Earnings is \$23,500

1. Pay expense of \$2
2. Sell product for \$40 with historical cost of \$32
3. Sell service for \$25

What is the final amount in Retained Earnings?

#4 The T-accounts below summarize
transactions of Torche Corporation from February 22 to February 25, 2013:

 Cash Balance 14,700 44 12 4 15 80 58
 PP&E, Net Balance 15,800 44
 Accounts Payable 4 Balance 2,400 15
 Other Liabilities Balance 5,000
 Accounts Receivable Balance 4,800 12
 Other Assets Balance 900
 Debt Balance 3,700 58
 Paid-In Capital Balance 6,000 80
 Inventory Balance 3,800 12 15
 Retained Earnings Balance 22,900 3

What is the final amount in Total Liabilities & Equity?

#5

 Stuart Company Balance Sheet As of March 11, 2013 (amounts in thousands) Cash 8,400 Accounts Payable 2,800 Accounts Receivable 4,700 Debt 3,400 Inventory 4,200 Other Liabilities 900 Property Plant & Equipment 17,200 Total Liabilities 7,100 Other Assets 2,800 Paid-In Capital 6,700 Retained Earnings 23,500 Total Equity 30,200 Total Assets 37,300 Total Liabilities & Equity 37,300

Use
T-accounts to record the transactions below, which occur on March 12, 2013,
close the T-accounts, and construct a balance sheet to answer the question.

1. Borrow \$52,000 from a bank
2. Purchase equipment for \$48,000 in cash
3. Issue \$85,000 in stock

What is the final amount in Total Assets?

#6

 Lightspeed Industries Balance Sheet As of March 11, 2013 (amounts in thousands) Cash 14,100 Accounts Payable 1,900 Accounts Receivable 3,200 Debt 3,600 Inventory 4,900 Other Liabilities 2,000 Property Plant & Equipment 16,300 Total Liabilities 7,500 Other Assets 500 Paid-In Capital 7,200 Retained Earnings 24,300 Total Equity 31,500 Total Assets 39,000 Total Liabilities & Equity 39,000

Use T-accounts to
record the transactions below, which occur on March 12, 2013, close the
T-accounts, and construct a balance sheet to answer the question.

1. Issue \$80,000 in stock
2. Borrow \$65,000 from a bank
3. Receive payment of \$12,000 owed by a customer
4. Pay \$6,000 owed to a supplier
5. Buy \$17,000 worth of manufacturing supplies on credit

What is the final amount in Total Assets?

#7

 Lightspeed Industries Balance Sheet As of March 11, 2013 (amounts in thousands) Cash 14,100 Accounts Payable 1,900 Accounts Receivable 3,200 Debt 3,600 Inventory 4,900 Other Liabilities 2,000 Property Plant & Equipment 16,300 Total Liabilities 7,500 Other Assets 500 Paid-In Capital 7,200 Retained Earnings 24,300 Total Equity 31,500 Total Assets 39,000 Total Liabilities & Equity 39,000

Use T-accounts to
record the transactions below, which occur on March 12, 2013, close the
T-accounts, and construct a balance sheet to answer the question.

1. Sell service for \$20,000
2. Pay expense of \$3,000
3. Sell product for \$25,000 with historical cost of \$20,000

What is the final amount in Total Assets?

Statement of Cash flows

of \$9,500,000.

The firm invested \$1,000,000 in manufacturing equipment during 2012.
The equipment is being depreciated over five years using straight-line
depreciation, starting in 2012.

Assuming no other adjustments to cash flow than those mentioned here, create a
statement of cash flows for 2012 with amounts in thousands.

What is the Net Cash Flow in 2012?

#4 Valley Technology had Net Income for
2012 of \$9,600,000.

The firm invested \$5,000,000 in manufacturing equipment during 2011 but made no
The equipment is being depreciated over five years using straight-line
depreciation, starting in 2011.

Assuming no other adjustments to cash flow than those mentioned here, create a
statement of cash flows for 2012 with amounts in thousands.

What is the Net Cash Flow in 2012?

#5 Suppose Siam Traders has the
following results related to cash flows for 2012:

Net Income of \$9,400,000
Increase in Accounts Payable of \$800,000
Decrease in Accounts Receivable of \$600,000
Decrease in Inventory of \$700,000

Assuming no other cash flow adjustments than those listed above, create a
statement of cash flows with amounts in thousands.

What is the Net Cash Flow from Operating Activities?

#6 Suppose Hopewell Corporation has the
following results related to cash flows for 2012:

Net Income of \$8,000,000
Increase in Accounts Payable of \$500,000
Increase in Accounts Receivable of \$700,000
Depreciation of \$1,300,000
Decrease in Inventory of \$300,000
Other Adjustments from Operating Activities of -\$900,000

Assuming no other cash flow adjustments than those listed above, create a
statement of cash flows with amounts in thousands.

What is the Net Cash Flow from Operating Activities?

#7 Suppose Dansko Integrated has the
following results related to cash flows for 2012:

Decrease in Debt of \$200,000
Dividends of \$800,000
Purchases of Property, Plant, & Equipment of \$6,700,000
Other Adjustments from Financing Activities of -\$600,000
Other Adjustments from Investing Activities of \$300,000

Assuming no other cash flow adjustments than those listed above, create a
statement of cash flows for financing and investing activities with amounts in
thousands.

What is the Net Cash Flow from Financing and Investing Activities?

#8 Suppose Torche Corporation has the
following results related to cash flows for 2012:

Net Income of \$8,500,000
Decrease in Accounts Payable of \$400,000
Increase in Accounts Receivable of \$800,000
Increase in Debt of \$100,000
Depreciation Expenses of \$1,600,000
Purchases of Property, Plant, & Equipment of \$5,400,000

Assuming no other cash flow adjustments than those listed above, create a
statement of cash flows with amounts in thousands.

What is the Net Cash Flow?

#9 Suppose Stuart Company has the
following results related to cash flows for 2012:

Net Income of \$7,700,000
Decrease in Accounts Payable of \$900,000
Decrease in Accounts Receivable of \$300,000
Decrease in Debt of \$600,000
Depreciation Expenses of \$1,700,000
Dividends of \$800,000
Increase in Inventory of \$800,000
Purchases of Property, Plant, & Equipment of \$7,500,000
Other Adjustments from Financing Activities of \$300,000
Other Adjustments from Investing Activities of \$300,000
Other Adjustments from Operating Activities of \$600,000

Create a statement of cash flows with amounts in thousands.

What is the Net Cash Flow?

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## Description

Problem
10-21 Product versus general, selling,

The following transactions pertain to 2012,
the first year of operations of Hall Company.
All inventory was started and completed during 2012. Assume that all transactions are cash transactions.

1. Acquired \$4,000 cash by issuing common
stock.

2. Paid \$720 for materials used to produce
inventory.

3. Paid \$1,800 to production workers.

4. Paid \$540 rental fee for production
equipment.

5. Paid \$180 to administrative employees.

6. Paid \$144 rental fee for administrative
office equipment.

7. Produced 300 units of inventory of which
200 units were sold at a price of \$12 each.

Required

Prepare an income statement, balance sheet,
and statement of cash flows.

Problem
11-23 Context-sensitive nature of cost
behavior classifications

Pacific Bankâ€™s start-up division
establishes new branch banks. Each
branch opens with three tellers. Total
teller cost per branch is \$90,000 per year.
The three tellers combined can process up to 90,000 customer
transactions per year. IF a branch does
not attain a volume of at least 60,000 transactions during its first year of
operations, it is closed. If the demand
for services exceeds 90,000 transactions, and additional teller is hired, and
the branch is transferred from the start-up division to regular operations.

Required

a. What is the relevant range of activity
for new branch banks?

b. Determine the amount of teller cost in
total and the teller cost per transaction for

branch that processes, 60,000, 70,000, 80,000, or 90,000
transactions. In this case (the

activity base is the number of transactions for a specific branch), is
the teller cost a

fixed or a variable cost?

c. Determine the amount of teller cost in
total and the teller cost per branch for Pacific

Bank, assuming that the start-up division operates 10, 15, 20, or 25
branches. In this

case (the activity base is the number of branches), is the teller cost a
fixed or a variable

cost?

Problem
12-15 Selecting an appropriate cost
driver (What is the base?)

The Vest School of Vocational Technology
has organized the school training programs into three departments. Each department provides training in a
different area as follow: nursing assistant, dental hygiene, and office
technology. The schoolâ€™s owner, Wilma
Vest, wants to know how much it costs to operate each of the three departments. To accumulate the total cost for each
department, the accountant has identified several indirect costs that must be
allocated to each. These costs are
\$10,080 of telephone expense, \$2,016 of supplies expense, \$720,000 of office
rent, \$144,000 of janitorial services, and \$150,000 of salary paid to the dean
of students. To provide a reasonably
accurate allocation of costs, the accountant has identified several possible
cost drivers. These drivers and their
association with each department follow.

