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accounting problems
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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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Description
see attached. 12 accounting problems.
must show all your work, including all calculations.
Problem #1 –
The
following information is available to reconcile Litner Co.’s book balance of
cash with its bank statement cash balance as of April 30. The April 30 cash
balance according to the accounting records is $78,356, and the bank statement
cash balance for that date is $83,525.
a. The bank erroneously cleared a $480
check against the account in April that was not issued by Litner. The check
documentation included with the bank statement indicates the check was actually
issued by Lightning Co.
b. On April 30, the bank issued a credit
memorandum for $53 interest earned on Litner’s account.
c. When the April checks are compared
with entries in the accounting records, it is found that Check No. 1828 had
been correctly drawn for $1,530 to pay for advertising but was erroneously
entered in the accounting records as $1,350
d. A credit memorandum indicates that
the bank collected $10,000 cash on a note receivable for Litner, deducted a $30
collection fee, and credited the balance to the company’s Cash account. Litner
did not record this transaction before receiving the statement.
e. A debit memorandum of $895 is
enclosed with the bank statement for an NSF check for $870 received from a
customer. The bank assessed a $25 fee for processing it.
f. Litner’s April 30 daily cash receipts
of $5,102 were placed in the bank’s night depository on that date, but do not
appear on the April 30 bank statement.
g. Litner’s April 30 cash disbursements
journal indicates that Check No. 1837 for $584 and Check No. 1840 for $1,219
were both written and entered in the accounting records, but are not among the
canceled checks.
1. Prepare the bank reconciliation for
this company as of April 30.
2. Prepare the journal entries necessary to
bring the company’s book balance of cash into conformity with the reconciled
cash balance as of April 30.
Problem #2
A company purchased merchandise
inventory costing $15,000 with credit terms of 2/10, n/30 on November 7. On
November 15, the company paid 1/3 of the amount due. The remaining balance was
paid on December 7.
Required:
a. Record the journal entries related to this transaction using the gross method of recording purchases.
b. Record the journal entries related to this transaction using the net method of recording
purchases.
c. Which method do you prefer? Why?
Problem #3
Timmons Company had a January 1, balance
in its Allowance for Doubtful Accounts of $7,000 for the current year. The
following transactions and events affected the Allowance for Doubtful Accounts
during the current year:
.gif”>
a. What amount should appear in the allowance for doubtful accounts in the
December 31, balance sheet for the current year?
b. How are the direct write-off
method and the allowance method applied in accounting for uncollectible
accounts receivables? Please explain in words.
Problem #4 –
A company purchased a machine for
$75,000 that was expected to last 6 years and to have a salvage value of
$6,000. At the beginning of the machine’s fourth year the company decided that
the machine’s estimated useful life should be revised to a total of 10 years
instead of 6 years. Also, the salvage value was re-estimated to be $5,500.
Straight-line depreciation was used throughout the machine’s life. Calculate the
depreciation expense for the fourth year of the machine’s useful life.
Problem #5
A company made the
following expenditures in connection with the construction of its new building:
.gif”>
Prepare a schedule showing the amounts to be recorded as Land,
Buildings, and Machinery.
Problem #6
–
A
company sells computers at a selling price of $1,800 each. Each computer has a
2 year warranty that covers replacement of defective parts. It is estimated
that 2% of all computers sold will be returned under the warranty at an average
cost of $150 each. During November, the company sold 30,000 computers, and 400
computers were serviced under the warranty at a total cost of $55,000. The
balance in the Estimated Warranty Liability account at November 1 was $29,000.
What is the company’s warranty expense for the month of November?
Problem #7
Xtreme Sports has $100,000 of 8% noncumulative, nonparticipating,
preferred stock outstanding. Xtreme Sports also has $500,000 of common stock
outstanding. In the company’s first year of operation, no dividends were paid.
During the second year, Xtreme Sports paid cash dividends of $30,000. How
should this dividend be distributed between common and preferred stockholders?
Show your calculations.
Problem #8 –
Information for the Ace Manufacturing Company follows:
.gif”>
Calculate the cost of goods manufactured for this company.
Problem #9 –
The following calendar year information about the Tahoma
Corporation is available on December 31:
.gif”>
The company applies overhead on the basis of 125% of direct labor
costs.
a. Calculate the amount of
over- or under-applied overhead.
b. What is the significance of this over- or
under-applied amount of overhead?
Problem #10 –
A company has a goal of earning $100,000 in after-tax
income. The company must pay $28,000 in income tax if it achieves the goal. The
contribution margin ratio is 30%. What dollar amount of sales must be achieved
to reach the goal if fixed costs are $64,000?
Problem #11 –
Hess Co. manufactures a product that sells for $12 per unit. Total
fixed costs are $96,000 and variable costs are $7 per unit. Hess can buy a
newer production machine that will increase total fixed costs by $22,800 but
variable costs will be decreased by $0.40 per unit. What effect would the
purchase of the new machine have on Hess’s break-even point in units?
Problem
#12 —
This problem is the discussion board activity about
the two homework problems on budgeting.
Follow the instructions on the Week #10 budgeting discussion board. Your posting/participation in the discussion
board activity is considered part of your final exam and is worth up to 10
points on the final exam. Your answers
must be in your own words.
To clarify, you are not
posting your answer on budgeting here.
You are posting it on the discussion board.
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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 quarter’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 company’s direct
materials budget and schedule of expected cash disbursements for purchases of
raw materials for the upcoming fiscal year.
2] Prepare the company’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 company’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 company’s manufacturing
overhead budget.
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 month’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.
d] Selling and administrative expenses
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 company’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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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
overhead 175,000 175,000
Selling
& administrative 112,000 112,000
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
overhead.
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
used—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 company’s income statement? Please show
your computations.
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 “A†table cloths. The standard costs for type “A†table cloths are:
Total Per table cloth
Direct
materials $89,600 $44.80
Direct
labor $18,000
9.00
Variable
manufacturing overhead
(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 “A†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
manufacturing overhead $ 7,700
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.
1.(TCOC)Thefollowingoverheaddataareforadepartmentofalargecompany.
ActualcostsStatic
Incurredbudget
Activitylevel(inunits)800750
Variablecosts:
Indirectmaterials$6,850$6,600
Electricity$1,312$1,275
Fixedcosts:
Administration$3,570$3,700
Rent$3,320$3,200
Required:Constructaflexiblebudgetperformancereportthatwouldbeusefulinassessinghowwellcosts
werecontrolledinthisdepartment.
2.(TCOD)LindonCompanyuses5,000unitsofPartXeachyearasacomponentintheassemblyofone
ofitsproducts.ThecompanyispresentlyproducingPartXinternallyatatotalcostof$80,000asfollows:
Directmaterials………………………………………..$18,000
Directlabor………………………………………………20,000
Variablemanufacturingoverhead………………. 12,000
Fixedmanufacturingoverhead………………….. 30,000
Totalcosts……………………………………………….80,000
AnoutsidesupplierhasofferedtoprovidePartXatapriceof$13perunit.IfLindonstopsproducingthe
partinternally,onethirdofthemanufacturingoverheadwouldbeeliminated.
Required:Prepareamakeorbuyanalysisshowingtheannualadvantageordisadvantageofaccepting
theoutsidesupplier’soffer.
3.(TCOE)HanksCompanyproducesasingleproduct.Operatingdataforthecompanyanditsabsorption
costingincomestatementforthelastyearispresentedbelow.
Unitsinbeginninginventory……………………………..0
Unitsproduced………………………………………..9,000
Unitssold………………………………………………8,000
Sales…………………………………………………$80,000
Lesscostofgoodssold:
Beginninginventory……………………………………….0
Addcostofgoodsmanufactured………………54,000
Goodsavailableforsale………………………….54,000
Lessendinginventory………………………………6,000
Costofgoodssold………………………………..48,000
Grossmargin……………………………………….32,000
Lesssellingandadmin.expenses……………..28,000
Netoperatingincome…………………………..$ 4,000
Variablemanufacturingcostsare$4perunit.Fixedfactoryoverheadtotals$18,000fortheyear.This
overheadwasappliedatarateof$2perunit.Variablesellingandadministrativeexpenseswere$1per
unitsold.
Required:Prepareanewincomestatementfortheyearusingvariablecosting.Commentonthe
differencesbetweentheabsorptioncostingandthevariablecostingincomestatements.
4.(TCOA)Thefollowingdata(inthousandsofdollars)havebeentakenfromtheaccountingrecordsof
KarmanaCorporationforthejustcompletedyear.
