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Allegheny River Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $750,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $5, and each unit of CBL sells for $10.
1. Calculate the amount of joint cost allocated to commercial building lumber (CBL) on a physicalunits basis.
2. Calculate the amount of joint cost allocated to the mine support braces (MSB) on a relative-salesvalue basis.
3. Assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $1,000,000 per production run. During this process, 10,000 units areunavoidably lost; these spoiled units have no value. The remaining units of commercial buildinglumber are saleable at $25.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tarlike preservative that costs $250,000 per production run. The braces are then sold for $12.50 each. Using the net-realizable-value basis, compute the completed cost assigned to each unit of commercial building lumber.
4. If Allegheny River Sawmill chose not to process the mine support braces beyond the splitoff point, the contribution from the joint milling process would increase or decrease by what amount?
5. Did you use the joint cost allocation results in answering requirement (4)? If so, how? Why did you use or not use the allocation results?
(The solution file link will be auto-messaged to your email immediatly, once the payment is made)
About AirJet Best Parts, Inc.
AirJet Best Parts, Inc. is a company dedicated to the design and manufacturing of aviation and airplane technologies and parts. The company has commercial and military clients worldwide.
Task 1: Assessing loan options for AirJet Best Parts, Inc.
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.
Bank APR Number of times compounded
National first prime rate + 6.75% Semi annually
Regions best 13.17 Monthly
1. Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (http://research.stlouisfed.org/fred2/). Select “Interest Rates” and then “Prime Bank Loan Rate”. Use the latest MPRIME. Show your calculations. (15 pts)
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
3. AirJet Best Parts, Inc. has decided to take a $6,950,000 loan being offered by Regions Best at 8.6% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. (20 pts)
Task 2: Evaluating Competitor’s Stock
AirJet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company and would like to determine the stock prices for key competitors. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
1. Using the dividend growth model and assuming a dividend growth rate of 5%, what is the rate of return for one of three key competitors? Use Yahoo Finance to obtain the latest dividend amount and price for one selected company. (15 pts)
2. Using the rate of return above, what should be the current share price of AirJet Best Parts, Inc. if the company maintains a constant 1% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. (10 pts)
3. Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on the stock was also $1.50, the same as the common stock. Which one would you think has a higher price, the preferred stock or the current stock? Explain your rationale. (5 pts)
4. What would happen with the price you computed above if AirJet Best Parts, Inc. announces that dividends at the end of the year will increase? What if the required rate of return increases? What changes in dividends will affect the stock price and how? (10 pts)
Task 3: Bond Evaluation
AirJet Best Parts, Inc. would like to issue 20-year bonds to obtain remaining funds for the new Mexico plant. The company currently has 7.5% semiannual coupon bonds in the market that sell for $1,062 and mature in 20 years.
1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value? (10 pts)
2. What is the difference between the coupon rate and the YTM of bonds? (10 pts)
3. What factors will contribute to the riskiness of these bonds? Explain in detail your rationale. (20 pts)
4. What type of positive and negative covenants may AirJet Best Parts, Inc. use in future bond issues? (10 pts)
Note: This tutorial includes the full project with supporting calculations in excel file and some guidelines to assist you in rewriting the tutorial to suit your needs. Some data indicated in the tutorial (Figures in red) has to be updated based on the current available data in the websites indicated. If you find the instructions confusing and need help recalculating, please mail us.
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
Year 4 $950,000
You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.
1. What is the project’s IRR? (10 pts)
2. What is the project’s NPV? (15 pts)
3. Should the company accept this project and why (or why not)? (5 pts)
4. Explain how depreciation will affect the present value of the project. (10 pts)
5. Provide examples of at least one of the following as it relates to the project: (5 pts each)
a. Sunk Cost
b. Opportunity cost
6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project? (20 pts)
Task 5: Cost of Capital
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate.
1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
a. What is the YTM of the competitor’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts)
b. What is the after-tax cost of debt if the tax rate is 34%? (5 pts)
c. Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)
d. Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts)
2. Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.
a. What is the cost of common equity? (5 pts)
b. Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (10 pts)
3. Compute the cost of preferred equity assuming the dividend paid for preferred stock is $2.93 and the current value of the stock is $50 per share.
a. What is the cost of preferred equity? (5 pts)
b. Is there any other method to compute this cost? Explain. (5 pts)
4. Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm? (10 pts)
5. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts)
6. Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not? (5 pts)
PR 15-4A The comparative financial statements of Triad Images Inc. are as follows. The market price of Triad Images Inc. common stock was $55 on December 31, 2008
The following summary transactions occurred during 2006 for Bluebonnet Bakers:
Cash received from:
Customers - $380,000
Interest on note receivable – 6000
Cash paid for:
Purchase of inventory - $160,000
Interest on note payable – 5000
The balance of cash and cash equivalents at the beginning of 2006 was $17000.
Prepare a statement of cash flows for December 2006 for Bluebonnet Bakers. Use the direct method for reporting operating activities.
The following transactions occurred during March 2006 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. [These are the same transactions analyzed in Exercise 2-1, when we determined their effect on elements of the accounting equation]
7. Paid $70,000 on account for the merchandise purchased in 3.
Presented below is the 2006 income statement and comparative balance sheet information for Tiger Enterprises.
For the Year Ended December 31, 2006 ($ in thousands)
Sales Revenue $7,000 Operating expenses: Cost of goods sold $3,360 Depreciation 240 Insurance 100 Administrative & other 1,800 Total operating expenses $5,500 Income before income taxes 1,500 Income tax expense 600 Net income $900 Balance Sheet Information ($ in thousands) Dec. 31, 2006 Dec. 31, 2005 Assets: Cash $300 $200 Accounts receivable 750 830 Inventory 640 600 Prepaid insurance 50 20 Plant and equipment 2,100 1,800 Less: Accumulated depreciation (840) (600) Total assets $3,000 $2,850 Liabilities and Shareholders' Equity: Accounts payable $300 $360 Payables for administrative & other expenses 300 400 Income taxes payable 200 150 Note payable (due 12/31/2007) 800 600 Common stock 900 800 Retained earnings 500 540 Total liabilities and shareholders' equity $3,000 $2,850
Prepare Tiger's statement of cash flows using the indirect method to present cash flows from operating activities.