 Cost Driver Department 1 Department 2 Department 3 Number of telephones 28 32 52 Number of Faculty members 20 16 12 Square footage of office space 28,800 16,800 12,000 Number of secretaries 2 2 2

a. Identify the appropriate cost objects.

b. Identify the appropriate cost driver for
each indirect cost and compute the allocation

rate for assigning each indirect cost to the cost objects.

c. Determine the amount of telephone
expense that should be allocated to each of the

three departments.

d. Determine the amount of supplies expense
that should be allocated to Department 3.

e. Determine the amount of office rent that
should be allocated to Department 2.

f. Determine the amount of janitorial
services cost that should be allocated to Department

1.

g. Identify two cost drivers not listed
here that could be used to allocate the cost of the

Deanâ€™s salary to the three departments.

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# accounting problems

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The tax year for these questions is 2005

1. Sue is a 50 percent working partner in a partnership. She is guaranteed an annual salary of \$60,000. Jim, the other 50 percent partner, is to receive the first \$10,000 of partnership profit before the balance is divided equally between them. During the year, the partnershipâ€™s accounting results were \$40,000 of income before any partner allocations. What amount of income will Sue be taxed on?

2. A and B are equal shareholders in AB, a calendar-year S corporation. On June 30, A sells one-half of her stock to C. The corporation reports \$30,000 of income for the year. How much of this income is allocated to A, B, and C?

3. Sonja is a talented 15-year-old dancer and has earned quite a bit of interest over the last six years from the money that her parents have invested for her. During 2005, she earned \$3,800 from dancing and \$2,850 in interest. If her parents claim her as a dependent, what is her income tax liability in the current year?

4. Sophie has AGI of \$47,000. Her itemized deductions after limitations are \$1400 for medical expenses , \$700 in property taxes, \$4500 of mortgage interest and \$800 for charitable contributions. What are her AMTI itemized deductions?

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# Accounting problems

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E 16-24 Balance sheet classification LO4 LO5 LO6 LO8

At
December 31, DePaul Corporation had a \$16 million balance in its deferred tax
asset account
and a \$68 million balance in its deferred tax liability account. The balances
were due to the
following cumulative temporary differences:
1. Estimated warranty expense, \$15 million: expense recorded in the year of the
sale;
tax-deductible when paid (one-year warranty).
2. Depreciation expense, \$120 million: straight-line in the income statement;
MACRS on the tax
return.
3. Income from installment sales of properties, \$50 million: income recorded in
the year of the
sale; taxable when received equally over the next five years.
4. Bad debt expense, \$25 million: allowance method for accounting; direct
write-off for tax
purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the
December 31
balance sheet. The tax rate is 40%.

E 16-25 Multiple tax rates; balance sheet classification
Case Development began operations in December 2011. When property is sold
on an installment basis, Case recognizes installment income for financial
reporting purposes in the year of the sale. For tax purposes, installment
income is reported by the installment method. 2011 installment income was
\$600,000 and will be collected over the next three years. Scheduled collections
and enacted tax rates for 2012-2014 are as follows:

2012 \$150,000 30%
2013 250,000 40
2014 200,000 40

Pretax accounting income for 2011 was \$810,000, which includes interest revenue
of \$10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.

Required:
1. Assuming no differences between accounting income and taxable income other
than those described above, prepare the appropriate journal entry to record
Caseâ€™s 2011 income taxes.
2. What is Caseâ€™s 2011 net income?
3. How should the deferred tax amount be classified in a classified balance
sheet?

Requirement 1

P17-16 Actuary and trustee reports indicate the following changes
in the PBO and plan assets of Lakeside Cable during 2011:

Prior service cost at Jan. 1, 2011, from plan amendment at the
beginning of 2009 (amortization: \$4 million per year) \$32 million
Net loss-pensions at Jan. 1, 2011 (previous losses exceeded previous gains)
\$40million
Average remaining service life of the active employee group 10 years

Actuary’s discount rate 8%
(\$in millions) PBO Plan Assets
Beginning of 2011 \$300 Beginning of 2011 \$200
Service cost 48 Return on plan assets.
Interest cost, 8% 24 7.5% (10% expected) 15
Loss (gain) on PBO (2) Cash contributions 45
Less: Retiree benefits (20) Less: Retiree benefits (20)
End of 2011 \$350 End of 2011 \$240

Required:

1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate
journal entries to
record the expense as well as the cash contribution to plan assets and payment
of benefits to
retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate
journal entry(s) to
record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011
balances in the PBO,
plan assets, prior service costâ€”AOCI, the net lossâ€”AOCI, and the pension
liability.
4. Assume the following actuary and trustee reports indicating changes in the
PBO and plan
assets of Lakeside Cable during 2012:
Determine Lakeside’s pension expense for 2012 and prepare the appropriate
journal entries to
record the expense, the cash funding of plan assets, and payment of benefits to
retirees.
5. Determine the new gains and/or losses in 2012 and prepare the appropriate
journal entry(s) to
record them.
6. Using T-accounts, determine the balances at December 31, 2012, in the net
lossâ€“AOCI and
prior service costâ€“AOCI.
7. Confirm the balances determined in Requirement 6 by preparing a pension

E17-19 Beale Management has a noncontributory, defined benefit
pension plan. On December 31, 2011 (the end of Bealeâ€™s fiscal year), the
following pension-related data were available:

Projected Benefit Obligation (\$in millions)

Balance, January 1, 2011 \$480

Service cost 82

Interest cost, discount rate, 5% 24

Gain due to changes in actuarial assumptions in 2011 (10)

Pension benefits paid (40)

Balance, December 31, 2011 \$536

Plant Assets

Balance, January 1, 2011 \$500

Actual return on plan assets 40

(Expected return on plan assets, \$45)

Cash Contributions 70

Pension benefits paid (40)

Balance, December 31, 2011 \$570

January 1, 2011, balances:

Pension asset \$20

Prior service cost-AOCI (amortization \$8 per year) 48

Net gain-AOCI (any amortization over 15 years) 80

Required:

1. Prepare the 2011 journal entry to record pension expense.

2. Prepare the journal entry(s) to record any 2011 gains and losses.

3. Prepare the 2011 journal entries to record the contribution to plan assets
and benefit payments to retirees.

4. Determine the balances at December 31, 2011, in the PBO, plan assets, the net
gain-ACOI, and prior service cost-ACOI and show how the balances changed during
2011. [Hint: You might find T-accounts useful.]

5. What amount will Beale report in its 2011 balance sheet as a net pension
asset or net pension liability for the funded status of the plan?

P16-7 Sherrod, Inc., reported pretax accounting income of \$76
million for 2011. The following information relates to differences between
pretax accounting income and taxable income:

a. Income from installment sales of properties included in pretax accounting
income in 2011 exceeded that reported for tax purposes by \$3 million. The
installment receivable account at year-end had a balance of \$4 million
(representing portions of 2010 and 2011 installment sales), expected to be
collected equally in 2012 and 2013.

b. Sherrod was assessed a penalty of \$2 million by the Environmental Protection
Agency for violation of a federal law in 2011. The fine is to be paid in equal
amounts in 2011 and 2012.

c. Sherrod rents its operating facilities but owns one asset acquired in 2010
at a cost of \$80 million. Depreciation is reported by the straight-line method
assuming a four-year useful life. On the tax return, deductions for
depreciation will be more than straight-line depreciation the first two years
but less than straight-line depreciation the next two years (\$ in millions):

Income Statement Tax Return Difference

2010 \$20 \$26 (\$6)

2011 20 35 (15)

2012 20 12 8

2013 20 7 13

\$80 \$80 \$0

d. Bad debt expense of \$3 million is reported using the allowance method in
2011. For tax purposes, the expense is deducted when accounts prove
uncollectible (the direct write-off method): \$2 million in 2011. At December
31, 2011, the allowance for uncollectible accounts was \$2 million (after
adjusting entries). The balance was \$1 million at the end of 2010.

e. In 2011, Sherrod accrued and expense and related liability for estimated
paid future absences of \$7 million relating to the companyâ€™s new paid vacation
program. Future compensation will be deductible on the tax return when actually
paid during the next two years (\$4 million 2012; \$3 million in 2013).

f. During 2010, accounting income included as estimated loss of \$2 million from
having accrued a loss contingency. The lost is paid in 2011 at which time it is
tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at
January 1, 2011, were \$1.2 million and \$2.8 million, respectively. The enacted
tax rate is 40% each year.

Required:

1. Determine the amounts necessary to record income taxes for 2011 and prepare
the appropriate journal entry.

2. What is the 2011 net income?

3. Show how deferred tax amounts should be classified and reported in the 2011
balance sheet.

E 17-10 Determine pension expense
Abbott and Abbott has a noncontributory, defined benefit pension plan. At
December 31, 2011,
Abbott and Abbott received the following information:

(\$in millions)
Projected Benefit Obligation
Balance, January 1 \$120
Service cost 20
Interest cost 12
Benefits paid (9)
Balance, December 31 \$143
Plant Assets
Balance, January 1 \$80
Actual return on plan assets 9
Contribution 2011 20
Benefits paid (9)
Balance, December 31 \$100

The expected long-term rate of return on plan assets was 10%. There was no
prior service cost and a negligible net loss AOCI on January 1, 2011.