Sales……………………………………………………….$950
Rawmaterialsinventory,beginning………………….$10
Rawmaterialsinventory,ending……………………..$30
Purchasesofrawmaterials………………………….$120
Directlabor………………………………………………$180
Manufacturingoverhead……………………………..$230
Administrativeexpenses……………………………..$100
Sellingexpenses………………………………………..$140
Workinprocessinventory,beginning………………$70
Workinprocessinventory,ending………………….$40
Finishedgoodsinventory,beginning………………$100
Finishedgoodsinventory,ending……………………$80
Usethesedatatoprepare(inthousandsofdollars)ascheduleofCostofGoodsManufacturedanda
ScheduleofCostofGoodsSoldfortheyear.Inaddition,elaborateontherelationshipbetweenthese
schedulesastheyrelatetotheflowofproductcostsinamanufacturingcompany.
1.(TCOF)LoxhamCorporationusestheweightedaveragemethodinitsprocesscostingsystem.Data
concerningthefirstprocessingdepartmentforthemostrecentmontharelistedbelow:
Workinprocess,beginning:
Unitsinbeginningworkinprocessinventory400
Materialscosts$6,900
Conversioncosts$2,500
Percentcompleteformaterials80%
Percentcompleteforconversion15%
Unitsstartedintoproductionduringthemonth6,000
Unitstransferredtothenextdepartmentduringthemonth5,400
Materialscostsaddedduringthemonth$112,500
Conversioncostsaddedduringthemonth$210,300
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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Description
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 |
|
be recorded by a |
|
decrease the balance |
|
decrease net income |
|
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?
|
|
|
|
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 |
|
fiscal assumption |
6.)
Adjusting entries can be classified as
|
accruals and |
|
deferrals and |
|
accruals and advances. |
|
postponements and |
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, |
|
Debit Office Supplies |
|
Debit Office Supplies |
|
Debit Office Supplies, |
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, |
|
debit Rent Expense, |
|
debit Prepaid Rent, |
|
debit Prepaid Rent, |
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 |
|
income statement debit |
|
income statement |
|
balance sheet debit |
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 |
|
debit to Income |
|
credit to Income |
|
debit to Income |
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 |
|
debit to Income |
|
credit to Rent Expense |
|
credit to Income |
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 |
|
a credit to Ramirez, |
|
credits to Expenses |
|
a debit to Revenue for |
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 |
|
credit to Income |
|
debit to Revenues for |
|
debit to Income |
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 |
|
credit to Income |
|
debit to Income |
|
debit to Income |
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 |
|
credits to Expenses |
|
a credit to Poole, |
|
a debit to Revenue for |
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:
|
|
|
|
20.) Mather Company made a
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:
|
|
|
|
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 |
|
a $3,000 credit to |
|
a $3,000 credit to |
|
a $4,200 debit to |
22.) In a perpetual inventory
system, the Cost of Goods Sold account is used
|
only when a cash sale |
|
only when a credit |
|
whenever there is a |
|
only when a sale of |
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. |
24.) Kershaw Bookstore had
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 |
|
gross profit. |
|
ending inventory. |
27.) Richmond’s Wholesale
uses a sales journal. An entry in this journal represents a
|
debit to Cash; credit |
|
debit to Sales |
|
debit to Accounts |
|
debit to Accounts |
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 |
|
A major consideration |
|
The accounting system |
|
To be useful, |
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 |
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 |
|
credit to Cash Over |
|
credit to Cash for |
|
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 |
|
debit to Bad Debts |
|
debit to Bad Debts |
|
debit to Allowance for |
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 |
$10,500 |
|
Accounts written off |
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 exceed |
|
liabilities exceed |
|
assets exceed current |
42.) Admire County Bank
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
|
|
|
|
43.) Admire County Bank
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?
|
|
|
|
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?
|
|
|
|
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. |
46.) A company receives $174,
of which $14 is for sales tax. The journal entry to record the sale would
include a
|
debit to Sales Tax |
|
debit to Sales Tax |
|
debit to Cash for |
|
debit to Sales for |
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Accounting problems
$8.00
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
                                 Number of Personnel               Direct cost
Personel                                  7                                $90,000
administrative                          6                                    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
$28.00
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.)
Adams
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:
a. If the company uses traditional costing and allocates overhead
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”>
Assume a traditional costing system applies the overhead costs
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
activity-cost drivers for overhead.
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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$32.00
Description
Problems
Section –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 |
|
(c) |
Thread. |
|
(d) |
Electricity costs of $.025 per |
|
(e) |
Janitorial costs of $2,000 per month. |
|
(f) |
Advertising costs |
|
(g) |
Sales salaries. |
|
(h) |
Color dyes for producing different |
|
(i) |
Salary of the production supervisor. |
|
(j) |
Straight-line depreciation on sewing |
|
(k) |
Patterns for different designs. |
|
(l) |
Hourly wages of |
|
(m) |
Property taxes on factory, building, |
|
(n) |
Cotton and polyester cloth. |
|
(o) |
Maintenance costs with sewing machine |
2. On October 31, the end of the first month of
operations, Morristown & Co. prepared the following income statement based
on absorption costing:
|
Morristown & Income Statement For Month Ended |
||
|
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 |
|
(b) |
Compute the sales (units) required to |
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. _____________________________________________________________
Factory Overhead
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
Variable factory overhead $20,000
Fixed factory overhead $4,000
$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
Variable factory overhead $20,000
Fixed factory overhead $4,000
$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
Variable factory overhead $10,000
Fixed factory overhead $ 2,000
$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
factory overhead
direct labor and
factory overhead
direct materials
and factory overhead
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 manager’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:
advertising expense
depreciation on
factory equipment
indirect
materials
property taxes
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Description
Problem 8-1A Plant asset costs;
depreciation methods LO C1, P1
|
Timberly |
|
Required: |
|
|
1.1 |
Prepare |
|
1.2 |
Prepare |
|
2. |
Compute |
|
3. |
Compute |
Problem 8-2A Asset cost allocation;
straight-line depreciation LO C1, P1
[The following information applies to
the questions displayed below.]
|
In |
|
Cost |
$ |
344,400 |
|
Cost |
185,400 |
|
|
Cost |
2,202,000 |
|
|
Cost |
173,000 |
|
|
Total |
7,937,299 |
|
|
|
.mheducation.com/” title=”Reference Information”>references
2.
value:
5.00 points
Problem
8-2A Part 1
|
Required: |
|
1. |
Allocate |
check my work.mheducation.com/” title=”Reference Information”>referencesebook
& resources
3.
value:
5.00 points
Problem
8-2A Part 2
|
2. |
Prepare |
Problem 8-2A Part 3
|
3. |
Using the straight-line method, prepare the December 31 adjusting |
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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?
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 hasn’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 rm’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.
Task Time
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.–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
5–7 days) have on the process?
( Each sheet done separate in Excel only please)
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$32.00
Description
CHAPTER
18 HW 12 Problems
|
The following costs result from the production and sale of 4,550 |
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Variable |
||
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Plastic |
$ |
127,400 |
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Wages |
423,150 |
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Drum |
168,350 |
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Variable |
||
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Sales |
118,300 |
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|
Fixed |
||
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Taxes |
9,500 |
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Factory |
19,000 |
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Factory |
79,000 |
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Fixed |
||
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Lease |
19,000 |
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Accounting |
69,000 |
|
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Administrative |
149,000 |
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Required: |
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1. |
Prepare a contribution margin income statement for the company.(Input all amounts as |
|
VINCE DRUM COMPANY |
||
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(4,550 units) |
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$ |
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Variable |
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$ |
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Fixed |
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$ |
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2.1 |
Compute its |
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VINCE DRUM COMPANY |
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Per unit |
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$ |
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Variable |
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$ |
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$ |
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2.2 |
Compute its contribution margin ratio.(Round your intermediate |
|
Contribution |
% |
|
Edge Equipment Co. manufactures and markets a number of rope |
.mheducation.com/” title=”Reference Information”>references
|
Section Break |
Learning Objective: |
|
|
Difficulty: Hard |
Learning Objective: |
2.
value:
10.00 points
|
1(a) |
Estimate Product XT’s break-even point in terms of sales units. |
|
Break-even |
units |
|
1(b) |
Estimate Product XT’s break-even point in terms of sales |
|
Break-even |
$ |
check my workeBook Links (2).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
|
|
Difficulty: Hard |
Learning Objective: |
3.
value:
10.00 points
|
3. |
Prepare a contribution margin income statement showing sales, |
|
EDGE EQUIPMENT CO. |
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|
|
$ |
|
|
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|
|
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|
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|
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|
Net income |
$ |
|
Jetson Co. sold 20,700 units of its only product and incurred a |
|
JETSON COMPANY |
|||||
|
Sales |
$ |
790,740 |
|||
|
Variable |
553,518 |
||||
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|
|
|
|||
|
Contribution |
237,222 |
||||
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Fixed |
321,000 |
||||
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|
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|
|||
|
Net loss |
$ |
(83,778 |
) |
||
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|
|
|
|||
|
|
rev: 02_07_2012
.mheducation.com/” title=”Reference Information”>references
|
Section Break |
Learning Objective: |
Learning Objective: 18-P2 |
|
Difficulty: Hard |
Learning Objective: |
4.