Prepare the cash flows from operating activities section of tiger's 2006 statement of cash flows using teh direct method. Assume that all purchases and sales of inventory are on account, and that there are no anticipated bad debts for account receivable.
1. Using ABB principles, justify the workforce needed for the cake decorating department within the local grocery store. The following data is available regarding the time necessary to bake and assemble small, large, and wedding cakes, as well as the time necessary to decorate each of these products.
The baking and assembling of the cakes is broken down into "units." It takes an employee 1 hour to bake and assemble 4 units.
A small cake represents
A small cake represents 1 unit
A small cake represents
A large cake represents
A wedding cake represents
Small cakes budgeted to be made
Large cakes budgeted to be made
Wedding cakes budgeted to be made
2. Slayton Enterprises produces computer equipment and programs for heavy equipment manufacturers. One of the most important parts of the company's new just-in-time production process is quality control. Initially, a traditional cost accounting system was used to assign quality control costs to products. All of the costs of the Quality Control Department were included in the plant's overhead cost rate and allocated to products based on direct labor dollars. Recently, the firm implemented an activity-based costing system. The activities, cost drivers, and rates for the quality control function are summarized below, along with cost allocation information from the traditional system. Also shown is information related to one order of the Ace computer line.
Traditional Costing Approach:
Quality control costs were assigned at a rate of 9% of direct labor dollars.
Order Ace 18:
Charged with $15,500 of direct labor costs.
Activity-Based Approach for the Quality Control Function:
Cost Assignment Rates
Order Ace 18 Activity Usage
Incoming Materials Inspection
Type of material used
$15.75 per type of material
10 types of material
Number of products
$0.95 per product
Tool and Gauge Control
Number of processes per cell
$7 per process
$65 per order
1. Compute the quality control cost that would be assigned to the Ace order under both the traditional approach and the activity-based costing approach to cost assignment.
2. What was the impact on the costs assigned to the Ace order as a result of shifting to the activity-based costing approach?
3. The Bear and Bull Company produces two products: bears and bulls. The following information is available:
Unit Selling Price
Unit Variable Costs
Unit Contribution Margin
Given the stated sales mix, how many bulls will need to be sold in order to obtain a profit of $60,000?
A large cake represents 2 units
A wedding cake represents 4 units
1. Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart:
a. Construct a portfolio containing (long or short) securities 1 and 2, with a return that does not depend on the market factor, F1t, in any way. (Hint: Such a portfolio will have β1 = 0.)
b. Compute the expected return and β2 coefficient for this portfolio.
c. Following the procedure in (a), construct a portfolio containing securities 3 and 4 with a return that does not depend on the market factor, F1t.
d. Compute the expected return and β2 coefficient for this portfolio.
e. There is a risk-free asset with an expected return equal to 5 percent, β1 = 0, and β2 = 0. Describe a possible arbitrage opportunity in such detail that an investor could implement it.
f. What effect would the existence of these kinds of arbitrage opportunities have on the capital markets for these securities in the short run and long run? Graph your analysis.
How do refugees differ from other immigrants? Where are most refugees found currently? What is U.S. government policy on refugees to the U.S.? According to the U.S. Committee on Refugees, what are the best and worst places in the world today for refugees? What are your recommendations regarding treatment of refugees?
(Solution file contain around 750 words)
In order to control costs, a company wishes to study the amount of money its sales force spends entertaining clients. The following is a random sample of six entertainment expenses (dinner costs for four people) from expense reports submitted by member of the sales force.
$157 $132 $109 $145 $125 $139
a. Calculate x¯, s2 and s for the expense data. In addition show that the two different formulas for calculating s2 give the same result.
b. Assuming that the distribution of entertainment expenses is approximately normally distributed calculate estimates of tolerance intervals containing 68.26 percent. 95.44 percent and 99.73 percent of all entertainment expenses by the sales force.
c. If a member of the sales force submits an entertainment expense (dinner cost for four) of $190, should this expense be considered unusually high (and possibly worthy of investigation by the company)? Explain your answer.
d. Compute and interpret the z-score for each of the six entertainment expenses.
Preview of the solution
American Apparel is the largest T-shirt manufacturer in the United States. All of its manufacturing is done in a single factory which employs 4,000 workers in central Los Angeles. The owner of this firm, Dov Charney, has been praised for treating his workers well:
“Pay is performance-related, and amounts to $12 an hour on average, far above California's minimum wage of $6.75. American Apparel staff can buy subsidized health insurance for $8 a week. They are entitled to free English lessons, subsidized meals and free parking.” (“The Hustler,” The Economist, January 4, 2007.)
The article goes on to delineate the high cost of these non-wage benefits. But Mr. Charney claims not to be an altruist. He is simply trying to maximize profit. Why might Mr. Chareny’s profit be higher by paying all the added benefits to his workers?
1. Compare the automotive manufacturing industry today to the automotive manufacturing industry of the 1950’s. Applying the economics of price and output, what is the difference between the industry of today and that of the 1950’s. What type of market structure is the auto industry? Has consumer surplus been affected in any way due to the changes in the auto industry structure, and if so, how?
2. Comparing the different models of pure (perfect) competition and oligopoly, what will be the effects or difference between the two in relation to:
Cost Classification. The L.A. Dress shop produces custom -designed dresses for retail sales on the premises. The shop sold 50 dresses last month. Costs incurred during the last month included the following:
b. Classify the costs as unit-related, batched-related, product-sustaining, or business-sustaining costs. What is the total cost for each category?