Required:
1)Determine Abbott and Abbottâ€™s pension expense for 2011.
2) Prepare the journal entries to record Abbott and Abbottâ€™s pension expense,
funding, and payment for 2011.

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1.
The target capital structure for Jowers Manufacturing is 50 percent common stock, 14 percent preferred stock, and 36 percent debt. If the cost of equity for the firm is 19.4 percent,
the cost of preferred stock is 12.2 %, and the before-tax cost of debt is 9.1 percent, what is Jower?s cost of capital? The firm?s marginal tax rate is 34 percent.
Jowerâ€™s WACC is % (ROUND TO THREE decimal places.)

2.
(Weighted average cost of capital) The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt.
If the cost of equity for the firm is 18 percent, the cost of preferred stock is 10 percent, the before-tax cost of debt is 8 percent, and the firmâ€™s tax rate is 35 percent,
what is QMâ€™s weighted average cost of capital?

3.
Crypton electronics has a capital structure consisting of 44% common stock and 56% debt, a debt issue of 1000 par value, 6.5 bonds that matures in 15 years and pays an annual interest well sell for \$975. Common stock of the firm is selling for 30.15 per share and the firm expects to pay a 2.31 dividend next year. Dividends have grown at the rate of 4.7% per year and expected to continue to do so for the foreseeable future. What is Cryptons cost of capital where the firms tax rate is 30%
Cryptonâ€™s cost of capital is % (Round to three decimal places.)

4.
As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant under the assumption that the firms present capital structure reflects the appropriate mix of capital source for the firms, you have determined the market value of the firm?s capital structure as follows Bonds \$3,600,000, preferred stock \$2,200,000, common stock \$ 6,400,000. To finance the purchase ranch manufacturing will sell 10 year bonds paying 7.3 % per year @ a market price of 1,045 .preferred stock paying \$2.09 dividend can be sold for 24.78 common stock for ranch manufacturing is currently selling for 54.14 per share and the firm paid a 2.92 dividend last year. Dividend are expected to continue growing at a rate of 5.1 per year into the indefinite future , if the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchased .
Ranch manufacturing company WACC is _____________ round 3 decimal places.

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## Description

1. Johnson Company has entered into a lease agreement for equipment which is not cancelable. The details of the lease are as follows: Inception of the lease: Jan 1, 2012, residual value at the end of the lease term is guaranteed at the end of the lease term for \$50,000, annual lease payments are \$124,798 due at the beginning of each year, starting on Jan 1, 2012. The lease term is 6 years, the economic life of the equipment is 5 years and the fair value of the asset at Jan 1, 2012 is \$600,000. The borrowing rate is 6% per year. The lessee uses the straight line method to depreciate the asset.

a. Prepare the journal entry to record the lease agreement on Jan 1, 2012 from the lesseeâ€™s perspective.

b. Record the first payment on Jan 1, 2012

c. Record the second payment on Jan 1, 2013 and any adjusting entries needed on Dec 31, 2013.

2. George Manufacturing manufactures equipment for booths and has leased one to Peterson for a period of 10 years. The equipment has an estimated useful life of 12 years and the normal selling price of the asset is \$278,072. The unguaranteed residual value is \$20,000. Peterson will make annual payments of \$40,000 at the beginning of each year starting on June 1, 2012 and all maintenance and insurance costs. It cost George \$180,000 to manufacture the equipment and the borrowing rate is 10%.

a. Record the lease agreement from the lessorâ€™s perspective on July 1, 2013.

b. Record receipt of the first payment on July 1, 2013

c. Record any adjusting entry at December 31, 2013

d. Record receipt of the second payment on July 1, 2014 and any other entries if needed.

3. On January 1, 2011 Richardson Corp. leased a new machine from Johnson Corp for 3 years which has an expected useful life of 8 years with no salvage value. It is depreciated on a straight line basis. The annual rental payments are \$180,000 and start at the beginning of the year. Richardson is required to pay a security deposit of \$35,000 at the signing of the lease.

a. Record the lease agreement from the lesseeâ€™s point of view on Jan 1, 2011.

b. Record payment of the security deposit by Richardson and the first payment

c. Record the journal entry for initial lease contract from the lessorâ€™s perspective.

d. Record the first payment received by the lessor and the security deposit.

e. Record any adjusting journal entry needed at December 31, 2011 by the lessee or lessor.

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from the income statement and balance sheet of Meranda
Company:

 Item 12/31/10 12/31/09 AccountsReceivable \$ 42,000 \$45,100 AccountsPayable 27,900 24,500 MerchandiseInventory 68,000 63,000 Sales(2010) 170,000 Interest Revenue(2010) 3,200 Dividend Revenue(2010) 1,800 TaxExpense (2010) 11,600 SalariesExpense (2010) 22,400 COGS(2010) 57,000 InterestExpense(2010) 2,200 OperatingExpenes 19,400

.gif”>.gif”>Completethecashflo

usingthe directmetho

fromoperating
activitiessectionforMeranda Companyfortheyearended
December31,2010.

 2. GiventhefollowiComputethepercentage balantothe cesheet,completeahorizontalanalysis.nearesttenthof apercent. Jessicaâ€™sJewelryStoreComparativeBalanceSheetForYearsEndedDecember 31 2011 and2010 (inthousands) 2011 2010 Difference Percentage Assets CurrentAssets Cashand Equivalents \$319 \$288 AccountsReceivable,net 166 173 Inventory 437 400 TotalCurrentAssets 922 861 Property,PlantandEquipment TotalAssets \$1,299 \$1,273 Liabilities CurrentLiabilities AccountsPayable 132 144 AccruedLiabilities 90 84 TotalCurrentLiabilities 222 228 Long-TermLiabilities 84 96 TotalLiabilities 306 324 Stockholdersâ€™Equity CommonStock 288 255 RetainedEarnings 705 694 TotalStockholdersâ€™Equity 993 949 TotalLiabilitiesand Stockholdersâ€™Equity 1,299 \$1,273

ng

Part
B: Answer each of the following 15 questions. Each answer is worth

4
points.

1. Given the following
information, show the increase or decrease in the

accounting equation:

A. Deanne invests \$45,000
and \$10,000 of office equipment into the

B. Furniture is purchased
for \$8,000 cash.

C. Supplies are purchased
on credit for \$2,300.

D. The monthâ€™s electric
bill of \$775 was paid.

E. The monthâ€™s cash sales
were \$5,000.

2. Journalize the
following transactions and include the explanations.

A. Tammy invested \$40,000
into her corporation on June 11.

B. Tammy purchased
inventory for \$95,000, of which \$70,000 was on

account on June 14.

C. Tammy paid one monthâ€™s
rent of \$2,400 on June 16.

\$15,000 on account on June 19.

E. Tammy had paid \$2,500 on her payables
account on June 21.

3. Prepare a trial
balance from the following information for Computer

Systems, Inc. for
December 31, 2012:

Accounts payable \$4,298

Common stock \$4,073

Sales \$8,302

Cash \$1,902

Notes payable \$888

Wages expense \$777

Supplies expense \$1,028

Equipment \$5,183

Accounts receivable
\$1,733

Inventory \$6,938

4. Compute the missing
information from this post-closing trial balance:

Cash
\$38,502

Accounts Receivable 14,372

Prepaid Rent 18,229

Prepaid Insurance 4,583

Supplies (A)

Accounts Payable
(B)

Wages Payable 29,428

Common Stock
30,049

Retained Earnings
18,423

_______ _______

Total
\$80,436 \$80,436

5

5. Journalize the
following transactions using the perpetual inventory

method:

Nov. 1 Purchased \$3,600
of merchandise from Hilltop, terms 2/10, n/30.

Nov. 5 Purchased \$1,750
of merchandise for cash from Owenâ€™s Supply.

Nov. 7 Purchased \$3,400
of merchandise from Seaside, terms 1/15, n/30.

Nov. 10 Returned \$500 of
merchandise to Seaside. Credit Memo #131.

Nov. 11 Paid the invoice
from Hilltop.

6. Given the following
information, prepare a balance sheet for Brandonâ€™s

Campstore for the year ending December 31,
2012:

 Cash \$38,745 Retained Earnings \$171,309 Common Stock \$43,500 Equipment \$37,200 Accounts Receivable \$14,109 Accounts Payable \$26,351 Land \$35,000 Inventory \$81,311 Prepaid Supplies \$9,003 Income Taxes Payable \$5,284 Office Computers \$16,399 Other PPE \$26,550 Accum. Depr. (all) \$21,013 Prepaid Insurance \$9,140

6

7. Rick Companyâ€™s
beginning inventory and purchases during the fiscal

year ended December 31,
2012, were as follows: (Note:
The company uses a

perpetual
system of inventory.)

 Units Unit Price Total Cost January 1â€”Beginning 18 \$24 432 inventory March 12â€”Sold 13 April 11â€”Purchase 45 \$29 \$1,305 June 20â€”Sold 33 Aug 16â€”Purchase 35 \$27 \$945 Sept 11â€”Sold 29 Total Cost of Inventory Ending inventory is 23 units. \$2,682

What
is the ending inventory of Rick Company for 2012 using FIFO?

