Three Accounting Problems

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Problem 1 – Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned
tomatoes. During the summer of 20X2, the joint costs of processing the tomatoes were $420,000. There
was no beginning or ending inventories for the summer. Production and sales value information for the
summer is as follows:
Product

Cases

Sales Value at
Splitoff Point

Separable Costs Selling Price

Catsup

100,000

$6 per case

$3.00 per case

$28 per case

Juice

150,000

8 per case

5.00 per case

25 per case

Canned

200,000

5 per case

2.50 per case

10 per case

Question: Determine the amount allocated to each product if the estimated net realizable value method is
used, and compute the cost per case for each product. (10 points)

Problem 2 – Zenon Chemical, Inc. processes pine rosin into three products: turpentine, paint thinner, and spot remover. During May, the joint costs of processing were $240,000. Production and sales value
information for the month is as follows:
Units
Produced

Sales Value at
Splitoff Point

Turpentine

6,000 liters

$60,000

Paint thinner

6,000 liters

50,000

Spot remover

3,000 liters

25,000

Product

Question: Determine the amount of joint cost allocated to each product if the physical-measure method is
used. (10 points)

Problem 3 – Oregon Lumber processes timber into four products. During January, the joint costs of
processing were $280,000. There was no inventory at the beginning of the month. Production and sales
value information for the month is as follows:
Sales Value at
Product

Board feet

Splitoff Point

Ending Inventory

2 x 4’s

6,000,000

$0.30 per board foot

500,000 bdft.

2 x 6’s

3,000,000

0.40 per board foot

250,000 bdft.

4 x 4’s

2,000,000

0.45 per board foot

100,000 bdft.

Slabs

1,000,000

0.10 per board foot

50,000 bdft.

Question: Determine the value of ending inventory if the sales value at splitoff method is used for product
costing. Round to three decimal places when necessary. (10 points)

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Three Accounting Problems

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Problem #1
Apogee Corp. has approached your firm for $250,000 in funding. You have been asked to evaluate their request and make recommendations.
Apogee is a relatively young firm that: has reached cash flow breakeven; has been experiencing strong early growth levels; and needs the funds to fund its continuing expansion. The firm’s industry has been experiencing very strong growth and it’s total market is expected to peak in the $25-30 million range.
Evaluate the situation and make your investment recommendations.

Problem #2
Smith Corp. has approached your firm for $800,000 in funding. You have been asked to evaluate their request and make recommendations.
Smith Corp. has been a solid performer over the past 5 years. It has a record of: steady, though modest, growth; steady profitability; and stable and sufficient internally generated cash flows. While not a “high flyer”, it has been a consistent performer.
The firm’s industry is in the latter growth stages and is composed of about 100 firms. Most of the firms are fragmented with modest market shares with the exception of Mansfield Corp, which has a market share of about 50%. Firms in the industry have increased their market share by addressing new customers from the market’s growth.
Smith Corp. has developed a prototype of a very promising new product. They believe the new product is superior to the one presently offered by Mansfield Corp. and believe it will take market share from Mansfield. The requested funding will be used to finalize the new product; to create appropriate production facilities; to fund early production; and to initiate & support a marketing program.
Evaluate the situation and make your investment recommendations.

Problem #3
Sunnyside Corp. has approached your firm for $1.2 million in funding. You have been asked to evaluate their request and make recommendations.
Sunnyside produces high precision valves used by customers as the components in the manufacture of high quality, high value industrial machinery. Sunnyside enjoys a strong reputation for quality in the industry and has a solid performance track record. Growth has been steady but controlled and the firm produces a steady, stable, and reasonably sufficient internally-generated cash flow.
Sunnyside’s production is capital intense, with high fixed costs. Its technology is continually updated and changes are needed to stay ahead of competitors and meet continuing customer needs. Orders tend to be large and periodic with an approximate 1 month lead time. Products are “quasi-customized” and produced to order. The firm typically produces a “core” product and then customizes it (adding features) for the particular order.
Sunnyside markets using direct sales and has a very stable customer base of about 60 customers. It relies on repeat business and has not aggressively added new customers. Of its customers, two account for about 60% of the business and their needs have been important drivers of the business and solid sources of cash flows.
The firm anticipates increasing growth over the next 4 years. However, its production facilities, which are highly efficient and a source of material cash flow, are very close to capacity. And its plant space is already fully utilized. While the firm periodically uses increased shifts to respond to order flow, it anticipates the needs for a production expansion – thus the funding request.
Prepare an evaluation of the strengths & weaknesses of the firm; and specify the concerns and considerations for any investment.