The common stock of the Island Angler Corporation is currently trading at a price of $31 per share. Both a put and a call option are available for the stock, each having an exercise price of $30 and an expiration date in exactly six months. The current market prices for the put and call are $1.50 and $3.09, respectively. The risk-free holding period return for the next six months is 2 percent, which corresponds to a 4 percent annual rate.
a. For each possible stock price in the following sequence, calculate the expiration date payoffs (net of the initial purchase price) for the following positions:
(1) buy one Island Angler call option, and (2) short on Island Angler call option:
10, 15, 20, 25, 30, 35, 40, 45, 50
Draw a graph of these payoff relationships, using net profit on the vertical axis and potential expiration date stock price on the horizontal axis. Be sure to specify the prices at which these respective positions will break even (i.e.,produce a net profit of zero)
b. Using the same potential stock prices as in Part a, calculate the expiration date payoffs and profits (net of the initial purchase price) for the following positions:
(1) buy one Island Angler put option, and (2) short one Island Angler put option. Draw a graph of these relationships, labeling the prices at which these investments will break even.
c. Determine whether the $1.59 difference in the market prices between the call and put options is consistent with the put-call parity relationship for European-style contracts.
You are a sugar dealer anticipating the purchase of 250,000 pounds of sugar in three months. You are concerned that the price of sugar will rise, so you take a long position in sugar futures. Each contract covers 112,000 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 19.56 cents per pound. Three months later, the actual spot price of sugar turns out to be 20.65 cents per pound and the futures price is 20.85 cents per pound.
a. Determine the effective price at which you purchased your sugar. How do you account for the difference in amounts for the spot and hedge positions?
b. Describe the nature of the basis risk in the long hedge.
In Mid-May, there are two outstanding call option contracts available on the stock of Hilltop, Inc.
Call # Exercise price Expiration date Market price
Call # 1 $40 19-Aug $6.40
Call # 2 $50 20-Aug $2.25
a. Assuming that you form a portfolio consisting of one Call #1 held long and two Calls #2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options.
b. Graph the net profit relationship in Part a, using stock price on the horizontal axis. What is (are) the breakeven stock price(s)? What is the point of maximum profit?
c. Under what market conditions will this strategy (which is known as a ‘call ratio spread’) generally make sense? Does the holder of this position have limited or unlimited liability?
1. Using the following information regarding actual sales for Seafood City, calculate the regression (trend) line:
Sales for Seafood City ($)
y = 2,092.31. + 81.98x
y = 2,092.31 + 121.98x
y = 1,892.31 + 81.98x
y = 1,892.31 + 81.98x
2. Using the following information regarding actual sales for Seafood City, project sales for Friday of Week 3 using simple linear regression:
3. Using the following information regarding actual sales for Sam’s Ski Supplies, calculate the seasonal ratio for January of Year 3:
Sales for Sam’s Ski Supplies ($000s)
4. Using the following information regarding actual sales for Seafood City, calculate the seasonal forecast of sales for Friday of Week 3:
5. The regression statistic that measures the accuracy of regression predictions is the:
coefficient of determination.
standard error of the estimate.
Thurman Brothers Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred $600,000 in overhead costs when a total of 10,000 direct labor hours were incurred. After implementing activity-based costing (ABC), the company’s accountant identified the following related information:
Proportion of Overhead Cost
Material delivery and handling
Number of deliveries
Number of inspections
Hours of supervisor time
Number of purchase orders
The number of activities for standard and custom-made cabinets are as follows:
During the past year, Thurman accepted a customer order for a set of custom-made cabinets that would require the following:
Direct labor hours --------------------------------------------
Number of deliveries -----------------------------------------
Number of inspections ---------------------------------------
Hours of supervisor time ------------------------------------
Number of purchase orders ---------------------------------
A. How much overhead would be applied to the job if traditional costing using direct labor hours as the cost driver were used?
B. Using activity-based costing (ABC), what would be the overhead rate for each of the four activities?
C. Using activity-based costing (ABC), what would be the total overhead applied to the above job?
D. Compare the overhead applied using traditional costing to ABC costing and remark on the difference. Which one do you think is more accurate?
Ashbrook Company adopted the dollar value LIFO method on january 1, 2010 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO.
Inventory At Base-year cost At current-year cost
1-1-10 $200,000 $200,000
12-31-10 240,000 264,000
12-31-11 256,000 286,720
Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at 12-31-11?
Presented below is information related to Martin Company.
Compute the ending inventory for Martin Company for 2007 through 2012 using the dollar-value LIFO method.
The following information relates to the Choctaw Company.
Date Ending Inventory
(End of year Prices) Price Index
12-31-07 $70,000 100
12-31-08 88,200 105
12-31-09 95,120 116
12-31-10 108,000 120
12-31-11 100,000 125
Use the dollar-value LIFO method to compute the ending inventory for Choctaw Company for 2007 through 2011
1) Since Nordstrom’s competes in the U.S. give an example of each of the marketing example of each of the marketing environment forces (Political, Legal, and Regulatory, Technological; Social; and Competitive and Economic Forces).
2)Discuss the positive or negative impact of the forces on marketing the department store.
3) Recomend how the company should take advantage of of respond to each of the marketing environment force examples (Political, Legal, and Regulatory, Technological; Social; and Competitive and Economic Forces).
4)Assume the company is planning to open stores in a new foreign market area, Mexico. Recommend a overall promotional (intergrated marketing communication) stratergy to support the market entry (major actions, general sequence).
5)Outline at leaset one marketing (distribution) channel that could be used to reach buyers in this foreign market. Provide supporting rationale.
Grant Wood Company manufactures desks. Most of the company's desks are standard models and are sold on the basis of catalog prices. At 12-31-11, the following finished desks appear in the company's inventory.
Fisnished Desks A B C D
2010 Catalog selling prices $450 $480 $900 $1050
FIFO cost per inventory list 12-31-10 470 450 830 960
Estimated current cost to manufacure
(at 12-31-10, and early 2011) 460 430 610 1,000
Sales commissioins and estimated other
costs of disposal 50 60 80 130
2011 catalog selling price 500 540 900 1,200
The 2011 catalog was in effect through 11-2010 and the 2011 catalog is effective as of 12-1-10.