7

8. Assume that in Year 1,
the ending merchandise inventory is overstated

by \$30,000. If this is
the only error in Years 1 and 2, fill in the items below,

indicating which items
will be understated, overstated, or correctly stated for

Years 1 and 2.

Item
Year 1 Year 2

Gross Profit _____________
______________

Net Income _____________
______________

Ending Retained
Earnings _____________
______________

9. Below is a list of
treatments of accounting topics. Place GAAP on the line

if the treatment is
GAAP-based and place IFRS on the line if the treatment is

IFRS-based.

A. The use of LIFO is
allowed. ___________________

B. Both research and
development costs are expensed as incurred.

___________________

C. Market is defined as current
replacement cost. ___________________

10. Record the necessary journal
entries from the following bank

reconciliation
information for July 31, 2011:

 Bank Balance, July 31, 2011 \$28,542 Checkbook Balance, July 31, 2011 29,344 Bank collection of note receivable 1,545 + 210 interest Bank service charge 75 Deposits in transit 3,145 Outstanding checks 2,685 NSF check from customer 770 Correction of book error (check #456 written for \$280, recorded at \$28)â€”maintenance expense

11. Journalize the
following transactions for Ryan Company:

July 1 Sold \$5,300 of merchandise
to Rick on account.

Nov. 1 Exchanged Rickâ€™s
account receivable for an eight-month, 6% note for

\$5,300.

Dec. 31 Recorded accrued interest on Jimâ€™s
note (round to nearest dollar).

July 1 Rick paid off his
note with interest (round to nearest dollar).

12. A computer system was purchased on July 1 at
a cost of \$125,000. Itâ€™s

expected to be used for four years and
to have a residual value of \$5,000 after

8,000 hours of service.
The system was used for 1,750 hours the first year and

2,100 hours the second
year. Calculate the depreciation expense to the nearest

dollar for the first and
second years.

Method

Year 1 Year 2

Straight-line ________ ________

Double-declining-balance ________ ________

Units-of-production ________ ________

10

13. Prepare journal
entries for the following transactions for Ryan Company

in the general journal:

Feb. 28 Machinery that
cost \$57,000 and had accumulated depreciation of

\$46,000 was sold for
\$2,500.

April 10 A van that cost
\$23,700 and had accumulated depreciation of

\$21,000 was sold for
\$1,250.

July 16 Equipment that
cost \$120,000 and had accumulated depreciation

for new equipment with a fair-market value of

\$140,000. The old
equipment and \$135,000 in cash were given for the new

equipment.

14. Journalize the
following treasury stock transactions:

May 1 Reacquired 800
shares of \$15 par common stock for \$13 per share.

May 7 Sold 400 shares at
\$11 per share.

May
9 Sold 250 shares at \$17 per share

15. The following
information was taken from the financial statements of

Brandon Company for
12/31/10 and12/31/09:

Net income for 2010:
\$313,000

Depreciation expense for
2010: \$28,400

Loss on sale of
equipment: \$7,300

Balance
Sheet
12/31/10 12/31/09

Accounts Receivable \$46,000 \$50,000

Merchandise
Inventory
35,000
28,000

Accounts Payable 27,000 24,000

Interest Payable
6,000
8,000

Prepare the operating
activities section of the statement of cash flows under the

indirect
method for the year ended December 31, 2010.

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1. #Ex 25-16

Based on the data below, assume that Sirrus
Phone Company uses the product cost concept of applying the cost-plus approach
to product pricing.

Variable Costs: Fixed
Costs:

Direct materials 130.00

Direct labor 50.00 Selling and adm. Exp 70000

Total 240.00 per unit

a.
Determine the total
manufacturing costs and the cost amount per unit for the production and sale of
3500 units for mobile phones.

b.
Determine the markup percentage
(rounded to two decimal places) for mobile phones.

c.
Determine the selling price of
mobile phones. Round to the nearest dollar.

#2. T7

1.The sales, income from operations, and invested
assets for each division of Winston Company are as follows:

 Sales Income fromOperations InvestedAssets Division C \$5,000,000 \$630,000 \$3,900,000 Division D 6,800,000 760,000 4,300,000 Division E 3,750,000 750,000 7,250,000

2. Management has established a minimum rate of return for invested assets of
8%.

 (a) Determine the residual income for each division. (b) Based on residual income, which of the divisions is the most profitable?

#3 (T8) answer one of the multiple choice below

The condensed income statement for a business
for the past year is presented as follows:

 Product F G H Total Sales \$300,000 \$220,000 \$340,000 \$860,000 Less variable costs 180,000 190,000 220,000 590,000 Contribution margin \$120,000 \$ 30,000 \$120,000 \$270,000 Less fixed costs 50,000 50,000 40,000 140,000 Income (loss) from oper. \$ 70,000 \$ (20,000) \$ 80,000 \$130,000

Management is considering the discontinuance of the manufacture and sale of Product
G at the beginning of the current year. The discontinuance would have no effect
on the total fixed costs and expenses or on the sales of Products F and H. What
is the amount of change in net income for the current year that will result
from the discontinuance of Product G?

 \$20,000 increase \$30,000 increase \$20,000 decrease \$30,000 decrease

#4 (T13)

Pnok Company has been purchasing a component,
Part Q, for \$18.90 a unit. Pnok is currently operating at 70% of capacity and
no significant increase in production is anticipated in the near future. The
cost of manufacturing a unit of Part Q, determined by absorption costing
methods, is estimated as follows:

 Direct materials \$11.25 Direct labor 4.50 Variable factory overhead 1.12 Fixed factory overhead 3.15 Total \$20.02

1. Prepare a differential analysis report, dated March 12 of the current year,
on the decision to make or buy Part Q.

#5 (T14)

FDE Manufacturing
Company has a normal plant capacity of 37,500 units per month. Because of an
extra large quantity of inventory on hand, it expects to produce only 30,000
units in May. Monthly fixed costs and expenses are \$112,500 (\$3 per unit at
normal plant capacity) and variable costs and expenses are \$8.25 per unit. The
present selling price is \$13.50 per unit. The company has an opportunity to
sell 7,500 additional units at \$9.90 per unit to an exporter who plans to
market the product under its own brand name in a foreign market. The additional
business is therefore not expected to affect the regular selling price or
quantity of sales of FDE Manufacturing Company.

Prepare a differential analysis report, dated April 21 of the current year, on
the proposal to sell at the special price.

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29. The
Spartan Technology Company has a proposed contract with the Digital Systems
Company of Michigan.
The initial investment in land and equipment will be \$120,000. Of this amount,
\$70,000 is subject to five-year MACRS depreciation. The balance is in
nondepreciable property. The contract covers six years; at the end of six
years, the nondepreciable assets will be sold for \$50,000, which is their
original cost. The depreciated assets will have zero resale value.

The contract will require an additional investment of \$55,000 in
working capital at the beginning of the first year and, of this amount, \$25,000
will be returned to the Spartan Technology Company after six years.

The investment will produce \$50,000 in
income before depreciation and taxes for each of the six years. The corporation
is in a 40 percent tax bracket and has a 10 percent cost of capital.

Should the investment be undertaken? Use the net present value
method.

30. An asset was purchased three years ago for
\$140,000. It falls into the five-year category for MACRS depreciation. The firm
is in a 35 percent tax bracket. Compute the:

a. Tax loss on the sale and the related tax
benefit if the asset is sold now for \$15,320.

b. Gain
and related tax on the sale if the asset is sold now for \$58,820. (Refer to
footnote 3.)

31. Polycom Technology is considering the
purchase of a new piece of equipment for
\$110,000. It has a nine-year midpoint of its asset depreciation range (ADR). It
will require an additional initial investment of \$60,000 in nondepreciable
working capital. Fifteen thousand dollars of this investment will be recovered
after the sixth year and will provide additional cash flow for that year.
Income before depreciation and taxes for the next
six years will be:

Year Amount

1………………… \$85,000

2………………… 75,000

3………………… 60,000

4………………… 52,500

5………………… 45,000

6………………… 40,000

The
tax rate is 30 percent. The cost of capital must be computed based on

the following (round the final value to
the nearest whole number):

 Cost (aftertax) Weights Debt………………………………………………….. Kd 7.0% 40% Preferred stock……………………………………. Kp 10.0 10 Common equity (retained earnings)……….. Ke 16.0 50

a. Determine the annual depreciation
schedule.

b. Determine annual cash flow. Include
recovered working capital in the sixth year.

c. Determine the weighted average cost of
capital.

d. Determine the net present value. Should
Polycom Technology purchase the new equipment?

32. Graphic Systems purchased a computerized
measuring device two years ago for \$80,000. It falls into the five-year
category for MACRS depreciation. The equipment can currently be sold for
\$28,400.

A new piece of equipment will cost \$210,000. It also falls into
the five-year category for MACRS depreciation.

Assume
the new equipment would provide the following stream of added cost savings for
the next six years.