value:
10.00 points
|
Required: |
|
|
1. |
Compute the break-even point in dollar sales for year 2011. (Round your |
|
Break-even |
$ |
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
5.
value:
10.00 points
|
2. |
Compute the predicted break-even point in dollar sales for year |
|
Break-even |
$ |
rev: 02_07_2012
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
6.
value:
10.00 points
|
3. |
Prepare a forecasted contribution margin income statement for |
|
JETSON COMPANY |
|
|
|
$ |
|
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|
Net income |
$ |
|
|
|
|
|
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
7.
value:
10.00 points
|
4. |
Compute the sales level required in both dollars and units to |
|
Sales |
$ |
|
|
Sales |
units |
|
|
|
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
8.
value:
10.00 points
|
5. |
Prepare a forecasted contribution margin income statement that |
|
JETSON COMPANY |
|
|
|
$ |
|
|
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|
|
|
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$ |
|
Letter Co. produces and sells two products, T and O. It |
|
Product T |
Product O |
|||||||
|
Sales |
$ |
774,400 |
$ |
774,400 |
||||
|
Variable |
464,640 |
154,880 |
||||||
|
|
|
|
|
|||||
|
Contribution |
309,760 |
619,520 |
||||||
|
Fixed |
187,760 |
497,520 |
||||||
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|
|||||
|
Income |
122,000 |
122,000 |
||||||
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Income |
39,040 |
39,040 |
||||||
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|||||
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Net income |
$ |
82,960 |
$ |
82,960 |
||||
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|
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|
|||||
|
|
.mheducation.com/” title=”Reference Information”>references
|
Section Break |
Learning Objective: |
|
|
Difficulty: Hard |
Learning Objective: |
9.
value:
10.00 points
|
Required: |
|
|
1. |
Compute the break-even point in dollar sales for each product.(Round your contribution |
|
Product T |
$ |
|
Product O |
$ |
|
|
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
10.
value:
10.00 points
|
2. |
Assume that the company expects sales of each product to decline |
|
LETTER CO. |
||
|
Product T |
Product O |
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|
$ |
$ |
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Net |
$ |
$ |
|
|
|
|
|
|
check my workeBook Links (3).mheducation.com/” title=”Reference Information”>references
|
Worksheet |
Learning Objective: |
Learning Objective: |
|
Difficulty: Hard |
Learning Objective: |
11.
value:
10.00 points
|
3. |
Assume that the company expects sales of each product to |
|
LETTER CO. |
||
|
Product T |
Product O |
|
|
|
$ |
$ |
|
|
||
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|
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$ |
$ |
|
|
||
|
National Co. manufactures and sells three products: red, white, |
|
Required: |
|
|
1. |
Assume if the company continues to use the old material, |
|
Break-Even Points |
Sales Units |
Sales Dollars |
|
Red at break-even |
$ |
|
|
White at |
$ |
|
|
Blue at |
$ |
|
|
|
|
2. |
Assume if the company uses the new material, determine its new |
|
Break-Even Points |
Sales Units |
Sales Dollars |
|
Red at |
$ |
|
|
White at |
$ |
|
|
Blue at |
$ |
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Description
EXERCISE 5-5 T
On January 1, 2011, Porter Company purchased
an 90% interest in the capital stock of Salem Company for $850,000. The fair
value of the noncontrolling interest was proportionate to the consideration
paid by the controlling interest. At that time, Salem Company had capital stock
of $550,000 and retained earnings of $80,000. Differences between the fair
value and the book value of the identifiable assets of Salem Company were as
follows: Equipment Land Inventory In-Process Research & Development Bonds
payable The book values of all other assets and liabilities of Salem Company
were equal to their fair values on January 1, 20011 The inventory was sold in
2011 and the equipment has a 5-year remaining life as of January 1, 2011. The
bonds payable mature in 5 years from January 1, 2011 At 12/31/13, Salem owes
Porter $25000 Required for the year ended December 31, 2013:
1.
Prepare the analysis as of acquisition date including unamortized differential
at 1/1/11.
2.
Prepare the journal entries Porter recorded with respect to its investment in
Porter for the year ended 12/31/13.
3.
Calculate Net income to controlling interest and Net income to non controlling interest
for the year 2013.
4.
Prepare all necessary elimination entries for the year ended 2013.
5.
Complete the consolidated workpapers for the year ended 12/31/13. Use formulas
in all calculations. INCOME STATEMENT P CO. S CO. ELIMINATIONS CONS.TOT.
12/31/2013 (000’s) DR. CR. Sales 2,100.00 450.00 2,550.000 Dividend Income
54.00 54.000 0.000 Total revenues 2,154.00 450.00 2,604.00 Cost of goods sold
950.00 200.00 1,150.00 Depreciation exp 50.00 30.00 80.00 Other Expenses 60.00
50.00 110.00 0.00 Total expenses 1,060.00 280.00 1,340.00 Total Net income 1,094.00
170.00 1,264.00 Less net income to noncontrolling interest 0.00 Net income to
controlling interest 1,264.00 RETAINED EARNINGS STATEMENT Retained Earnings
1/1/13 500.00 230.00 730.000 Net income 1,094.00 170.00 1,264.00 Dividends
declared 90.00 60.00 150.00 Retained Earnings 12/31/13 1,504.00 340.00 1,844.00
BALANCE SHEET Cash 76.00 65.00 141.00 Accounts receivable 445.00 190.00 635.00
Inventory 780.00 175.00 955.00 Investment in Sub 850.00 850.00 Land 215.00
320.00 535.00 IPR&D 0.00 Plant and Equipment 360.00 280.00 640.00 Goodwill
0.00 Total assets 2,726.00 1,030.00 3,756.00 Accounts payable 132.00 110.00
242.000 bonds payable 90.00 30.00 120.000 Common stock 1,000.00 550.00
1,550.000 Paid in capital 0.000 Retained earnings 1,504.00 340.00 1,844.000 Noncontrolling
interest in sub 0.000 Total liabilities and equity 2,726.00 1,030.00 0.00 0.00
3,756.00 0.00 0.00 0.00
Problrm
Workpaper Entries and Consolidated Financial Statements
On January 1, 2004, Palmer Company acquired a 90% interest
in Stevens Company at a cost
of $1,000,000. At the purchase date, Stevens Company’s
stockholders’ equity consisted of the
following:
Common Stock $500,000
Retained Earnings 190,000
An examination of Stevens Company’s assets and liabilities
revealed the following at the date
of acquisition:
Book Value Fair Value
Cash $ 90,726 $ 90,726
Accounts Receivable 200,000 200,000
Inventories 160,000 210,000
Equipment 300,000 390,000
Accumulated Depreciation – Equipment (100,000) (130,000)
Land 190,000 290,000
Bonds Payable (205,556) (150,000)
Other 54,830 54,830
Total $ 690,000 $ 955,556
Additional Information—Date of Acquisition:
Stevens Company’s equipment had an original life of 15 years
and a remaining useful life of
10 years. All the inventory was sold in 2004. Stevens
Company purchased its bonds payable
on the open market on January 10, 2004, for $150,000 and
recognized a gain of $55,556.
Financial statement data for 2006 are presented here:
Workpaper Entries and Consolidated Financial Statements
On January 1, 2004, Palmer Company acquired a 90% interest in
Stevens Company at a cost
of $1,000,000. At the purchase date, Stevens Company’s
stockholders’ equity consisted of the
following:
Common Stock $500,000
Retained Earnings 190,000
An examination of Stevens Company’s assets and liabilities
revealed the following at the date
of acquisition:
Book Value Fair Value
Cash $ 90,726 $ 90,726
Accounts Receivable 200,000 200,000
Inventories 160,000 210,000
Equipment 300,000 390,000
Accumulated Depreciation – Equipment (100,000) (130,000)
Land 190,000 290,000
Bonds Payable (205,556) (150,000)
Other 54,830 54,830
Total $ 690,000 $ 955,556
Additional Information—Date of Acquisition:
Stevens Company’s equipment had an original life of 15 years
and a remaining useful life of
10 years. All the inventory was sold in 2004. Stevens
Company purchased its bonds payable
on the open market on January 10, 2004, for $150,000 and
recognized a gain of $55,556.
Financial statement data for 2006 are presented here:
Palmer Stevens
Company Company
1/1 Retained Earnings $ 297,600 $ 210,000
Net Income 131,500 45,000
429,100 255,000
Dividends (120,000) (35,000)
12/31 Retained Earnings $ 309,100 $ 220,000
Cash $ 201,200 $ 151,000
Accounts Receivable 221,000 173,000
Inventories 100,400 81,000
Investment in Stevens Company 1,000,000
Equipment 450,000 300,000
Accumulated Depreciation – Equipment (300,000) (140,000)
Land 360,000 290,000
Total Assets $2,032,600 $ 855,000
Accounts Payable $ 323,500 $ 135,000
Bonds Payable 400,000
Common Stock 1,000,000 500,000
Retained Earnings 309,100 220,000
Total Liabilities and Equity $2,032,600 $ 855,000
What method is Palmer using to account for its investment in
Stevens? How can you tell?