All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross margin on selling price and has usually been successful in doing so.
At what amount should each of the four desks appear in the company's 12-31-10, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individal-item basis?
Silver lumber COmpany handles three principal lines of merchandise with these varying rates of gross profit on cost.
Hardware and fittings 40%
On August 18, a fire distroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. the only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction.
Lumber Millwork Hardware
Inventroy 1-1-11 $250,000 $90,000 $45,000
Purchases to 8-18-11 $1,500,000 375,000 160,000
Sales to 8-18-11 2,050,000 533,000 245,000
Submit your estimate of the inventory amounts immediately preceding the fire
Country Products manufactures quilt racks. Pine is introduced in Department 1, where the raw material is cut and assembled. In department 2, completed racks are stained and packaged for shipment. Department 1 applies overhead on the basis of machine hours; Department 2 applies overhead on the basis of direct labor hours. The company’s predetermined overhead rates were computed using the following information:
Decision Making Across the Organization
BYP6-4 On April 10, 2008, fire damaged the office and warehouse of Inwood Company. Most of the accounting records were destroyed, but the following account balances were determined as of March 31, 2008: Merchandise Inventory, January 1, 2008, $80,000; Sales (January 1–March 31, 2008), $180,000; Purchases (January 1–March 31, 2008) $94,000. The company’s fiscal year ends on December 31. It uses a periodic inventory system. From an analysis of the April bank statement, you discover cancelled checks of $4,200 for cash purchases during the period April 1–10. Deposits during the same period totaled $18,500. Of that amount, 60% were collections on accounts receivable, and the balance was cash sales. Correspondence with the company’s principal suppliers revealed $12,400 of purchases on account from April 1 to April 10. Of that amount, $1,600 was for merchandise in transit on April 10 that was shipped FOB destination. Correspondence with the company’s principal customers produced acknowledgments of credit sales totaling $37,000 from April 1 to April 10. It was estimated that $5,600 of credit sales will never be acknowledged or recovered from customers.
Inwood Company reached an agreement with the insurance company that its fire-loss claim should be based on the average of the gross profit rates for the preceding 2 years. The financial statements for 2006 and 2007 showed the following data.
Net sales $600,000 $480,000
Cost of goods purchased 404,000 356,000
Beginning inventory 60,000 40,000
Ending inventory 80,000 60,000
Inventory with a cost of $17,000 was salvaged from the fire.
With the class divided into groups, answer the following.
(a) Determine the balances in (1) Sales and (2) Purchases at April 10.
*(b) Determine the average profit rate for the years 2006 and 2007. (Hint: Find the gross profit rate for each year and divide the sum by 2.)
*(c) Determine the inventory loss as a result of the fire, using the gross profit method.
The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm’s finances are in the following proportions?
a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm’s weighted average cost of capital.
b. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon’s retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon’s investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon’s cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares?
The trial balance of Terry Manning Fashion Center contained the following accounts at November 30, the end of the company's fiscal year.
TERRY MANNING FASHION CENTER
November 30, 2010
Accumulated Depreciation - Store Equipment
Accumulated Depreciation - Delivery Equipment
Sales Returns and Allowances
Cost of Goods Sold
Preparation of 10 column worksheet, income statement, equity statement, balance sheet, Adjusting entries and closing entries.
(Solution is prepared in excel with each cell linked. so you can easily understand. If the figures in your question varies, just change the trial balance figure and adjustment figure, the solution will automatically change)
The ledgers of Mid City Galleries Inc. contain the following balances as of December 31, 2008.
Commissions expense on art sales
Depreciation expense (administrative)
Inventory, December 31
Loss on the sale of office equipment
Miscellaneous administrative expenses
Miscellaneous selling expenses
Wages and salaries
Income taxes are calculated at 30 percent of income. The galleries had 90,000 shares of common stock outstanding for the entire year. Total assets amounted to $7,509,000, and common stockholder's equity was $3,975,400.
Complete in good form the multiple-step income statement for Mid City Galleries.
Calculate three measures of profitability and one ratio of solvency.
Winningham Company maintains a petty cash fund for small expenditures. The following transactions occurred over a 2-month period.
July 1 Established petty cash fund by writing a check on Cubs Bank for $200.
15 Replenished the petty cash fund by writing a check for $196.00. On this date the fund consisted of $4.00 in cash and the following petty cash receipts: freight-out $94.00, postage expense $42.40, entertainment expense $46.60, and miscellaneous expense $11.20.
31 Replenished the petty cash fund by writing a check for $192.00. At this date, the fund consisted of $8.00 in cash and the following petty cash receipts: freight-out $82.10, charitable contributions expense $45.00, postage expense $25.50, and miscellaneous expense $39.40.
Aug. 15 Replenished the petty cash fund by writing a check for $187.00.
On this date, the fund consisted of $13.00 in cash and the following petty cash receipts: freight-out $75.60, entertainment expense $43.00, postage expense $33.00, and miscellaneous expense $37.00.
16 Increased the amount of the petty cash fund to $300 by writing a check for $100.
31 Replenished petty cash fund by writing a check for $284.00. On this date, the fund consisted of $16 in cash and the following petty cash receipts: postage expense $140.00, travel expense $95.60, and freight-out $47.10.
Journalize the petty cash transactions.
Post to the petty cash account
What internal control features exist in a petty cash fund
Robinson Company began operations late in 2010 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2010 and no markdowns during 2010, the ending inventory for 2010 was $14,000 under both the conventinal retail method and the LIFO retail method. At the end of 2011, management wants to compare the results of applying the conventional and LIFO retail methods. there was no change in the price level during 2010. The following data are available for computations.