 Year Cash Flow 1……………. \$76,000 2……………. 66,000 3……………. 62,000 4……………. 60,000 5……………. 56,000 6……………. 42,000

The
tax rate is 34 percent and the cost of capital is 12 percent.

a. What is the book value of the old
equipment?

b. What is the tax loss on the sale of the
old equipment?

c. What is the tax benefit from the sale?

d. What is the cash inflow from the sale of
the old equipment?

e. What is the net cost of the new equipment?
(Include the inflow from the sale of the old equipment.)

f. Determine the depreciation schedule for
the new equipment.

g. Determine the depreciation schedule for
the remaining years of the old equipment.

h. Determine the incremental depreciation between
the old and new equipment and the related tax shield benefits.

i. Compute the aftertax benefits of the cost
savings.

j. Add the depreciation tax shield benefits
and the aftertax cost savings, and determine the present value. (See Table
12-17 as an example.)

k. Compare the present value of the
incremental benefits (j) to the net
cost of the new equipment (e). Should
the replacement be undertaken?

COMPREHENSIVE PROBLEM

The Woodruff Corporation purchased a piece
of equipment three years ago for \$230,000. It has an asset depreciation range
(ADR) midpoint of eight years. The old equipment can be sold for \$90,000.

A
new piece of equipment can be purchased for \$320,000. It also has an ADR of
eight years.

Assume the old and new equipment would provide the following
operating gains (or losses) over the next six years.

 New Equipment Old Equipment 1…………. \$80,000 \$25,000 2…………. 76,000 16,000 3…………. 70,000 9,000 4…………. 60,000 8,000 5…………. 50,000 6,000 6…………. 45,000 (7,000)

The
firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new
equipment be purchased to replace the old equipment?

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13. Aerospace Dynamics will invest \$110,000 in a
project that will produce the following cash flows. The cost of capital is 11
percent. Should the project be undertaken? (Note that the fourth yearâ€™s cash
flow is negative.)

 Year Cash Flow 1……………. \$36,000 2……………. 44,000 3……………. 38,000 4……………. (44,000) 5……………. 81,000

14. The Horizon Company will invest \$60,000 in a
temporary project that will generate the following cash inflows for the next
three years.

 Year Cash Flow 1……………. \$15,000 2……………. 25,000 3……………. 40,000

The
firm will also be required to spend \$10,000 to close down the project at the
end of the three years. If the cost of capital is 10 percent, should the
investment be undertaken?

15. Skyline Corp. will invest \$130,000 in a
project that will not begin to produce returns until after the 3rd year. From
the end of the 3rd year until the end of the 12th year (10 periods), the annual
cash flow will be \$34,000. If the cost of capital is 12 percent, should this
project be undertaken?

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### Discussion Questions

 12-1. What are the important administrative considerations in the capital budgeting process? 12-3. What are the weaknesses of the payback method? 12-5. What does the term mutually exclusive investments mean? 12-6. How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods? 12-7. If a corporation has projects that will earn more than the cost of capital, should it ration capital? 12-8. What is the net present value profile? What three points should be determined to graph the profile? 12-9. How does an asset’s ADR (asset depreciation range) relate to its MACRS category?

Problems

1. Assume a corporation has earnings before
depreciation and taxes of \$90,000, depreciation of \$40,000, and that it is in a
30 percent tax bracket. Compute its cash flow using the format below.

Earnings before depreciation and taxes _____

Depreciation _____

Earnings before taxes _____

Taxes @ 30% _____

Earnings after taxes _____

Depreciation _____

Cash flow _____

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Andre has asked you to evaluate his business, Andreâ€™s Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid \$9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are \$1,750 per month. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is \$12. Andre has asked you to find the following information.

1. Find the contribution margin per haircut. Assume that the barbers’ compensation is a fixed cost. Show calculations to support your answer.
2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.
3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.
4. Suppose Andre revises the compensation method. The barbers will receive \$4 per hour plus \$6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.

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[1]. Financial
analysts for Naulls Industries have revealed the following information about
the company:

Â·
Naulls
Industries currently has a capital structure that consists of 75 percent common
equity and 25 percent debt.

Â·
The risk-free
rate, kRF, is 5 percent.

Â·
The market
risk premium , kM – kRF, is 6 percent.

Â·
Naullsâ€™s
common stock has a beta of 1.2.

Â·
Naulls has
20-year bonds outstanding with an annual coupon rate of 12 percent and a face
value of \$1,000. The bonds sell today
for \$1,200.

Â·
The companyâ€™s
tax rate is 40 percent.

What is the companyâ€™s current WACC?

a. 7.41%

b. 9.17%

c.10.61%

d.10.99%

e.11.57%

[2]. Grateway
Inc. has a weighted average cost of capital of 11.5 percent. Its target capital
structure is 55 percent equity and 45 percent debt. The company has sufficient
retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9 percent, and
the companyâ€™s tax rate is 30 percent. If
the expected dividend next period (D1) is \$5 and the current stock
price is \$45, what is the companyâ€™s growth rate?

a.2.68%

b.3.44%

c.4.64%

d.6.75%

e.8.16%

[3]. The
managers of Kenforest Grocers are trying to determine the companyâ€™s optimal
capital budget for the upcoming year.
Kenforest is considering the following projects:

Rate of

Project Size Return Risk

A \$200,000 16% High

B 500,000 14 Average

C 400,000 12 Low

D 300,000 11 High

E 100,000 10 Average

F 200,000 10 Low

G 400,000 7 Low

The company estimates that its WACC is 11
percent. All projects are
risk by adding 2 percentage points to the WACC for high-risk projects and
subtracting 2 percentage points from the WACC for low-risk projects. Which of the projects will the company
accept?

a.A, B, C, E, F

b.B, D, F, G

c.A, B, C, E

d,A, B, C, D, E

e.A, B, C, F

Steel has a capital structure with 30 percent debt (all long-term bonds) and 70
percent common equity.The
yield to maturity on the companyâ€™s long-term bonds is 8 percent, and the firm
estimates that its overall composite WACC is 10 percent.The risk-free rate of interest
is 5.5 percent, the market risk premium is 5 percent, and the companyâ€™s tax
uses the CAPM to determine its cost of equity.What is the beta on Bradshawâ€™s
stock?

a.1.07

b.1.48

c.1.31

d.0.10

e.1.35

[5]. Arizona
Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7
percent and kM is 14 percent.
Suppose the firm sells 10 percent of its assets with beta equal to 1.25
and purchases the same proportion of new assets with a beta of 1.1. What will be the firmâ€™s new overall required
rate of return, and what rate of return must the new assets produce in order to
leave the stock price unchanged?

a.15.645%;
15.645%

b.15.750%;
14.700%

c.15.645%;
14.700%

d.15.750%;
15.645%

e.14.750%;
15.750%

[6]. Sun
State Mining Inc., an all-equity firm, is considering the formation of a new
division that will increase the assets of the firm by 50 percent. Sun
State currently has a
required rate of return of 18 percent, U.S. Treasury bonds yield 7 percent, and the
market risk premium is 5 percent. If Sun State
wants to reduce its required rate of return to 16 percent, what is the maximum
beta coefficient the new division could have?

a.2.2

b.1.0

c.1.8

d.1.6

e.2.0

[7]. Heavy
Metal Corp. is a steel manufacturer that finances its operations with 40
percent debt, 10 percent preferred stock, and 50 percent equity. The interest
rate on the companyâ€™s debt is 11 percent.
The preferred stock pays an annual dividend of \$2 and sells for \$20 a
share. The companyâ€™s common stock trades
at \$30 a share, and its current dividend (D0) of \$2 a share is
expected to grow at a constant rate of 8 percent per year. The flotation cost of external equity is 15
percent of the dollar amount issued, while the flotation cost on preferred
stock is 10 percent. The company
estimates that its WACC is 12.30 percent.
Assume that the firm will not have enough retained earnings to fund the
equity portion of its capital budget.
What is the companyâ€™s tax rate?

a.30.33%

b.32.86%

c.35.75%

d.38.12%

e.40.98%

[8]. Anderson
Company has four investment opportunities with the following costs (paid at t =
0) and expected returns:

Expected

Project Cost Return

A \$2,000
16.0%

B 3,000
14.5

C 5,000
11.5

D 3,000
9.5

The company has a target capital structure that
consists of 40 percent common equity, 40 percent debt, and 20 percent preferred
stock. The company has \$1,000 in
retained earnings. The company expects
its year-end dividend to be \$3.00 per share (D1 = \$3.00). The dividend is expected to grow at a
constant rate of 5 percent a year. The
companyâ€™s stock price is currently \$42.75.
If the company issues new common stock, the company will pay its
investment bankers a 10 percent flotation cost.

The company can issue corporate bonds with a yield
to maturity of 10 percent. The company
is in the 35 percent tax bracket. How
large can the cost of preferred stock be (including flotation costs) and it
still be profitable for the company to invest in all four projects?

a. 7.75%

b. 8.90%

c.10.46%

d.11.54%

e.12.68%

Multiple
Part:

(The
following information applies to the next three problems.)

The Global Advertising Company has a marginal tax rate of
40 percent. The company can raise debt
at a 12 percent interest rate and the last dividend paid by Global was
\$0.90. Globalâ€™s common stock is selling
for \$8.59 per share, and its expected growth rate in earnings and dividends is
5 percent. If Global issues new common
stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures
with 30 percent debt and 70 percent equity.