Prepare a consolidated ?nancial statements workpaper for the
year ended December 31,
2006
Prepare a consolidated ?nancial statements workpaper for the
year ended December 31,
2006
Prepare in good form a schedule or t-account showing the
calculation of the controlling interest in combined net income for the year
ended December 31, 2006.
PROBLEM 5-6 Workpaper
Entries for Two Years and Sale of Equipment in Year Two
On January 1, 2004, Perini Company purchased an 85% interest
in Silvas Company for
$400,000. On this date, Silvas Company had common stock of
$90,000 and retained earnings
of $210,000. An examination of Silvas Company’s assets and
liabilities revealed that their
book value was equal to their fair value except for the
equipment.
Book Value Fair Value
Equipment $ 360,000
Accumulated Depreciation (120,000)
$ 240,000 $ 300,000
(1) The cost method is used to account for the investment.
(2) The partial equity method is used to account for the
investment.
During 2004 and 2005, Perini Company reported net income
from its own operations of
$80,000 and paid dividends of $50,000 in each year. Silvas
Company had income of $40,000
each year and paid dividends of $30,000 on each December 31.
Accumulated depreciation is presented on a separate row in
the workpaper and in the consolidated ?nancial statements
Prepare eliminating entries for consolidated ?nancial
statements workpaper for the year
ended December 31, 2004, assuming:
(1) The cost method is used to account for the investment.
(2) The partial equity method is used to account for the
investment.
Accumulated depreciation is presented on a separate row in
the workpaper and in the
consolidated ?nancial statements
The cost method is used to account for the investment.
(2) The partial equity method is used to account for the
investment.
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Description
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 hour’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
your answer with appropriate computations.
B. Would your answer to requirement a
change if Kent offered to buy a batch of 1,000 blankets for $ 51 per unit? Support
your answer with appropriate computations.
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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Description
Submit your responses to the
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 women’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 Tomco’s sales to Swissco are essentially equivalent to those of
the sales made to unrelated foreign distributors.
2. USAco, a domestic corporation, forms
a Canadian subsidiary, CANco, to distribute USAco’s widgets in Canada. USAco
sells widgets to CANco for resale in Canada, provides CANco with USAco’s unique
distribution software, and provides the use of USAco’s collections staff to
collect receivables from delinquent accounts.
What are the intercompany transactions that USAco must price
at arm’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. Erica’s job
is to provide technical assistance to customers who purchase the company’s
mainframe computers. Many of Erica’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 Erica’s home country that is identical
to the United States Model Income Tax Convention of November 15, 2006.
How does the United States tax Erica’s activities?
How would your answer
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
Finco’s sole shareholder since Finco was organized in 1990. At the end of the
current year, Winco sells all of Finco’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. Winco’s basis in Finco’s stock was $5 million
immediately prior to the sale.
Assume Winco’s capital gain on the sale of Finco’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 Winco’s basis in Finco’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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Description
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 par—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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Description
Problem 1. Maple Company started the year with no inventory. During the year, it purchased
two identical inventory items at different times. The first unit cost $800 and the second, $700.
One of the items was sold during the year.
Required:
Based on this information, how much product cost would be allocated to cost of goods sold and
ending inventory, assuming use of:
a. LIFO
b. FIFO
c. Weighted average
Cost of goods sold
LIFO
FIFO
Weighted Average
Ending inventory
Problem 2. Teague Company purchased a new machine on January 1, 2012, at a cost of
$150,000. The machine is expected to have an eight-year life and a $15,000 salvage value. The
machine is expected to produce 675,000 finished products during its eight-year life. Smith
produced 70,000 units in 2012 and 110,000 units during 2013.
Required:
1) Determine the amount of depreciation expense to be recorded on the machine for the years
2012 and 2013 under each of the following methods:
2012
a) Straight-line method
b) Units of production method
c) Double-declining balance method
1. What documentation issued by a bank increases a company’s checking account balance at the bank?
A) An account invoice
B) A debit memo
C) A credit memo
D) A certified check
2. Martin Company has no beginning inventory. Martin purchased 500 units of inventory that cost $5.00 each. At a later date the company purchased an additional 700 units of inventory that cost $6.00 each. Martin sold 900 units of inventory for $8.00. If Martin uses FIFO cost flow method, the amount of gross margin appearing on the income statement will be:
A) $2,300
B) $6,200
C) $1,800
D) $2,000
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Description
-
Iowa Steakhouse opened a new restaurant on the site of an existing building. It paid the owner $520,000 for the land and building, of which it attributes $104,000 to the land and $416,000 to the building. Iowa incurred legal costs of $25,200 to conduct a title search and prepare the necessary legal documents for the purchase. It then paid $71,800 to renovate the building to make it suitable for Iowa’s use. Property and liability insurance on the land and building for the first year was $24,000, of which $8,000 applied to the period during renovation and $16,000 applied to the period after opening. Property taxes on the land and building for the first year totaled $30,000, of which $10,000 applied to the period during renovation and $20,000 applied to the period after opening. Calculate the amounts that Iowa Steakhouse should include in the Land account and in the Building account. (10 points)
-
.0pt=”” right=””>Sears reports in millions of dollars on its balance sheet for year-end Year 6 and Year 5 as follows:
|
Year 6 |
Year 5 |
|
|
Credit Card Receivables |
27,371 |
24,932 |
|
Less: Allowance for Uncollectibles |
(821) |
(808) |
It reports charge-offs [synonym for write-offs] of accounts receivable during Year 6 of 4.5 percent of its average gross receivables of $26,000 million and that Bad Debt Expense is 3.5 percent of credit card sales. What were Sears’ credit card sales for Year 6? (6 points)
-
For the following six items, assume that Talbot Company, a growing profitable company, has large and growing inventories. Assume that Talbot Company has been using a FIFO cost flow assumption and plans to switch to LIFO for both financial reporting and tax reporting. Assume that Talbot pays all income taxes currently, as accrued, in cash.
Required:
Fill in each of the blanks below with one of these: larger, smaller, unchanged, or insufficient (information given to answer question). Several years after the switch from FIFO to LIFO: (12 points)
|
1. |
Working capital will be __________. |
|
2. |
Accounts payable will be __________. |
|
3. |
On the statement of cash flows, cash provided by operating activities will be ___ |
|
4. |
Total shareholders’ equity will be __________. |
|
5. |
Deferred tax balance on the balance sheet will be __________. |
|
6. |
Inventory turnover will be __________. |
-
Inventory flows for Toy Elmo Company for the month of January are as follows:
|
# of units |
Unit cost |
|
|
Beginning inventory* |
250 |
$1.00 |
|
Purchases: |
||
|
January 3 |
100 |
1.10 |
|
January 15 |
150 |
1.15 |
|
January 17 |
300 |
1.05 |
|
Sales: |
||
|
January 5 |
200 |
|
|
January 18 |
100 |
|
|
January 24 |
150 |
*Assume the same for FIFO, LIFO, and weighted average cost flow assumptions.
Required:
Compute the cost of goods sold and ending inventory for the Toy Elmo Company using cost flow assumption and the following assumptions: (18 points)
|
a. |
FIFO under a periodic inventory system |
|
b. |
LIFO under a periodic inventory system |
|
c. |
Weighted average under a periodic inventory system |
|
d. |
FIFO under a perpetual inventory system |
|
e. |
LIFO under a perpetual inventory system |
|
f. |
Weighted average under a perpetual inventory system |
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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. Management’s net income goal is $113,339.
Compute the required sales in dollars needed to achieve management’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
Fixed manufacturing overhead $10,250
Variable manufacturing overhead $31,564
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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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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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.
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.
Problem 2Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities.
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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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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Description
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
What is the final amount in Total Liabilities & Equity?
#5
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Use T-accounts to 1. Issue $80,000 in stock What is the final amount in Total Assets? Please specify your answer in the same units as the financial statement. #7 |
Use T-accounts to 1. Sell service for $20,000 What is the final amount in Total Assets? Please specify your answer in the same units as the financial statement. |
Statement of Cash flows
#3 Siam Traders had Net Income for 2012
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?
Please specify your answer in the same units as the financial statement.
#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
additional capital investments in 2012.
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?
Please specify your answer in the same units as the financial statement.
#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?
Please specify your answer in the same units as the financial statement.
#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?
Please specify your answer in the same units as the financial statement.
#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?
Please specify your answer in the same units as the financial statement.
#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?
Please specify your answer in the same units as the financial statement.
#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?
Please specify your answer in the same units as the financial statement.
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Description
Problem
10-21 Product versus general, selling,
and administrative costs
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 Bank’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 school’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 |
Department |
Department |
Department |
|
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
Dean’s salary to the three departments.