Inventory, 1-1-10 $14,000 $20,000
Net Markups 9,000
Net markdowns 2,500
Purchases 55,500 81,000
Estimated Theft 2,000
Compute the cost of the 2010 ending inventory under both:
(a) The conventional retail method
(b) The LIFO retail method
1. Fruit Snacks Corp Inc. makes lunchbox style fruit snacks. The owner of the company is setting up a standard cost system, and she has collected the following data for one of the company’s products – fruit chews.
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer Valley Lodge will sell all 300 lift tickets on those 40 days.) Running the new lift will cost $500 a day for the entire 200 days the lodge is open. Assume that the lift tickets at Deer Valley cost $55 a day. The new lift has an economic life of 20 years.
1. Assume that the before-tax required rate of return for Deer Valley is 14%. Compute the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer.
2. Assume that the after-tax required rate of return for Deer Valley is 8%, the income tax rate is 40%, and the MACRS recovery period is 10 years. Compute the after-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer.
3. What subjective factors would affect the investment decision?
The pinkerton publishing company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large scale, intergrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more labour intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firm's cost of capital is 10%
a. Calculate NPV & IRR for the following project:
b. Graph the NPV profiles for Plan A and Plan B.
Harvard Research issues bonds dated January 1, 2009, that pay interest semiannually on June 30 and December 31. The bonds have a $45,000 par value, an annual contract rate of 6%, and mature in 6 years.
For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2009, and (b) prepare the journal entry to record their issuance.
Market rate at the date of issuance is 4%.
Market rate at the date of issuance is 6%.
Market rate at the date of issuance is 8%.
1) JIT has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bond’s price.
a. $956.42 b. $1,000.00 c. $1,168.31 d. $1,213.19
2) What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Round your answer to the nearest whole percent and assume annual coupon payments.
a. 5% b. 14% c. 12% d. 11%
3) Montford Company bonds have a 14% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of Montford bonds if investors’ required rate of return is 12%.
a. $1,114.70 b. $1,149.39 c. $894.06 d. $1,000.00
4) You are considering the purchase of Boco bonds that were issued 14 years ago. When the bonds were originally sold, they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to maturity on the bonds?
a. 8.50% b. 14.38% c. 11.11% d. 7.67%
5) Delta Corp. preferred stock pays $3.15. What is the value of the stock if your required rate of return is 8.5% (round your answer to the nearest $1, and assume no transaction costs)?
a. $33 b. $23 c. $27 d. $37
6) Touch High Co. just paid a dividend of $1.65 on its common stock. This company’s dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value of per share of TH stock.
a. $20.63 b. $21.24 c. $15.00 d. $55.00
7) Little Rock stock is currently selling for $42.86. It is expected to pay a dividend of $3.00 at the end of the year. Dividends are expected to grow at a constant rate of 3% indefinitely. Compute the required rate of return on LR stock.
a. 10% b. 33% c. 7% d. 4.3%
8) What is the expected rate of return for an investment that has the following expected scenario? If there is an 18% probability of a recession, 2.0% return; if there is a 65% probability of a moderate economy, 9.5% return; if there is a 17% probability of a strong economy, 14.2% return.
a. 11.25% b. 7.33% c. 8.95% d. 9.59%
9) You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% 1.35 14% Y Corporation 35% .95 10% Z Corporation 45% .75 8% Compute the expected return and beta for the portfolio.
a. 10.67%, 1.02 b. 9.9%, 1.02 c. 34.4%, .94 d. 9.9%, .94
10) Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following questions State of the Economy Probability of the States Percentage Returns Economic recession 25% 5% Moderate economic growth 55% 10% Strong economic growth 20% 13% The expected return from investing in the asset is:
a. 9.00%. b. 9.35%. c. 10.00%. d. 10.55%.
The standard deviation of returns is:
a. 8.00%. b. 7.63%. c. 4.68%. d. 2.76%.
It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new investment under consideration and the evaluation of several mutually exclusive projects. Given your lack of tenure at Caledonia, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at judging your understanding of the capital-budgeting process. The memorandum you received outlining your assignment follows:
a. Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits?
b. How does depreciation affect free cash flows?
c. How do sunk costs affect the determination of cash flows?
d. What is the project’s initial outlay?
e. What are the differential cash flows over the project’s life?
f. What is the terminal cash flow?
g. Draw a cash flow diagram for this project.
h. What is its net present value?
i. What is its internal rate of return?
j. Should the project be accepted? Why or why not?
k. In capital budgeting, risk can be measured from three perspectives. What are those three measures of a project’s risk?
l. According to the CAPM, which measurement of a project’s risk is relevant? What complications does reality introduce into the CAPM view of risk, and what does that mean for our view of the relevant measure of a project’s risk?
m. Explain how simulation works. What is the value in using a simulation approach?
n. What is sensitivity analysis and what is its purpose?
The bookkeeper for Biggio Corporation made these errors in journalizing and posting.
1. A credit posting of $400 to Accounts Receivable was omitted.
2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.
3. A collection on account of $100 was journalized and posted as a debit to Cash $100 and a credit to Accounts Payable $100.
4. A credit posting of $300 to Property Taxes Payable was made twice.
5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25.
6. A debit of $395 to Advertising Expense was posted as $359.
For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.
Error In Balance Difference Larger Column
1 No $400 Debit
Malone Company estimates that 360,000 direct labor hours will be worked during the coming year, 2008, in the Packaging Department. On this basis, the following budgeted manufacturing overhead cost data are computed for the year.
Fixed Overhead Costs:
Property taxes 18,000
Variable Overhead Costs:
Indirect labor 126,000
Indirect materials 90,000
It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours. During October, 27,000 direct labor hours were worked and the following overhead costs were incurred.
Fixed overhead costs: Supervision $7,500, Depreciation $5,000, Insurance $2,470, Rent $2,000, and Property taxes $1,500.
Variable overhead costs: Indirect labor $10,360, Indirect materials, $6,400, Repairs $4,000, Utilities $5,700, and Lubricants $1,640.
a. Prepare a monthly manufacturing overhead budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2008.
b. Prepare a flexible budget report for October
c. Comment on management’s efficiency in controlling manufacturing overhead costs in October.