[9]. What is
Globalâ€™s cost of retained earnings if it can use retained earnings rather than
issue new common stock?

a.12.22%

b.17.22%

c.10.33%

d. 9.66%

e.16.00%

[10]. What is
the cost of common equity raised by selling new stock?

a.12.22%

b.17.22%

c.10.33%

d. 9.66%

e.16.00%

[11]. What is
the firmâ€™s weighted average cost of capital if the firm has sufficient retained
earnings to fund the equity portion of its capital budget?

a.11.95%

b.12.22%

c.12.88%

d.13.36%

e.14.21%

(The
following information applies to the next two problems.)

Byron Corporationâ€™s present capital structure,
which is also its target capital structure, is 40 percent debt and 60 percent
common equity. Assume that the firm has
no retained earnings. The companyâ€™s
earnings and dividends are growing at a constant rate of 5 percent; the last
dividend (D0) was \$2.00; and the current equilibrium stock price is
\$21.88. Byron can raise all the debt
financing it needs at 14 percent. If
Byron issues new common stock, a 20 percent flotation cost will be incurred. The firmâ€™s marginal tax rate is 40 percent.

[12]. What is
the component cost of the equity raised by selling new common stock?

a.17.0%

b.16.4%

c.15.0%

d.14.6%

e.12.0%

[13]. What is
the firmâ€™s weighted average cost of capital?

a.10.8%

b.13.6%

c.14.2%

d.16.4%

e.18.0%

(The
following information applies to the next six problems.)

Rollins Corporation has a target capital structure
consisting of 20 percent debt, 20 percent preferred stock, and 60 percent
common equity. Assume the firm has
insufficient retained earnings to fund the equity portion of its capital
budget. Its bonds have a 12 percent coupon, paid semiannually, a current
maturity of 20 years, and sell for \$1,000.
The firm could sell, at par, \$100 preferred stock that pays a 12 percent
annual dividend, but flotation costs of 5 percent would be incurred. Rollinsâ€™ beta is 1.2, the risk-free rate is
10 percent, and the market risk premium is 5 percent. Rollins is a constant
growth firm that just paid a dividend of \$2.00, sells for \$27.00 per share, and
has a growth rate of 8 percent. The
firmâ€™s policy is to use a risk premium of 4 percentage points when using the
bond-yield-plus-risk-premium method to find ks. Flotation costs on new common stock total 10
percent, and the firmâ€™s marginal tax rate is 40 percent.

[14]. What is
Rollinsâ€™ component cost of debt?

a.10.0%

b. 9.1%

c. 8.6%

d. 8.0%

e. 7.2%

[15]. What is
Rollinsâ€™ cost of preferred stock?

a.10.0%

b.11.0%

c.12.0%

d.12.6%

e.13.2%

[16]. What is
Rollinsâ€™ cost of retained earnings using the CAPM approach?

a.13.6%

b.14.1%

c.16.0%

d.16.6%

e.16.9%

[17]. What is
the firmâ€™s cost of retained earnings using the DCF approach?

a.13.6%

b.14.1%

c.16.0%

d.16.6%

e.16.9%

[18]. What is
Rollinsâ€™ cost of retained earnings using the bond-yield-plus-risk-premium
approach?

a.13.6%

b.14.1%

c.16.0%

d.16.6%

e.16.9%

[19]. What is
Rollinsâ€™ WACC, if the firm has insufficient retained earnings to fund the
equity portion of its capital budget?

a.13.6%

b.14.1%

c.16.0%

d.16.6%

e.16.9%

(The
following information applies to the next two problems.)

The Jackson Company has just paid a dividend of
\$3.00 per share on its common stock, and it expects this dividend to grow by 10
percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate
is 10 percent; and the expected return on the market is 14 percent. The firmâ€™s investment bankers believe that
new issues of common stock would have a flotation cost equal to 5 percent of
the current market price.

[20]. How much
should an investor be willing to pay for this stock today?

a.\$62.81

b.\$70.00

c.\$43.75

d.\$55.00

e.\$30.00

[21]. What will
be Jacksonâ€™s
cost of new common stock if it issues new stock in the marketplace today?

a.15.25%

b.16.32%

c.17.00%

d.12.47%

e. 9.85%

(The
following information applies to the next two problems.)

Becker Glass Corporation expects to have earnings before
interest and taxes during the coming year of \$1,000,000, and it expects its
earnings and dividends to grow indefinitely at a constant annual rate of 12.5
percent. The firm has \$5,000,000 of debt
outstanding bearing a coupon interest rate of 8 percent, and it has 100,000
shares of common stock outstanding. Historically, Becker has paid 50 percent of
net earnings to common shareholders in the form of dividends. The current price of Beckerâ€™s common stock is
\$40, but it would incur a 10 percent flotation cost if it were to sell new
stock. The firmâ€™s tax rate is 40
percent.

[22]. What is
the firmâ€™s cost of retained earnings?

a.15.0%

b.15.5%

c.16.0%

d.16.5%

e.17.0%

[23]. What is
Beckerâ€™s cost of newly issued stock?

a.16.0%

b.16.5%

c.17.0%

d.17.5%

e.18.0%

(The
following information applies to the next four problems.)

J. Ross and Sons Inc. has a target capital structure
that calls for 40 percent debt, 10 percent preferred stock, and 50 percent
common equity. The firmâ€™s current
after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes
at this rate. The firmâ€™s preferred stock
currently sells for \$90 a share and pays a dividend of \$10 per share; however,
the firm will net only \$80 per share from the sale of new preferred stock. Rossâ€™ common stock currently sells for \$40
per share, but the firm will net only \$34 per share from the sale of new common
stock. The firm recently paid a dividend
of \$2 per share on its common stock, and investors expect the dividend to grow
indefinitely at a constant rate of 10 percent per year. Assume the firm has sufficient retained
earnings to fund the equity portion of its capital budget.

[24]. What is
the firmâ€™s cost of retained earnings?

a.10.0%

b.12.5%

c.15.5%

d.16.5%

e.18.0%

[25]. What is
the firmâ€™s cost of newly issued common stock?

a.10.0%

b.12.5%

c.15.5%

d.16.5%

e.18.0%

[26]. What is
the firmâ€™s cost of newly issued preferred stock?

a.10.0%

b.12.5%

c.15.5%

d.16.5%

e.18.0%

[27]. What is
the firmâ€™s weighted average cost of capital?

a. 9.5%

b.10.3%

c.10.8%

d.11.4%

e.11.9%

(The following information applies
to the next three problems.)

The following information applies to the Coetzer Company:

Â·
Coetzer has a
target capital structure of 40 percent debt and 60 percent common equity.

Â·
Coetzer has
\$1,000 par value bonds outstanding with a 15-year maturity, a 12 percent annual
coupon, and a current price of \$1,150.

Â·
The risk-free
rate is 5 percent. The market risk
premium (kM â€“ kRF) is also 5 percent.

Â·
Coetzerâ€™s
common stock has a beta of 1.4.

Â·
Coetzerâ€™s tax
rate is 40 percent.

[28]. What is
the companyâ€™s after-tax cost of debt?

a. 3.6%

b. 6.0%

c. 7.2%

d.10.0%

e.12.0%

[29]. What is
the companyâ€™s after-tax cost of common equity?

a. 6.0%

b. 8.4%

c. 9.6%

d.10.0%

e.12.0%

[30]. What is
the companyâ€™s WACC?

a. 6.0%

b. 7.4%

c. 9.6%

d.10.8%

e.12.2%

(The
following information applies to the next four problems.)

Viduka Constructionâ€™s CFO wants to
estimate the companyâ€™s WACC. She has
collected the following information:

Â·
The company
currently has 20-year bonds outstanding.
The bonds have an 8.5 percent annual coupon, a face value of \$1,000, and
they currently sell for \$945.

Â·
The companyâ€™s
stock has a beta = 1.20.

Â·
The market
equals 5 percent.

Â·
The risk-free
rate is 6 percent.

Â·
The company
has outstanding preferred stock that pays a \$2.00 annual dividend. The preferred
stock sells for \$25 a share.

Â·
The companyâ€™s
tax rate is 40 percent.

Â·
The companyâ€™s
capital structure consists of 40 percent long-term debt, 40 percent common
stock, and 20 percent preferred stock.

[31]. What is
the companyâ€™s after-tax cost of debt?

a.5.10%

b.5.46%

c.6.46%

d.8.50%

e.9.11%

[32]. What is
the companyâ€™s after-tax cost of preferred stock?

a.4.80%

b.5.60%

c.7.10%

d.8.00%

e.8.40%

[33]. What is
the companyâ€™s after-tax cost of common equity?

a. 7.20%

b. 7.32%

c. 7.94%

d.12.00%

e.12.20%

[34]. What is
the companyâ€™s WACC?

a. 7.95%

b. 8.12%

c. 8.59%

d. 8.67%

e.10.04%

(The following information applies
to the next three problems.)

Burlees Inc.â€™s
CFO is interested in calculating the cost of capital. In order to calculate the cost of capital,
the company has collected the following information:

Â·
The companyâ€™s
capital structure consists of 40 percent debt and 60 percent common stock.