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Three Accounting Problems

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1. Mariah Company contracted with Andre Corporation to construct custom-made equipment. The equipmentwas completed and ready for use on January 1, 2013. Mariah paid for the machine by issuing a $220,000,three-year note that bears interest at the rate of 5%, payable annually on December 31 each year. Since themachine was custom-built, the cash price was unknown. However, when compared to similar contracts, 8%
was deemed to be a reasonable rate of interest.
Required:
1. Prepare the journal entry by Mariah to record the purchase of equipment.
2. Prepare journal entries to record interest for each of the first two years.

2.. On July 1, 2013, Walter Allen Inc. purchased 6,000 shares of the outstanding common stock of Piaffe
Corporation at a cost of $140,000. Piaffe had 30,000 shares of outstanding common stock. Assume the total
book value and fair value of net assets is $650,000. Both companies have a January through December
fiscal year. The following data pertains to Piaffe Corporation during 2013:
Dividends declared and paid, Jan. 1 – June 30 $12,000
Dividends declared and paid, July 1 – Dec. 31 $12,000
Net income, Jan.1 – June 30 $14,000
Net income, July 1 – Dec. 31 $18,000
Required:
1. Prepare the entry to record the original investment in Piaffe.
2. Compute any goodwill on the acquisition.
3. Prepare all other entries for 2013 under the equity method.

3. The following facts relate to gift cards sold by Dover Saddlery during 2013. Dover’s fiscal year ends on
December 31.
(a.) In October 2013, sold $3,000 of gift cards, and redeemed $500 of those gift cards.
(b.) In November 2013, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700
of November gift cards.
(c.) In December 2013, sold $3,000 of gift cards, and redeemed $200 of October gift cards, $2,000 of
November gift cards, and $400 of December gift cards.
(d.) State Line views a gift card to be “broken” (with a remote probability of redemption) two months
after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July
would be viewed as broken as of September 30.
Required:
1. Prepare all journal entries appropriate to be recorded only during the month of December 2013 relevant to
gift card sales, gift card redemptions, and gift card breakage.
2. Determine the balance of the unearned revenue liability to be reported in the December 31, 2013, balance
sheet.

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Three Accounting Problems

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Compute the payback period for each of these two separate investments:

a. A new operating system for an existing machine is expected to cost $260,000 and have a useful life of four years. The system yields an incremental after-tax income of $75,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. (Round your intermediate calculations to the nearest dollar amount and final answer to 2 decimal places.)

Payback period years

b. A machine costs $190,000, has a $14,000 salvage value, is expected to last seven years, and will generate an after-tax income of $41,000 per year after straight-line depreciation. (Round your intermediate calculations to the nearest dollar amount and final answer to 2 decimal places.)

Payback period years

2.value:
A machine costs $700,000 and is expected to yield an after-tax net income of $30,000 each year. Management predicts this machine has a 11-year service life and a $140,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to the nearest whole number. Omit the “%” sign in your response.)