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Description
Problem 1
On January 10 Donna Stark uses her Baver Co. credit card to purchase merchandise from Baver Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12 Stark pays $1,600 on the balance due. On March 10 Stark is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12
Instructions
Prepare the entries on Baver Co.’s books related to the transactions that occurred on January 10, February 12, and March 10
Problem 2
At the beginning of the current period, Emler Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had net credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period
Instructions
(a) Prepare the entries to record sales and collections during the period.
(b) Prepare the entry to record the write-off of uncollectible accounts during the period.
(c) Prepare the entries to record the recovery of the uncollectible account during the period.
(d) Prepare the entry to record bad debts expense for the period.
(e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts.
(f) Calculate the net realizable value of the receivables at the end of the period.
Problem 3
The December 31, 2013, balance sheet of the Kramer Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2014, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected
Instructions
(a) Journalize the 2014 transactions.
(b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2014?
Problem 4
For each entry below make a correcting entry if necessary. If the entry given is correct, then state “No entry required.”
(a) The $70 cost of repairing a printer was charged to Equipment.
(b) The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.
(c) The $6,000 closing costs associated with the acquisition of land were debited to Operating Expenses.
(d) A $300 charge for transportation expenses on new equipment purchased was debited to Freight-In.
Problem 5
Kendrick Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order.
Debits
1. Cost of real estate purchased as a plant site (land and building) $ 130,000
2. Accrued real estate taxes paid at the time of the purchase of the real estate 4,000
3. Cost of demolishing building to make land suitable for construction of a new
building 10,000
4. Architect’s fees on building plans 14,000
5. Excavation costs for new building 30,000
6. Cost of filling and grading the land 5,000
7. Insurance and taxes during construction of building 6,000
8. Cost of repairs caused by a small fire shortly after completion of building 7,000
9. Interest paid during the year, of which $45,000 pertains to the construction
period 74,000
10. Full payment to building contractor 955,000
11. Cost of parking lots and driveways 36,000
12. Real estate taxes paid for the current year on the land 4,000
Total Debits $1,275,000
Credits
13. Insurance proceeds for fire damage $3,000
14. Proceeds from salvage of demolished building 3,500
Total Credits $6,500
Instructions
Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.
Item Land Buildings Other Account Title
Problem 6
On March 1, 2014, Geoffrey Company acquired real estate, on which it planned to construct a small office building, by paying $85,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional expenditures before construction began included $1,500 attorney’s fee for work concerning the land purchase, $5,500 real estate broker’s fee, $9,100 architect’s fee, and $16,000 to put in driveways and a parking lot.
Instructions
(a) Determine the amount to be reported as the cost of the land.
(b) For each cost not used in part (a), indicate the account to be debited.
Problem 7
Brewer Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 55,000
Notes Payable, 3-month 90,000
Accumulated Depreciation—Equipment 14,000
Notes Payable, 5-year, 8% 75,000
Payroll Taxes Expense 6,000
Interest Payable 5,000
Mortgage Payable 180,000
Sales Taxes Payable 23,000
Instructions
(a) Prepare the current liability section of Brewer Company’s balance sheet, assuming $12,000 of the mortgage is payable next year.
(b) Comment on Brewer’s liquidity, assuming total current assets are $450,000.
Problem 8
On March 1, Cooper Company borrows $80,000 from New National Bank by signing a 6-month, 6%, interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Cooper Company.
(a) Prepare the entry on March 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.
Problem 9
On June 1, Huntley Company borrows $50,000 from the bank by signing a 60-day, 6%, interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Huntley Company.
(a) Prepare the entry on June 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.
Prepare the entry to record payment of the note at maturity.
Problem 10
On May 15, Holt’s Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $1,200.
Instructions
(a) Determine the amount borrowed by Holt’s.
(b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of interest owed was $900?
(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).
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Description
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 partnership’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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Description
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
Case’s 2011 income taxes.
2. What is Case’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 $240
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate
journal entries to
record the expense as well as the cash contribution to plan assets and payment
of benefits to
retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate
journal entry(s) to
record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011
balances in the PBO,
plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension
liability.
4. Assume the following actuary and trustee reports indicating changes in the
PBO and plan
assets of Lakeside Cable during 2012:
Determine Lakeside’s pension expense for 2012 and prepare the appropriate
journal entries to
record the expense, the cash funding of plan assets, and payment of benefits to
retirees.
5. Determine the new gains and/or losses in 2012 and prepare the appropriate
journal entry(s) to
record them.
6. Using T-accounts, determine the balances at December 31, 2012, in the net
loss–AOCI and
prior service cost–AOCI.
7. Confirm the balances determined in Requirement 6 by preparing a pension
spreadsheet.
E17-19 Beale Management has a noncontributory, defined benefit
pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the
following pension-related data were available:
Projected Benefit Obligation ($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 company’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 Abbott’s pension expense for 2011.
2) Prepare the journal entries to record Abbott and Abbott’s pension expense,
funding, and payment for 2011.
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Description
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.
Jower’s WACC is % (ROUND TO THREE decimal places.)
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.
Jower’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 firm’s tax rate is 35 percent,
what is QM’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%
Crypton’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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$19.00
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 lessee’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 lessor’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 lessee’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 lessor’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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$32.00
Description
The following infcrmationwasmadeavailable
from the income statement and balance sheet of Meranda
Company:
|
Item |
12/31/10 |
12/31/09 |
|
AccountsReceivable |
$ |
$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 |
11,600 |
|
|
SalariesExpense |
22,400 |
|
|
COGS(2010) |
57,000 |
|
|
InterestExpense(2010) |
2,200 |
|
|
OperatingExpenes |
19,400 |
.gif”>
.gif”>Completethecashflo
usingthe directmetho
fromoperating
activitiessectionforMeranda Companyfortheyearended
December31,2010.
|
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
business.
B. Furniture is purchased
for $8,000 cash.
C. Supplies are purchased
on credit for $2,300.
D. The month’s electric
bill of $775 was paid.
E. The month’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 month’s
rent of $2,400 on June 16.
D. Tammy had sales of
$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 Owen’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 Brandon’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 Company’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 1—Beginning |
18 |
$24 |
432 |
|
inventory |
|||
|
March 12—Sold |
13 |
||
|
April 11—Purchase |
45 |
$29 |
$1,305 |
|
June 20—Sold |
33 |
||
|
Aug 16—Purchase |
35 |
$27 |
$945 |
|
Sept 11—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 |
$28,542 |
|
Checkbook Balance, |
29,344 |
|
Bank collection of |
1,545 + |
|
Bank service charge |
75 |
|
Deposits in transit |
3,145 |
|
Outstanding checks |
2,685 |
|
NSF check from |
770 |
|
Correction of book |
11. Journalize the
following transactions for Ryan Company:
July 1 Sold $5,300 of merchandise
to Rick on account.
Nov. 1 Exchanged Rick’s
account receivable for an eight-month, 6% note for
$5,300.
Dec. 31 Recorded accrued interest on Jim’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. It’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
of $112,000 was traded in
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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$21.00
Description
Resolved Question:
1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.
Painting Cost
1/2 Beginning inventory Woods $21,000
4/19 Purchase Sunset 21,800
6/7 Purchase Earth 31,200
12/16 Purchase Moon 4,000
Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s
a. cost of goods sold.
b. gross profit.
c. ending inventory.
2. Inventory valuation methods: basic computations. The January beginning inven¬tory of the Gilette Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.
FIFO LIFO Weighted Average
Goods available for sale $ $ $
Ending inventory, March 31
Cost of goods sold
3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow:
• 1/2/20X3 Purchases on account: 500 units @ $6 = $3,000
• 1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550
• 1/20/20X3 Purchases on Account: 200 units @ 5 = $1,000
• 1/25/20X3 Sales on Account: 300 units @ $8.50 = $2,550
The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.
a. Duplicate the journal entries that would have appeared on the computer printout under FIFO & LIFO
b. Calculate the balance in the firm’s Inventory account under each method.
c. Briefly explain the absence of the Purchases account to the company president.
4. Inventory valuation methods: computations and concepts.
Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:
Date Quantity Unit Cost Total Cost
1/3 100 $125 $12,500
4/3 200 $135 $27,000
6/3 100 $145 $14,500
7/3 100 $155 $15,500
Total 500 $69,500
Wild Riders sold 400 boards at $250 per board on the dates listed below. The company uses a perpetual inventory system.
Date Quantity Sold Unit Price Total Sales
3/17 50 $250 $12,500
5/17 75 $250 $18,750
8/10 275 $250 $68,750
Total 400 $100,000
Instructions
a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:
• First-in, first-out
• Last-in, first-out
• Weighted average
b. Which of the three methods would be chosen if management’s goal is to
(1) produce an up-to-date inventory valuation on the balance sheet?
(2) show the lowest net income for tax purposes?