Brothers Steve and Herman Hargenrater began operations of their tool and die shop (H & H Tool, Inc.) on January 1, 2010. The annual reporting period ends December 31. The trial balance on January 1, 2011, follows:
Account Titles Debit Credit
Cash $ 4,000
Accounts receivable 7,000
Accumulated depreciation (on equipment) $ 8,000
Other assets (not detailed to simplify) 5,000
Income taxes payable
Long-term notes payable 7,000
Contributed capital (85,000 shares) 85,000
Retained earnings 10,000
Income tax expense
Remaining expenses (not detailed to simplify)
Totals $110,000 $110,000
Transactions during 2011 follow:
a.Borrowed $12,000 cash on a five-year, 10 percent note payable, dated march 1, 2011.
b.Purchased land for a future building site; paid cash, $12,000.
c.Earned revenues for 2011, $208,000, including $52,000 on credit and the rest in cash.
d.Sold 4,000 additional shares of capital stock for cash at $1 market value per share on January 1, 2011.
Data for adjusting entries
Supplies counted on December 31, 2011, $18,000.
7. Compute the following ratios for 2011 and explain what the results suggest about the company:
a. Financial leverage
b. Total asset turnover
c. Net profit margin
1. Cave Company produces a product called Lem. The standard direct material cost to produce one unit of Lem is 4 quarts of raw material at $2.50 per quart. During May 2010, 4,200 quarts of raw material were purchased at a cost of $10,080. All the purchased material was used to produce 1,000 units of Lem.
a) Compute the actual cost per quart and the material price variance for May 2010.
b) Assume the same facts except that Cave Company purchased 5,000 quarts of material at the previously calculated cost per quart, but used only 4,200 quarts. Compute the material price variance and material usage variance for May 2010, assuming that Cave identifies at the earliest possible time.
c) Which managers at Cave Company would most likely assume responsibility for control of the variance computed in requirement (b)?
2. For each independent case, fill in the missing figures.
Standard Hours per unit
Standard rate per hour
Actual hours worked
Actual Labor Cost
Labor rate variance
Labor efficiency variance
Julie Molony opened Julie’s Maids Cleaning Service Inc. on July 1, 2010. During July, the company completed the following transactions.
July 1 Issued $14,000 of common stock for $14,000 cash.
1 Purchased a used truck for $10,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $800 on account.
5 Paid $1,800 on a one-year insurance policy, effective July 1.
12 Billed customers $3,800 for cleaning services.
18 Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies.
20 Paid $1,600 for employee salaries.
21 Collected $1,400 from customers billed on July 12.
25 Billed customers $1,500 for cleaning services.
31 Paid gas and oil for the month on the truck, $400.
31 Paid a $600 cash dividend.
The chart of accounts for Julie’s Maids Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634 Cleaning Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries Expense.
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the worksheet.
(1) Earned but unbilled fees at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $100 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and a retained earnings statement for July, and a classified balance sheet at July 31, 2010.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f ) Journalize and post the closing entries, and complete the closing process. Use page J3 for the journal.
(g) Prepare a post-closing trial balance at July 31.
Memphis Corp., a merchandiser, recently completed its 2009 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, (5) Other Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company’s balance sheets and income statement follow.
Comparative Balance Sheets
December 31, 2009 and 2008
Cash ……………………………………………………………………………………………………………….$ 165,000 $137,000
Accounts receivable ………………………………………………………………………………………. 82,000 74,000
Merchandise inventory …………………………………………………………………………………. 620,000 525,000
Equipment ……………………………………………………………………………………………………. 345,000 240,000
Accum. Depreciation – Equipment ………………………………………………………………... (159,000) (102,000)
Total assets …………………………………………………………………………………………………… $1,053,000 $874,000
Liabilities and Equity
Accounts payable ………………………………………………………………………………………….. $ 160,000 $ 96,000
Income taxes payable…………………………………………………………………………………….. 22,000 19,000
Commons stock, $2 par value ……………………………………………………………………….. 588,000 560,000
Paid-in capital in excess
Of par value, common stock ………………………………………………………………………. 201,000 159,000
Retained earnings …………………………………………………………………………………………... 82,000 40,000
Total liabilities and equity ………………………………………………………………………………$1,053,000 $874,000
For Year Ended December 31, 2009
Sales ……………………………………… $1,794,000
Cost of goods sold …………………. 1,088,000
Gross profit …………………………… 706,000
Depreciation expense ………… $ 57,000
Other expenses ………………….. 500,000 557,000
Income before taxes …………….. 149,000
Income taxes expense ………….. 22,000
Net income …………………………... $ 127,000
Additional Information on Year 2009 transactions
a. Purchased equipment for $105,000 cash.
b. Issued 14,000 shares of common stock for $5 cash per share.
c. Declared and paid $85,000 in cash dividends.
Prepare a complete statement of cash flows; report its cash inflows and cash outflows from operating activities according to the indirect method.
Morrisey & Brown, Ltd of Sydney is a merchandising company that is the sole distributor of a product that is increasing in popularity among Australian consumers. The company’s income statements for the three most recent months follow:
Rockford management services began business on january 1, 2010, with a capital investment of $120,000. The company manages condominiums for owners (service revenue) and rents space in its own office building (Rent revenue). The trial balance and adjusted trial balance columns of the worksheet at the end of the first year are as follows
1. The controller of a small private college is complaining about the amount of work she is required to do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an old English professor and probably doesn't know the difference between a cost and revenue.
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't know much accounting?
2. Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5000 per year. The controller has determined the following schedule of costs to educate students: Number of Students Total Costs 4000 $30,000,000 4100 30,300,000 4200 30,600,000 4300 30,900,000. The current enrollment is 4200 students. The president of the university has calculated the cost per student in the following manner:$30,600,000/4200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?
3. A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores. The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are: A B C Units Produced 10,000,000 20,000,000 30,000,000Variable Costs $ 200,000 $450,000 $650,000 Fixed Costs $1,000,000 $1,000,000 $1,000,000.
a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?