Accounting rate of return %

3.value:
K2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $374,400 with a 7-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 9% return on this investment. The company expects to sell 149,760 units of the equipment’s product each year. The expected annual income related to this equipment follows. (Use Table B.3)

Sales $ 234,000
Costs
Materials, labor, and overhead (except depreciation) 82,000
Depreciation on new equipment 53,486
Selling and administrative expenses 23,400

Total costs and expenses 158,886

Pretax income 75,114
Income taxes (20%) 15,023
Net income $ 60,091



Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

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Three Accounting Problems

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1….Growco, a domestic corporation, is a tire manufacturer. Growco is planning to build a new production facility, and has narrowed down the possible sites for this new plant to either Happystan (a low-tax foreign country) or Sadstan (a high-tax foreign country). Growco will structure the new facility as a wholly-owned foreign subsidiary, Sproutco, and finance Sproutco solely with an equity investment. Growco projects that Sproutco’s results during its first year of operations will be as follows:
Sales………………………………………………………………………………… $400,000,000
Cost of goods sold……………………………………………………………………. (290,000,000)
Selling, general, and administrative expenses……………………………………………………………. (60,000,000)
Net profit………………………………… ………………………… $ 50,000,000


Assume that the U.S. corporate tax rate is 35%, the Happystan rate is 20%, and the Sadstan rate is 40%. Further assume that both Happystan and Sadstan impose a 5% withholding rate on dividend distributions, but neither country imposes withholding taxes on interest or royalty payments. Compute the total tax rate (U.S. plus foreign) on Sproutco’s profits under the following assumptions:
The new production facility is located in Happystan and Sproutco repatriates none of its profits during the first year.
The new production facility is located in Happystan and Sproutco repatriates 30% of its profits during the first year through a dividend distribution.
The new production facility is located in Sadstan and Sproutco repatriates none of its profits during the first year.
The new production facility is located in Sadstan and Sproutco repatriates 30% of its profits during the first year through a dividend distribution.
The new production facility is located in Sadstan and Growco modifies its plans for Sproutco as follows:
finance Sproutco with both debt and equity, such that Sproutco will pay Growco $15 million of interest each year, charge Sproutco an annual royalty of $10 million for the use of Sproutco’s patents and trade secrets, and eliminate Sproutco’s dividend distribution.
What do the results of these various scenarios suggest regarding the differential tax costs of operating in low- versus high-tax countries?


2…Six years ago, NewCo, Inc., a domestic manufacturer of mold- injection systems, established a sales and service operation in Madrid, Spain. The Madrid office was structured as a Spanish corporation, but NewCo made a check-the-box election to treat the operation as a branch in order to obtain a U.S. tax deduction for the branch’s start-up losses. The Spanish operation has become quite profitable and NewCo wishes to change its U.S. tax classification from a branch to a subsidiary by filing a new check-the-box election (this is feasible since 5 years had passed since the first election). At the time of the conversion, the Spanish operation’s assets includes some local currency, accounts receivable from Spanish customers, an inventory of spare parts, and an extensive database of information regarding Spanish customers that the marketing personnel had painstakingly developed over the years. NewCo’s CFO has asked you to brief her regarding the U.S. tax consequences of the incorporation transaction.


3…A foreign corporation can structure its U.S. operations as either a branch or a subsidiary. What are the tax advantages of operating in the United States through a separately incorporated subsidiary? What are the tax advantages of operating in the United States through an unincorporated branch? What general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the United States?

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Three Accounting Problems

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1. How long does it take $1,000 to quadruple in value if you have an 11% annual return? Assume annual compounding, and express your answer in years (to two decimals).

2. Assume the following spot and forward rates for the euro ($/euro).

Spot rate = $1.6277
30-day forward rate = 1.6330
90-day forward rate = 1.6353
120-day forward rate = 1.6387

A) What is the dollar value of one euro in the spot market?
B) Suppose you issued a 120-day forward contract to exchange 200,000 euros into Canadian dollars. How many dollars are involved?
C) How many euros can you get for one dollar in the spot market?
D) What is the 120-day forward premium?

3. The MacHardee Plumbing Company has common stock outstanding. The stock paid a dividend of $2.00 per share last year, but the company expects that earnings and dividends will grow by 25% for the next two years before dropping to a constant 9% growth rate afterward. The required rate of return on similar common stocks is 13%.

What is the per-share value of the company’s common stock?

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