5. Depreciation methods. XXXXX XXXXX Enterprises purchased a delivery van for $40,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid¬ual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:
a. Units-of-output, assuming 17,000 miles were driven during 20X8
b. Straight-line
c. Double-declining-balance
6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $2,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:
a. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method
b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.
7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 – 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
Instructions
a. Compute depreciation for 20X3 – 20X7 by using the following methods: straight line, units of output, and double-declining-balance.
b. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.
c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.
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$17.00
Description
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
per unit Factory overhead 175000
Direct labor 50.00 Selling and adm. Exp 70000
Factory overhead 35.00
Selling and adm. Exp 25.00
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 from |
Invested |
|
|
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 |
#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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$16.00
Description
The standard costs and actual costs for direct materials for the manufacture of 2,500 actual units of product are as follows:
Standard Costs
Direct materials 2,500 kilograms @ $8
Actual Costs
Direct materials 2,600 kilograms @ $8.75
The amount of the direct materials quantity variance is:
2. The standard costs and actual costs for direct materials for the manufacture of 2,500 actual units of product are as follows:
Standard Costs
Direct materials (per completed unit) 1.04 kilograms @$8.75
Actual Costs
Direct materials 2,500 kilograms @ $8
The amount of direct materials price variance is:
3. McCabe Manufacturing Co.’s static budget at 8,000 units of production includes $40,000 for direct labor and $4,000 for electric power. Total fixed costs are $23,000. At 9,000 units of production, a flexible budget would show:
4.O’Neill Co. has $296,000 in accounts receivable on January 1. Budgeted sales for January are $860,000. O’Neill expects to sell 20% of its merchandise for cash. Of the remaining 80% of sales on account, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are:
5. If fixed costs are $561,000 and the unit contribution margin is $8.00, what is the break-even point in units if variable costs are decreased by $.50 a unit?
6. If fixed costs are $300,000 and the unit contribution margin is $5, what amount of units must be sold in order to realize an operating income of $50,000?
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$28.00
Description
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 year’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?
16. The Ogden Corporation makes an investment of
$25,000, which yields the following
cash flows:
|
Year |
Cash Flow |
|
1……………. |
$ 5,000 |
|
2……………. |
5,000 |
|
3……………. |
8,000 |
|
4……………. |
9,000 |
|
5……………. |
10,000 |
a. What is the present value with a 9 percent
discount rate (cost of capital)?
b. What is the internal rate of return? Use
the interpolation procedure shown in this chapter.
c. In this problem would you make the same
decision in parts a and b
17. The Danforth Tire Company is considering the
purchase of a new machine that would increase the speed of manufacturing and
save money. The net cost of this machine is $66,000. The annual cash flows have
the following projections.
|
Year |
Cash Flow |
|
1……………. |
$21,000 |
|
2……………. |
29,000 |
|
3……………. |
36,000 |
|
4……………. |
16,000 |
|
5……………. |
8,000 |
a. If the cost of capital is 10 percent, what
is the net present value?
b. What is the internal rate of return?
c. Should the project be accepted? Why?
18. You are asked to evaluate two projects for
Adventures Club, Inc. Using the net present value method combined with the
profitability index approach described in footnote 2 on page ____, which project
would you select? Use a discount rate of 12 percent.
|
Project X (trips to Disneyland) |
Project Y (international film festivals) |
||
|
Year |
Cash Flow |
Year |
Cash Flow |
|
1………………………… |
$4,000 |
1…………………………… |
$10,800 |
|
2………………………… |
5,000 |
2…………………………… |
9,600 |
|
3………………………… |
4,200 |
3…………………………… |
6,000 |
|
4………………………… |
3,600 |
4…………………………… |
7,000 |
19. Cablevision, Inc., will invest $48,000 in a
project. The firm’s discount rate (cost of capital) is 9 percent. The
investment will provide the following inflows.
|
1……………. |
$10,000 |
|
2……………. |
10,000 |
|
3……………. |
16,000 |
|
4……………. |
19,000 |
|
5……………. |
20,000 |
The internal rate of return is 15 percent.
a. If the reinvestment assumption of the net
present value method is used, what will be the total value of the inflows after
five years? (Assume the inflows come at the end of each year.)
b. If the reinvestment assumption of the
internal rate of return method is used, what will be the total value of the
inflows after five years?
c. Generally is one investment assumption
likely to be better than another?
20. The 21st Century Corporation uses the
modified internal rate of return. The firm has a cost of capital of 8 percent.
The project being analyzed is as follows ($20,000 investment):
|
Year |
Cash Flow |
|
1……………. |
$10,000 |
|
2……………. |
9,000 |
|
3……………. |
6,800 |
a. What is the modified internal rate of
return? An approximation from Appendix B is adequate. (You do not need to
interpolate.)
b. Assume the traditional internal rate of
return on the investment is 14.9 percent. Explain why your answer in part a would be lower.
21. Oliver Stone and Rock Company uses a process
of capital rationing in its decision making. The firm’s cost of capital is 12
percent. It will invest only $80,000 this year. It has determined the internal
rate of return for each of the following projects.
|
Project |
Project Size |
Percent of Internal Rate of Return |
|
A……………………. |
$15,000 |
14% |
|
B…………………….. |
25,000 |
19 |
|
C…………………….. |
30,000 |
10 |
|
D……………………. |
25,000 |
16.5 |
|
E…………………….. |
20,000 |
21 |
|
F…………………….. |
15,000 |
11 |
|
G……………………. |
25,000 |
18 |
|
H……………………. |
10,000 |
17.5 |
a. Pick out the projects that the firm should
accept.
b. If Projects B and G are mutually
exclusive, how would that affect your overall answer? That is, which projects
would you accept in spending the $80,000?
22. Miller Electronics is considering two new
investments. Project C calls for the purchase of a coolant recovery system.
Project H represents an investment in a heat recovery system.
The firm wishes to use a net present value profile in comparing the projects.
The investment and cash flow patterns are as follows:
|
Project C ($25,000 Investment) |
Project H ($25,000 investment) |
||
|
Year |
Cash Flow |
Year |
Cash Flow |
|
1…………………….. |
$ 6,000 |
1…………………………. |
$20,000 |
|
2…………………….. |
7,000 |
2…………………………. |
6,000 |
|
3…………………….. |
9,000 |
3…………………………. |
5,000 |
|
4…………………….. |
13,000 |
a. Determine the net present value of the
projects based on a zero discount rate.
b. Determine the net present value of the
projects based on a 9 percent discount rate.
c. The internal rate of return on Project C
is 13.01 percent, and the internal rate of return on Project H is 15.68
percent. Graph a net present value profile for the two investments similar to
Figure 12-3. (Use a scale up to $10,000 on the vertical axis, with $2,000
increments. Use a scale up to 20 percent on the horizontal axis, with
5 percent increments.)
d. If the two projects are not mutually
exclusive, what would your acceptance or rejection decision be if the cost of
capital (discount rate) is 8 percent? (Use the net present value profile for
your decision; no actual numbers are necessary.)
e. If the two projects are mutually exclusive
(the selection of one precludes the selection of the other), what would be your
decision if the cost of capital is (1) 5 percent,
(2) 13 percent, (3) 19 percent? Use the net present value profile for your
answer.
23. Software Systems is considering an
investment of $20,000, which produces the following inflows:
|
Year |
Cash Flow |
|
1……………. |
$11,000 |
|
2……………. |
9,000 |
|
3……………. |
5,800 |
You
are going to use the net present value profile to approximate the value for the
internal rate of return. Please follow these steps:
a. Determine the net present value of the
project based on a zero discount rate.
b. Determine the net present value of the
project based on a 10 percent discount rate.
c. Determine the net present value of the
project based on a 20 percent discount rate
(it will be negative).
d. Draw a net present value profile for the
investment. (Use a scale up to $6,000 on the vertical axis, with $2,000
increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent
increments.) Observe the discount rate at which the net present value is zero.
This is an approximation of the internal rate of return on the project.
e. Actually compute the internal rate of
return based on the interpolation procedure presented in this chapter. Compare
your answers in parts d and e.
24. Howell Magnetics Corporation is going to
purchase an asset for $400,000 that will produce $180,000 per year for the next
four years in earnings before depreciation and taxes. The asset will be
depreciated using the three-year MACRS depreciation schedule in Table 12-9.
(This represents four years of depreciation based on the half-year convention.)
The firm is in a 34 percent tax bracket. Fill in the schedule below for the
next four years. (You need to first determine annual depreciation.)
|
Earnings |
_____ |
|
Depreciation |
_____ |
|
Earnings before taxes |
_____ |
|
Taxes |
_____ |
|
Earnings after taxes |
_____ |
|
+ Depreciation |
_____ |
|
Cash |
_____ |
25. Assume $80,000 is going to be invested in
each of the following assets. Using Tables 12-8 and 12-9, indicate the dollar
amount of the first year’s depreciation.
a. Computers
b. Petroleum refining product
c. Office furniture
d. Pipeline distribution
26. The Keystone Corporation will purchase an
asset that qualifies for three-year MACRS depreciation. The cost is $60,000 and
the asset will provide the following stream of earnings before depreciation and
taxes for the next four years:
Year 1……………… $27,000
Year 2……………… 30,000
Year 3……………… 23,000
Year 4……………… 15,000
The firm is in a 36
percent tax bracket and has an 11 percent cost of capital. Should it purchase
the asset?