Â·
The company
has bonds outstanding with 25 years to maturity. The bonds have a 12 percent annual coupon, a
face value of \$1,000, and a current price of \$1,252.

Â·
The company
uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 5 percent
and the market risk premium, (kM – kRF), equals 6
percent. The companyâ€™s common stock has
a beta of 1.6.

Â·
The companyâ€™s
tax rate is 40 percent.

[35]. What is
the companyâ€™s after-tax cost of debt?

a.3.74%

b.4.80%

c.5.62%

d.7.20%

e.8.33%

[36]. What is
the companyâ€™s cost of common equity?

a. 9.65%

b.14.00%

c.14.60%

d.17.60%

e.18.91%

[37]. What is
the companyâ€™s weighted average cost of capital (WACC)?

a.10.5%

b.11.0%

c.11.5%

d.12.0%

e.12.5%

Web Appendix 9A

Multiple
Choice: Conceptual

9A-[38]. Sunshine Inc. has two divisions. 50 percent of the firmâ€™s capital is invested
in Division A, which has a beta of 0.8.
The other 50 percent of the firmâ€™s capital is invested in Division B,
which has a beta of 1.2. The company has
no debt, and it is 100 percent equity financed. The risk-free rate is 6 percent
and the market risk premium is 5 percent.
Sunshine assigns different hurdle rates to each division, and these
hurdle rates are based on each divisionâ€™s market risk. Which of the following statements is most
correct?

a.Sunshineâ€™s composite WACC is 11 percent.

b.Division B has a lower weighted average cost of
capital than Division A.

c.If Sunshine assigned the same hurdle rate to
each division, this would lead the firm to select too many projects in Division
A and reject too many projects in Division B.

d.Statements a and b are correct.

e.Statements a and c are correct.

9A-[39]. If the firm is being operated so as to
maximize shareholder wealth, and if our basic assumptions concerning the
relationship between risk and return are true, then which of the following
should be true?

a.If the beta of the asset is larger than the
firmâ€™s beta, then the re-quired return on the asset is less than the required
return on the firm.

b.If the beta of the asset is smaller than the
firmâ€™s beta, then the required return on the asset is greater than the required
return on the firm.

c.If the beta of the asset is greater than the
firmâ€™s beta prior to the addition of that asset, then the firmâ€™s beta after the
purchase of the asset will be smaller than the original firmâ€™s beta.

d.If the beta of an asset is larger than the
firmâ€™s beta prior to the addition of that asset, then the required return on
the firm will be greater after the purchase of that asset than prior to its
purchase.

e.None of the statements above is correct.

9A-[40]. Using the Security Market Line concept in
capital budgeting, which of the following is correct?

a.If the expected rate of return on a given
capital project lies above the SML, the project should be accepted even if its
beta is above the beta of the firmâ€™s average project.

b.If a projectâ€™s return lies below the SML, it
should be rejected if it has a beta greater than the firmâ€™s existing beta but
accepted if its beta is below the firmâ€™s beta.

c.If two mutually exclusive projectsâ€™ expected
returns are both above the SML, the project with the lower risk should be
accepted.

d.If a projectâ€™s expected rate of return is
greater than the expected rate of return on an average project, it should be
accepted.

e.None of the statements above is correct.

Multiple Choice: Problems

9A-[41]. Louisiana Enterprises, an all-equity firm, is
considerÂ­ing a new capital investment.
AnalyÂ­sis has indicated that the proposed investment has a beta of 0.5
and will generate an expected return of 7 percent. The firm currently has a required return of
10.75 percent and a beta of 1.25. The
investment, if undertaken, will double the firmâ€™s total assets. If kRF is 7 percent and the market
return is 10 percent, should the firm undertake the investÂ­ment? (Choose the best answer.)

a.Yes;theexpectedreturnofthe asset(7%)exceedstherequiredreturn (6.5%).

b.Yes; the beta of the asset will reduce the risk
of the firm.

c.No; the expected return of the asset (7%) is
less than the required return (8.5%).

d.No; the risk of the asset (beta) will increase
the firmâ€™s beta.

e.No; the expected return of the asset is less
than the firmâ€™s required return, which is 10.75%.

Medium:

9A-[42]. Assume you are the director of capital
budgeting for an all-equity firm. The firmâ€™s current cost of equity is 16
percent; the risk-free rate is 10 percent; and the market risk premium is 5
percent. You are considering a new
project that has 50 percent more beta risk than your firmâ€™s assets currently
have, that is, its beta is 50 percent larger than the firmâ€™s existing
beta. The expected return on the new
project is 18 percent. Should the
project be accepted if beta risk is the appropriate risk measure? Choose the correct statement.

a.Yes; its expected return is greater than the
firmâ€™s cost of capital.

return is less than its expected return.

c.No; a 50 percent increase in beta risk gives a
risk-adjusted required return of 24 percent.

d.No; the projectâ€™s risk-adjusted required return
is 2 percentage points above its expected return.

e.No; the projectâ€™s risk-adjusted required return
is 1 percentage point above its expected return.

Web Appendix 9B

Multiple
Choice: Conceptual

9B-[43]. Which of the following methods involves
calculating an average beta for firms in a similar business and then applying
that beta to determine a projectâ€™s beta?

b.Pure play method.

c.Accounting beta method.

d.CAPM method.

e.Statements b and c are correct.

Multiple
Choice: Problems

9B-[44]. Northern Conglomerate has two divisions,
Division A and Division B. Northern
looks at competing pure-play firms to estimate the betas of each of the two
divisions. After this analysis, Northern
concludesthat Division A has a beta of 0.8 and Division B has a
beta of 1.5. The twodivisions
are the same size. The risk-free rate is
5 percent and the market risk premium, kM – kRF, is 6
percent. Assume that Northern is 100
percent equity financed. What is the overall composite WACC for Northern
Conglomerate?

a. 9.8%

b.10.2%

c.11.9%

d.13.6%

e.14.0%

9B-[45]. Interstate Transport has a target capital
strucÂ­ture of 50 percent debt and 50 percent common equity. The firm is considering a new independent
project that has a return of 13 percent and is not related to
transportation. However, a pure play
proxy firm has been identified that is exclusively engaged in the new line of
busiÂ­ness. The proxy firm has a beta of
1.38. Both firms have a marginal tax
rate of 40 percent, and Interstateâ€™s before-tax cost of debt is 12
percent. The risk-free rate is 10
percent and the market risk premium is 5 percent. The firm should

a.Reject the project; its return is less than the
firmâ€™s required rate of return on the project of 16.9 percent.

b.Accept the project; its return is greater than
the firmâ€™s required rate of return on the project of 12.05 percent.

c.Reject the project; its return is only 13
percent.

d.Accept the project; its return exceeds the
risk-free rate and the before-tax cost of debt.

e.Be indifferent between accepting or rejecting;
the firmâ€™s required rate of return on the project equals its expected return.

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# Accounting Problems….

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## Description

1. On January 1, 2013, Daniels Corporation issued \$5,000,000, 10-year, 8% bonds at 103. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2013 is

a. Cash 5,000,000
Bonds Payable 5,000,000

b. Cash 5,150,000
Bonds Payable 5,150,000

c. Premium on Bonds Payable 150,000
Cash 5,000,000
Bonds Payable 5,150,000

d. Cash 5,150,000
Bonds Payable 5,000,000

2. Levin Company issued 500 shares of no-par common stock for \$5,500. Which of the following journal entries would be made if the stock has a stated value of \$2 per share?

a. Cash 5,500
Common Stock 5,500

b. Cash 5,500
Common Stock 1,000 Paid-in Capital in Excess of Par 4,500

c. Cash 5,500
Common Stock 1,000
Paid-in Capital in Excess of Stated Value 4,500

d. Common Stock 5,500
Cash 5,500

3. Motes industries owns 45% of Newton Company. For the current year, Newton reports net income of \$250,000 and declares and pays a \$60,000 cash dividend. Which of the following correctly presents the journal entries to record Motesâ€™ equity in Newtonâ€™s net income and the receipt of dividends from Newton?

a. Dec. 31 Stock Investments 112,500
Revenue from Stock Investments 112,500
Dec. 31 Cash 27,000
Stock Investments 27,000

b. Dec. 31 Stock Investments 112,500
Revenue from Stock Investments 112,500
Dec. 31 Cash 60,000
Stock Investments 60,000

c. Dec. 31 Stock Investments 85,500
Revenue from Stock Investments 85,500
Dec. 31 Cash 27,000
Stock Investments 27,000

d. Dec. 31 Revenue from Stock Investments 112,500
Stock Investments 112,500
Dec. 31 Stock Investments 27,000
Cash 27,000

4. Talbot, Inc. has the following income statement (in millions):
Wilkinson, INC.
Income Statement
For the Year Ended December 31, 3
Net Sales \$300
Cost of Goods Sold 120
Gross Profit 180
Operating Expenses 44
Net Income \$136

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

a. 30%
b. 40%
c. 100%
d. None of the above

5. Mah, Inc. completed Job No. B14 during 2013. The job cost sheet listed the following:
Direct materials \$55,000
Direct labor \$30,000
Units produced 3,000 units
Units sold 1,800 units

How much is the cost of the finished goods on hand from this job?

a. \$105,000
b. \$63,000
c. \$42,000
d. \$51,000

6. In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 80,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. The equivalent units of production for materials for June were

a. 90,000 equivalent units.
b. 100,000 equivalent units.
c. 104,000 equivalent units.
d. 80,000 equivalent units.