27. Oregon Forest Products will acquire new
equipment that falls under the five-year MACRS category. The cost is $300,000.
If the equipment is purchased, the following earnings before depreciation and
taxes will be generated for the next six years.
Year 1………………… $112,000
Year 2………………… 105,000
Year 3………………… 82,000
Year 4………………… 53,000
Year 5………………… 37,000
Year 6………………… 32,000
The firm is in a 30
percent tax bracket and has a 14 percent cost of capital. Should Oregon Forest
Products purchase the equipment? Use the net present value method.
28. The Thorpe Corporation is considering the
purchase of manufacturing equipment with a 10-year midpoint in its asset
depreciation range (ADR). Carefully refer to Table 12-8 to determine in what
depreciation category the asset falls. (Hint: It is not 10 years.) The asset
will cost $80,000, and it will produce earnings before depreciation and taxes
of $28,000 per year for three years, and then $12,000 a year for seven more
years. The firm has a tax rate of 34 percent. With a cost of capital of 12
percent, should it purchase the asset? Use the net present value method. In
doing your analysis, if you have years in which there is no depreciation,
merely enter a zero for depreciation.
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Discussion
Questions
|
12-1. |
What are the important |
|
|
12-3. |
What |
|
|
12-5. |
What |
|
|
12-6. |
How |
|
|
12-7. |
If a corporation has |
|
|
12-8. |
What |
|
|
12-9. |
How |
|
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 _____
2. a. In problem 1, how much would cash flow be if there were only $10,000
in depreciation? All other factors are the same.
b. How much cash flow is lost due to the reduced depreciation between problems
1 and 2a?
3. Assume a firm has earnings before
depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent
tax bracket.
a. Compute its cash flow.
b. Assume it has $200,000 in depreciation.
Recompute its cash flow.
c. How large a cash flow benefit did the
depreciation provide?
4. Bob Cole, the president of a New York
Stock Exchange-listed firm, is very short term oriented and interested in the
immediate consequences of his decisions. Assume a project that will provide an
increase of $3 million in cash flow because of favorable tax consequences, but
carries a three-cent decline in earning per share because of a write-off
against first quarter earnings. What decision might Mr. Cole make?
5. Assume a $100,000 investment and the
following cash flows for two alternatives.
|
Year |
Investment |
Investment B |
|
1 |
$30,000 |
$40,000 |
|
2 |
50,000 |
30,000 |
|
3 |
20,000 |
15,000 |
|
4 |
60,000 |
15,000 |
|
5 |
— |
50,000 |
Which
of the two alternatives would you select under the payback method?
6. Assume a $40,000 investment and the
following cash flows for two alternatives.
|
Year |
Investment X |
Investment Y |
|
1 |
$ 6,000 |
$15,000 |
|
2 |
8,000 |
20,000 |
|
3 |
9,000 |
10,000 |
|
4 |
17,000 |
— |
|
5 |
20,000 |
— |
Which
of the alternatives would you select under the payback method?
7. Referring back to problem 6, if the inflow
in the fifth year for Investment X were $20,000,000 instead of $20,000, would
your answer change under the payback method?
8. The Short-Line Railroad is considering a
$100,000 investment in either of two companies. The cash flows are as follows:
|
Year |
Electric Co. |
Water Works |
|
1……………… |
$70,000 |
$15,000 |
|
2……………… |
15,000 |
15,000 |
|
3……………… |
15,000 |
70,000 |
|
4-10…………. |
10,000 |
10,000 |
a. Using the payback method, what will the
decision be?
b. Explain why the answer in part a can be misleading.
9. X-treme Vitamin Company is considering two
investments, both of which cost $10,000. The cash flows are as follows:
|
Year |
Project A |
Project B |
|
1………………. |
$12,000 |
$10,000 |
|
2………………. |
8,000 |
6,000 |
|
3………………. |
6,000 |
16,000 |
a. Which of the two projects should be chosen
based on the payback method?
b. Which of the two projects should be chosen
based on the net present value method? Assume a cost of capital of 10 percent.
c. Should a firm normally have more
confidence in answer a or answer b?
10. You buy a new piece of equipment for
$16,980, and you receive a cash inflow of $3,000 per year for 12 years. What is
the internal rate of return?
11. Warner Business Products is considering the
purchase of a new machine at a cost of $11,070. The machine will provide $2,000
per year in cash flow for eight years. Warner’s cost of capital is 13 percent.
Using the internal rate of return method, evaluate this project and indicate
whether it should be undertaken.
12. Elgin Restaurant Supplies is analyzing the
purchase of manufacturing equipment that will cost $20,000. The annual cash
inflows for the next three years will be:
|
Year |
Cash Flow |
|
1……………. |
$10,000 |
|
2……………. |
9,000 |
|
3……………. |
6,500 |
a. Determine the internal rate of return
using interpolation.
b. With a cost of capital of 12 percent,
should the machine be purchased?
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Andre has asked you to evaluate his business, Andre’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.
- Find the contribution margin per haircut. Assume that the barbers’ compensation is a fixed cost. Show calculations to support your answer.
- Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.
- What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.
- 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:
·
Naulls
Industries currently has a capital structure that consists of 75 percent common
equity and 25 percent debt.
·
The risk-free
rate, kRF, is 5 percent.
·
The market
risk premium , kM – kRF, is 6 percent.
·
Naulls’s
common stock has a beta of 1.2.
·
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.
·
The company’s
tax rate is 40 percent.
What is the company’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 company’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 company’s growth rate?
a.2.68%
b.3.44%
c.4.64%
d.6.75%
e.8.16%
Answer: e :
[3]. The
managers of Kenforest Grocers are trying to determine the company’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
independent. The company adjusts for
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
[4]. Bradshaw
Steel has a capital structure with 30 percent debt (all long-term bonds) and 70
percent common equity.The
yield to maturity on the company’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 company’s tax
rate is 40 percent.Bradshaw
uses the CAPM to determine its cost of equity.What is the beta on Bradshaw’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 firm’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 company’s debt is 11 percent.
The preferred stock pays an annual dividend of $2 and sells for $20 a
share. The company’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 company’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
company’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. Global’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
Global’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 firm’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 Corporation’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 company’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 firm’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 firm’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. Rollins’ 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
firm’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 firm’s marginal tax rate is 40 percent.
[14]. What is
Rollins’ component cost of debt?
a.10.0%
b. 9.1%
c. 8.6%
d. 8.0%
e. 7.2%
[15]. What is
Rollins’ cost of preferred stock?
a.10.0%
b.11.0%
c.12.0%
d.12.6%
e.13.2%
[16]. What is
Rollins’ 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 firm’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
Rollins’ 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
Rollins’ 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 firm’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 Jackson’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 Becker’s common stock is
$40, but it would incur a 10 percent flotation cost if it were to sell new
stock. The firm’s tax rate is 40
percent.
[22]. What is
the firm’s cost of retained earnings?
a.15.0%
b.15.5%
c.16.0%
d.16.5%
e.17.0%
[23]. What is
Becker’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 firm’s current
after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes
at this rate. The firm’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. Ross’ 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 firm’s cost of retained earnings?
a.10.0%
b.12.5%
c.15.5%
d.16.5%
e.18.0%
[25]. What is
the firm’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 firm’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 firm’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:
·
Coetzer has a
target capital structure of 40 percent debt and 60 percent common equity.
·
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.
·
The risk-free
rate is 5 percent. The market risk
premium (kM – kRF) is also 5 percent.
·
Coetzer’s
common stock has a beta of 1.4.
·
Coetzer’s tax
rate is 40 percent.
[28]. What is
the company’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 company’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 company’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 Construction’s CFO wants to
estimate the company’s WACC. She has
collected the following information:
·
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.
·
The company’s
stock has a beta = 1.20.
·
The market
risk premium, km– kRF,
equals 5 percent.
·
The risk-free
rate is 6 percent.
·
The company
has outstanding preferred stock that pays a $2.00 annual dividend. The preferred
stock sells for $25 a share.
·
The company’s
tax rate is 40 percent.
·
The company’s
capital structure consists of 40 percent long-term debt, 40 percent common
stock, and 20 percent preferred stock.
[31]. What is
the company’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 company’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 company’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 company’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.’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:
·
The company’s
capital structure consists of 40 percent debt and 60 percent common stock.
·
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.
·
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 company’s common stock has
a beta of 1.6.
·
The company’s
tax rate is 40 percent.
[35]. What is
the company’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 company’s cost of common equity?
a. 9.65%
b.14.00%
c.14.60%
d.17.60%
e.18.91%
[37]. What is
the company’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 firm’s capital is invested
in Division A, which has a beta of 0.8.
The other 50 percent of the firm’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 division’s market risk. Which of the following statements is most
correct?
a.Sunshine’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
firm’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
firm’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
firm’s beta prior to the addition of that asset, then the firm’s beta after the
purchase of the asset will be smaller than the original firm’s beta.
d.If the beta of an asset is larger than the
firm’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 firm’s average project.
b.If a project’s return lies below the SML, it
should be rejected if it has a beta greater than the firm’s existing beta but
accepted if its beta is below the firm’s beta.
c.If two mutually exclusive projects’ expected
returns are both above the SML, the project with the lower risk should be
accepted.
d.If a project’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 firm’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 firm’s beta.
e.No; the expected return of the asset is less
than the firm’s required return, which is 10.75%.
Medium:
9A-[42]. Assume you are the director of capital
budgeting for an all-equity firm. The firm’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 firm’s assets currently
have, that is, its beta is 50 percent larger than the firm’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
firm’s cost of capital.
b.Yes; the project’s risk-adjusted required
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 project’s risk-adjusted required return
is 2 percentage points above its expected return.
e.No; the project’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 project’s beta?
a.Risk premium method.
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 Interstate’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
firm’s required rate of return on the project of 16.9 percent.
b.Accept the project; its return is greater than
the firm’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 firm’s required rate of return on the project equals its expected return.
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Accounting Problems….
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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
Premium on Bonds Payable 150,000
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 Motes’ equity in Newton’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
Manufacturing overhead applied $20,000
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 depreciation—Equipment (20,000) (14,000)
Total assets $ 122,000 $ 87,000
Liabilities and Stockholder’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 stockholder’s equity $ 122,00 $ 87,000
Additional information:
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
Manufacturing overhead:
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.
Make Buy
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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Description
3. Which of the following accounts is not closed to Income
Summary? A) Cost of Goods Sold B) Merchandise Inventory C) Sales D) Sales
Discounts
4. Claims for which formal instruments of credit are issued
as proof of the debt are A) accounts receivable. B) interest receivable. C)
notes receivable. D) other receivables.
5. When the allowance
method is used to account for uncollectible accounts, Bad Debts Expense is
debited when A) a sale is made. B) an account becomes bad and is written off.
C) management estimates the amount of uncollectibles. D) a customer’s account
becomes past-due.
6. A factor which
distinguishes the corporate form of organization from a sole proprietorship or
partnership is that a A) corporation is organized for the purpose of making a
profit. B) corporation is subject to numerous federal and state government
regulations. C) corporation is an accounting economic entity. D) corporation’s
temporary accounts are closed at the end of the accounting period.
7. Flynn Company reported a net loss of $11,000 for the year
ended December 31, 2008. During the year, accounts receivable decreased $9,000,
merchandise inventory increased $13,000, accounts payable increased by $27,000
and depreciation expense of $17,000 was recorded. During 2008, operating
activities A) used net cash of $29,000. B) used net cash of $51,000. C)
provided net cash of $29,000. D) provided net cash of $51,000.
8. In recording the sale of accounts receivable, the
commission charged by a factor is recorded as A) Bad Debts Expense. B)
Commission Expense. C) Loss on Sale of Receivables. D) Service Charge Expense.
9. Inventoriable costs include all of the following except
the A) freight costs incurred when buying inventory. B) costs of the purchasing
and warehousing departments. C) cost of the beginning inventory. D) cost of
goods purchased. Use the following to answer question
10: On October 1, Jerry’s Carpet Service borrows $250,000
from First National Bank on a 3-month, $250,000, 8% note. 10. What entry must
Jerry’s Carpet Service make on December 31 before financial statements are
prepared? A) a B) b C) c D) d
INFORMATION MISSING
11. W.B. Reindeer Company’s inventory records show the
following data: Units Unit Cost Inventory, January 1 5,000 9 Purchases: June 18
4,500 6 November 8 3,000 4 A physical inventory on December 31 shows 2,000
units on hand. W.B. Reindeer sells the units for $17 each. The company has an
effective tax rate of 30%. Reindeer uses the periodic inventory method. The
weighted-average cost per unit is A) $5.00. B) $6.33. C) $6.72. D) $6.58.
12. A stock split A) may occur in the absence of retained
earnings. B) will increase total paid-in capital. C) will increase the total
par value of the stock. D) will have no effect on the par value per share of
stock.
13. Each payment on a
mortgage note payable consists of A) interest on the original balance of the
loan. B) reduction of loan principal only. C) interest on the original balance
of the loan and reduction of loan principal. D) interest on the unpaid balance
of the loan and reduction of loan principal.
14. An accounting time period that is one year in length,
but does not begin on January 1, is referred to as A) a fiscal year. B) an
interim period. C) the time period assumption. D) a reporting period.
15. Paid-In Capital in Excess of Stated Value A) is credited
when no-par stock does not have a stated value. B) is reported as part of paid-in
capital on the balance sheet. C) represents the amount of legal capital. D)
normally has a debit balance.
16. If a company is given credit terms of 2/10, n/30, it
should A) hold off paying the bill until the end of the credit period, while
investing the money at 10% annual interest during this time. B) pay within the
discount period and recognize a savings. C) pay within the credit period but
don’t take the trouble to invest the cash while waiting to pay the bill. D)
recognize that the supplier is desperate for cash and withhold payment until
the end of the credit period while negotiating a lower sales price.
17. All of the following are reported as current liabilities
except A) accounts payable. B) bonds payable. C) notes payable. D) unearned
revenues.
18. In a manufacturing business, inventory that is ready for
sale is called A) raw materials inventory. B) work in process inventory. C)
finished goods inventory. D) store supplies inventory.
19. Which of the following methods of computing depreciation
is production based? A) Straight-line B) Declining-balance C) Units-of-activity
D) None of these
20. The method of accounting for uncollectible accounts that
results in a better matching of expenses with revenues is the A) aging accounts
receivable method. B) direct write-off method. C) percentage of receivables
method. D) percentage of sales method.
21. Intangible assets are the rights and privileges that
result from ownership of long-lived assets that A) must be generated
internally. B) are depletable natural resources. C) have been exchanged at a
gain. D) do not have physical substance.
Use the following to
answer question
22: On October 1, 2008, Dole Company places a new asset into
service. The cost of the asset is $60,000 with an estimated 5-year life and
$15,000 salvage value at the end of its useful life. 22. What is the
depreciation expense for 2008 if Dole Company uses the straight-line method of
depreciation? A) $2,250 B) $12,000 C) $3,000 D) $6,000
23. If a stockholder receives a dividend consisting of a
promissory note, the stockholder has received a A) stock dividend. B) cash
dividend. C) contingent dividend. D) scrip dividend.
24. Generally, the most important category on the statement
of cash flows is cash flows from A) operating activities. B) investing
activities. C) financing activities. D) significant noncash activities.
25. Which of the statements below is not true? A) An
adjusted trial balance should show ledger account balances. B) An adjusted
trial balance can be used to prepare financial statements. C) An adjusted trial
balance proves the mathematical equality of debits and credits in the ledger.
D) An adjusted trial balance is prepared before all transactions have been
journalized.
26. A retail store credited the Sales account for the sales
price and the amount of sales tax on sales. If the sales tax rate is 4% and the
balance in the Sales account amounted to $166,400, what is the amount of the
sales taxes owed to the taxing agency? A) $160,000 B) $166,400 C) $6,656 D)
$6,400
27. Stine 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? A) 20% B) 24%
C) 36% D) 72%
28. The net income reported on the income statement for the
current year was $206,000. Depreciation was $44,000. Account receivable and
inventories decreased by $20,000 and $41,000, respectively. Prepaid expenses and
accounts payable increased, respectively, by $1,000 and $7,200. How much cash
was provided by operating activities? A) $276,200 B) $317,200 C) $302,800 D)
$310,000
29. Rudolf Diesel Company’s inventory records show the
following data: Units Unit Cost Inventory, January 1 5,000 $9 Purchases: June
18 4,500 7 November 8 3,000 6 A physical inventory on December 31 shows 3,000
units on hand. Under the FIFO method, the December 31 inventory is A) $18,000.
B) $22,680. C) $22,000. D) $27,000.
30. Expenditures that maintain the operating efficiency and
expected productive life of a plant asset are generally A) expensed when
incurred. B) capitalized as a part of the cost of the asset. C) debited to the
Accumulated Depreciation account. D) not recorded until they become material in
amount.
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Description
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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Description
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 31… 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
Received
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.
Additional information was provided:
As
of Dec 31…. 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 were… (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
•
record sales net of an estimate of expected future returns
•
record sales in current period and returns in future periods as they occur
• do not record any sales until
expiration of all return privileges have passed
•
all of the above
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