7. A company budgeted unit sales of 204,000 units for January, 2013 and 240,000 units for February, 2013. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month’s budgeted unit sales. If there were 61,200 units of inventory on hand on December 31, 2013, how many units should be produced in January, 2013 in order for the company to meet its goals?

a. 214,800 units
b. 204,000 units
c. 193,200 units
d. 276,000 units

8. A company’s planned activity level for next year is expected to be 200,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Variable Fixed
Indirect materials \$280,000 Depreciation \$120,000
Indirect labor 400,000 Taxes 20,000
Factory supplies 40,000 Supervision 100,000
A flexible budget prepared at the 160,000 machine hours level of activity would show total manufacturing overhead costs of

a. \$576,000.
b. \$720,000.
c. \$768,000.
d. \$816,000.

9. A company developed the following per-unit standards for its product: 2 pounds of direct materials at \$4 per pound. Last month, 1,500 pounds of direct materials were purchased for \$5,700. The direct materials price variance for last month was

a. \$5,700 favorable.
b. \$300 favorable.
c. \$150 favorable.
d. \$300 unfavorable.

10. In incremental analysis,

a. costs are not relevant if they change between alternatives.
b. all costs are relevant if they change between alternatives.
c. only fixed costs are relevant.
d. only variable costs are relevant.
?

Problem 1:
Here are comparative balance sheets for Hayes Company.
Hayes Company
Comparative Balance Sheets
December 31, 2013
Assets 2013 2012
Cash \$ 43,000 \$ 10,000
Accounts receivable 18,000 14,000
Inventories 25,000 18,000
Prepaid expenses 6,000 9,000
Long-term investments 0 18,000
Equipment 60,000 32,000
Accumulated depreciationâ€”Equipment (20,000) (14,000)
Total assets \$ 122,000 \$ 87,000

Liabilities and Stockholderâ€™s Equity
Accounts payable \$ 17,000 \$ 7,000
Bonds payable 37,000 47,000
Common stock (\$1 par) 40,000 23,000
Retained earnings 28,000 10,000
Total liabilities and stockholderâ€™s equity \$ 122,00 \$ 87,000

1. The 2013 Income Statement reported \$6,000 in depreciation expense, a \$4,000 loss on
sale of investments and Net income of \$43,000.
2. Cash dividends of \$15,000 were declared and paid.
3. Long-term investments that has a cost of \$18,000 were sold for \$14,000
4. Sales for 2013 were \$120,000.
Instructions: Prepare a statement of cash flows for 2013 using the indirect method.
Hayes Company
Statement of Cash Flows
For the Year Ended December 31, 2013

Adjustments to reconcile net income to net cash provided by operating activities

Problem 2:
Doherty Corporation is projecting a cash balance of \$31,785 in its December 31, 2013, balance sheet. Doherty schedule of expected collections from customers for the first quarter of 2013 shows total collections of \$189,885. The schedule of expected payments for direct materials for the first quarter of 2013 shows total payments of \$40,200. Other information gathered for the first quarter of 2013 is: sale of equipment \$3,392; direct labor \$70,178, manufacturing overhead \$34,583, and purchase of securities \$12,372. Selling and administrative expenses are projected to be \$45,117; this figure includes \$1,117 in depreciation expense on the office equipment. All costs and expenses will be paid in cash. Doherty wants to maintain a balance of at least \$30,000 cash at the end of each quarter.

Instructions: Complete the cash budget for the first quarter.

Doherty Corporation
Cash Budget
For the Quarter Ending March 31, 2013

Problem 3

Delaney Corporation has the following cost records for February 2013.

Indirect factory labor \$ 4,612 Factory utilities \$ 601
Direct materials used 22,361 Depreciation, factory equipment 1,585
Work in process, 6/1/12 2,769 Direct labor 31,084
Work in process, 6/30/12 3,733Maintenance, factory equipment 1,792
Finished goods, 6/1/12 4,609 Indirect materials 2,268
Finished goods, 6/30/12 7,429 Factory manager’s salary 3,315

Instructions: Prepare a cost of goods manufactured schedule for February 2013.

Delaney Corporation
Cost of Goods Manufactured Schedule
For the Month Ended June 30, 2013

Problem 4:
Wallace Corporation has 72,615 shares of common stock outstanding. It declares a \$2.10 per share cash dividend on August 1 to stockholders of record on September 15. The dividend is paid on October 31.

Instructions: Prepare the entries on the appropriate dates to record the declaration and payment of the cash dividend.

Date Account Description Debit Credit

Problem 5:
Hawkins Manufacturing incurs unit costs of \$7.90 (\$6.10 variable and \$1.80 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 12,000 of the assembly part at \$5.75 per unit. If the offer is accepted, Hawkins will save all variable costs but no fixed costs.

Instructions: Prepare an analysis showing the total cost savings, if any, Hawkins will realize by buying the part.
Total annual cost

Hawkins Company should _______________ the part because total annual costs to
make are less than total costs to buy.

Problem 6
On July 1, Ketel Corporation purchases 500,000 shares of its \$6 par value common stock for the treasury at a cash price of \$10 per share. On September 1, it sells 275,000 shares of the treasury stock for cash at \$13 per share. The balance in the retained earnings account is \$6,345,000.

Instructions: Journalize the two treasury stock transactions.

Date Account Description Debit Credit

Problem 7:
Reed Company has a unit-selling price of \$500, variable costs per unit of \$269, and fixed costs of \$265,580.

Instructions: Compute the break-even point in units using either (a) the mathematical equation or (b) contribution margin per unit. Round answer up to the next whole unit.

Problem 8:
Lopez Company has a factory machine with a book value of \$89,851 and a remaining useful life of 4 years. A new machine is available at a cost of \$325,275. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from \$630,925 to \$425,840.

Instructions: Prepare an analysis showing whether the old machine should be retained or replaced.

Retain Equipment Replace Equipment

Total costs

The equipment should be _______________ because total costs are lower than to retain the machine.

Problem 9:
For Mathers Company, variable costs are 68% of sales, and fixed costs are \$215,000. Management’s net income goal is \$68,610.

Instructions: Compute the required sales needed to achieve management’s target net income of \$78,610.

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# accounting problems

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problem

5-9

Exercise 5-9 Preparing adjusting and closing entries
for a merchandiser LO P3

The following list includes
selected permanent accounts and all of the temporary accounts from the December
31, 2013, unadjusted trial balance of Emiko Co., a business owned by Kumi
Emiko. Emiko Co. uses a perpetual inventory system.

5-10
Fill in the blanks in the following separate income statements a through e. Identify any negative

amount by putting it in parentheses.

ex 5-15

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# accounting problems

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1. (TCO A) Platypus
Building Inc. won a bid for a new office building contract. Below is info from
the project accountant:
Total
Construction Fixed Price \$8,000,000
Construction
Start Date March 3,
2012
Construction
Complete Date December 4,
2013

As
of Dec 31â€¦ 2012 2013
Actual
cost incurred \$2,500,000 \$3,150,000
Estimated
remaining costs \$3,750,000 \$-
Billed
to customer \$2,400,000 \$5,300,000
from customer \$2,250,000 \$5,400,000

Assuming Platypus
Building Inc. uses the completed contract method, what amount of gross profit
would be recognized in 2013?
1.
\$2,000,000
2.
\$2,350,000
3.
\$1,650,000
4.
\$940,000

2. (TCO A) Kerry Corp purchased a used bottling machine from Bob’s Bottling
Inc. on Jan 1, 2012 for \$2,100,000. Bob accounted for the sale correctly under
the installment sales method. It had a book value of \$1575000. Kerry paid with
\$300000 cash and a note for \$1800000 with an annual interest of 10%. Kerry
agreed to make equal annual payments of \$600000. Kerry Corp made their first
payment on Jan 1, 2013 of \$780000 which included interest of \$180000 to date of
payment.
As
of Dec 31, 2013 Bob has deferred gross profit of ?
1.
\$255,000
2.
\$330,000
3.
\$375,000
4. \$300,000

3. (TCO A) Blue
Suede Construction Corp used the percentage-of-completion method of revenue
recognition. They were contracted to build the new amphitheater for \$800000.

As
of Dec 31â€¦. 2012
2013
Percentage
of completion 15% 40%
Estimated
total expected costs \$550,000 \$580,000
Gross
profit recognized (Cumulative) \$50,000 \$99,000
Contracted
costs incurred during 2013 wereâ€¦ (Points
: 5)
1.
\$145,000
2. \$149,500
3.
\$151,000
4.
\$232,000

4. (TCO A) In
industries with high rates of return (such as a magazine distribution company)
an alternative method of revenue recognition would be

â€¢
record sales net of an estimate of expected future returns
â€¢
record sales in current period and returns in future periods as they occur
â€¢ do not record any sales until
expiration of all return privileges have passed
â€¢
all of the above

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