4. The Jung Corporation’s budget calls for the following production:
Quarter 1 45,000 units
Quarter 2 38,000 units
Quarter 3 34,000 units
Quarter 4 48,000 units.
Each unit of production requires three pounds of direct material. The company’s policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter’s direct material requirements.
Compute budgeted direct materials purchases for the third quarter.
5. The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.
a. What is the application rate for the maintenance department?
b. What is the additional cost to the maintenance department of providing another hour of maintenance?
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?
6. Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSBs) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each unprocessed unit of MSB sells for $2 per unit and each unprocessed unit of CBL sells for $4 per unit. If the CBL is processed further at a cost of $200,000, it can be sold at $10 per unit but 10,000 units are unavoidably lost (with no discernible value). The MSB units can be coated with a preservative at a cost of $100,000 per production run and then sold for $3.50 each.
a. If no further work is done after the initial milling process, calculate the cost of CBL using physical quantities to allocate the joint cost.
b. If no further work is done after the initial milling process, calculate the cost of MSB using relative sales value to allocate the joint cost.
c. Should MSB and CBL be processed further or sold immediately after initial milling?
7. The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.
a. How much overhead is allocated?
b. What is the over/under absorbed overhead?
8. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product. Quantity Price Cost Direct materials 8 pounds $1.80 per pound $14.40Direct labor 0.25 hour $8.00 per hour ___2.00_ $16.40During May, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for May were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.
9. The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.
a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials.
b. Describe how Jeff could use standards for planning purposes.
c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures.
d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?
10. Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.
Hawks Electronic Repair Shop has budgeted the following time and material for 2008.
Hawks Electronic Repair Shop
Budgeted Costs for the Year 2008
Time Charges Material Loading Charges
Shop employees’ wages and benefits $108,000 -
Parts manager’s salary and benefits - $25,400
Office employee’s salary and benefits 20,000 13,600
Overhead (supplies, depreciation, advertising, utilities) 26,000 18,000
Total budgeted costs $154,000 $57,000
Hawks budgets 5,000 hours of repair time in 2008 and will bill a profit of $5 per labor hour along with a 30% profit markup on the invoice cost of parts. The estimated invoice cost for parts to be used is $100,000.
On January 5, 2008 Hawks is asked to submit a price estimate to fix a 72-inch big-screen TV.
Hawks estimates that this job will consume 20 hours of labor and $500 in parts.
(a) Compute the labor rate for Hawks Electronic Repair Shop for the year 2008.
(b) Compute the material loading charge percentage for Hawks Electronic Repair Shop for the year 2008.
(c) Prepare a time-and-material price quotation for fixing the big-screen TV.
1. Toying With Nature wants to take advantage of children's current fascination with dinosaurs by adding several scale-model dinosaurs to its existing product line. Annual sales of the dinosaurs are estimated at 80,000 units at a price of $6 per unit. Variable manufacturing costs are estimated at $2.50 per unit, incremental fixed manufacturing costs (excluding depreciation) at $43,000 annually, and additional selling and general expenses related to the dinosaurs at $58,000 annually.
To manufacture the dinosaurs, the company must invest $350,000 in design molds and special equipment. Since toy fads wane in popularity rather quickly, Toying With Nature anticipates the special equipment will have a three-year service life with only a $20,000 salvage value. Depreciation will be computed on a straight-line basis. All revenue and expenses other than depreciation will be received or paid in cash. The company's combined federal and state income tax rate is 40 percent.
a.Prepare a schedule showing the estimated increase in annual net income from the planned manufacture and sale of dinosaur toys.
b.Compute the annual net cash flows expected from this project.
c.Compute for this project the (1) payback period, (2) return on average investment, and (3) net present value, discounted at an annual rate of 15 percent.
2. V. S. Yogurt is considering two possible expansion plans. Proposal A involves opening 10 stores in northern California at a total cost of $3,150,000. Under another strategy, Proposal B, V. S. Yogurt would focus on southern California and open six stores for a total cost of $2,500,000. Selected data regarding the two proposals have been assembled by the controller of V. S. Yogurt as follows:
Proposal A Proposal B
Required investment $3,150,000 $2,500,000
Estimated life of store locations 7 years 7 years
Estimated salvage value $0 $400,000
Estimated annual net cash flow 750,000 570,000
Depreciation on equipment (straight-line basis) 450,000 300,000
Estimated annual net income ? ?
a.For each proposal, compute the (1) payback period, (2) return on average investment, and (3) net present value, discounted at management's required rate of return of 15 percent.
3. Sonic, Inc., sells business software. Currently, all of its programs come on disks. Due to their complexity, some of these applications occupy as many as seven disks. Not only are the disks cumbersome for customers to load, they are relatively expensive for Sonic to purchase. The company does not intend to discontinue using disks altogether. However, it does want to reduce its reliance on the disk medium.
Two proposals are being considered. The first is to provide software on computer chips. Doing so requires a $300,000 investment in equipment. The second is to make software available through a computerized "software bank." In essence, programs would be downloaded directly from Sonic using telecommunication technology. Customers would gain access to Sonic's mainframe, specify the program they wish to order, and provide their name, address, and credit card information. The software would then be transferred directly to the customer's hard drive, and copies of the users' manual and registration material would be mailed the same day. This proposal requires an initial investment of $240,000.
The following information pertains to these proposals. Due to rapidly changing technology, neither proposal is expected to have any salvage value or an estimated life exceeding six years.
Computer Chip Software Bank EquipmentInstallation
Estimated incremental annual
revenue of investment $300,000 $160,000
Estimated incremental annual expense
of investment (including taxes) 250,000 130,000
The only difference between Sonic's incremental cash flows and its incremental income is attributable to depreciation. A minimum return on investment of 15 percent is required.
a.Compute the payback period of each proposal.
b.Compute the return on average investment of each proposal.
c.Compute the net present value of each proposal using the tables
1. Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell?
2. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10% with semiannual compounding, how much should you be willing to pay for this bond?
a. $ 826.31
c. $ 957.50
3. Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity?
4. A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?
5. Wald Corporation has outstanding bonds with a 6-year maturity, $1,000 par value, and 7% coupon paid semiannually (3.5% each 6 months), and those bonds sells at their par value. Wald has another bond with the same risk, maturity, and par value, but this second bond pays a 7% annual coupon. What is an estimate of the price of the annual coupon bond? Neither bond is callable.
a. $ 994.18
b. $ 998.56
6. Kholdy Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between the bond's YTM and its YTC?
7. Walker Industries has a bond outstanding with 12 years to maturity, a 9% coupon paid semiannually, and a $1,000 par value. The bond has a 7% nominal yield to maturity, but it can be called in 3 years at a price of $1,045. What is the bond’s nominal yield to call?
8. A 12-year, 8.5% annual coupon bond has a yield to maturity of 9.5% and a par value of $1,000. What is the bond’s current yield?
Herbal care Corp. , a distributor of herb-based sunscreens is ready to begin its third quarter in which peak sales occur. The company has requested a $40,000, 90 day loan from its bank to help meet cash requirements during the quarter. Since Herbal care has experienced difficulty in paying off its loan in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:
Past experience shows that 25% of the month’s sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.
Salaries and wages
Merchandise purchases are paid in full during the month following purchases. Accounts payable for merchandise purchase on June 30, which will be paid during July, total $180,000.
Smoky mountain corp. makes two types of hiking boots Xtreme and the Pathfinder, Data concerning these two product lines appear below:
Selling price per unit
Direct materials per unit
Direct labor per unit
Direct labor-hours per unit
Estimated annual production
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:
Estimated total manufacturing overhead
Estimated total direct labor hours
Activities and Activity Measures
Supporting direct labor (direct labor hours)
Batch setups (setups)
Product sustaining (number of products)
Total manufacturing overhead cost
Compute the product margins for the Xtreme and the Pathfinder products under the activity based costing systems.
Benny’s Bouncing Balls manufactures two types of bouncy balls, small and large. Budgeted and actual operating data for the year 2008 are:
In Ramirez Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion costs, and production data for its Sterilizing Department in selected months during 2010 are as follows.
Compute the physical units for January and May
Compute the equivalent units of production for (1) materials and (2) conversion costs for each month.
Logan Industries purchased the following assets and constructed a building as well. All this was done during the current year.
Assets 1 and 2
These assets were purchased as a lump sum for $104,000 cash. The following information was gathered:
Description initial cost on depreciation to book value on Appraised value
sellers book date on sellers sellers books
Machinery $100,000 $50,000 $50,000 $90,000
Office equipment 60000 10000 50000 30000
This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900.
This machinery was acquired by trading in used machinery. (This exchange lacks commercial substance.) Facts concerning the trade-in are as follows:
Cost of machinery traded: $100,000
Accumulated depreciation to date of sale: $36,000
Fair value of machinery traded: $80,000
Cash received: $10,000
Fair value of machinery acquired: $70,000
Office equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market value of $11 per share.
Construction of Building
A building was constructed on land purchased last year at a cost of $180,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows:
To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%.
Record the acquisition of each of these assets.
Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.
Equipment (cost): $28,000
Accumulated depreciation: $19,000
Fair value of equipment: $13,500
Cash given up: $2,000
Equipment (cost): $28,000
Accumulated depreciation: $10,000
Fair value of equipment: $15,500
a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
b) Prepare the journal entries to record the exchange on the books of both companies. Assume the exchange has commercial substance.
Hernandez Timber Company owns 9,000 acres of timberland purchased in 1999 at a cost of $1,400 per acre. At the time of purchase the land without the timber was valued at $400 per acre. In 2000, Hernandez built fire lanes and roads, with a life of 30 years, at a cost of $87,000. Every year Hernandez sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2001, Hernandez selectively logged and sold 700,000 board feet of timber, of the estimated 3,000,000 board feet. In 2002, Hernandez planted new seedlings to replace the trees cut at a cost of $100,000.
4-5A. (Pro forma balance sheet construction)
Use the following industry average ratios to construct a pro forma balance sheet for Carlos Menza, Inc.
Dvorak Music produces two durable music stands:
Stand a Stand B
Selling price $90 $80
Less variable costs 30 44
Contribution margin $60 $36
Stand A requires 6 labor hours and stand B requires 3 labor hours. The company has only 350 available labor hours per week. Further, the company can sell all it can produce of either product.
a. Which stand(s) should the company produce?
b. What would be the incremental benefit of obtaining 15 additional labor hours?
The following information relates to Jorgensen Manufacturing for calendar year 2011, the company’s first year of operation:
Units produced 8,000
Units sold 7,000
Selling price per unit $4,500
Direct material per unit $2,000
Direct labor per unit $1,200
Variable manufacturing overhead per unit $900
Variable selling cost per unit $225
Annual fixed manufacturing overhead $800,000
Annual fixed selling and administrative expense $400,000
a. Prepare an income statement using full costing.
b. Prepare an income statement using variable costing.
c. Calculate the amount of fixed manufacturing overhead that will be included in ending inventory under full costing and reconcile it to the difference between incomes computed under variable and full costing.
d. Suppose that the company sold 8,000 units during the year. What would the variable costing net income have been? What would the full costing net income have been?
Regal Polish manufactures a single product in one department and uses a process costing system. At the start of May, there were 10,000 units in process that were 100 percent complete with respect to direct material and 60 percent complete with respect to conversion costs (labor and overhead). During the month, the company began production of 105,000 units. Ending Work in Process Inventory consisted of 5,000 units that were 100 percent complete with respect to material and 70 percent complete with respect to conversion costs.
Cost Information Beginning Work in Process Costs Added in May
Direct material $4,000 $76,500
Direct labor 200 8,880
Manufacturing overhead 300 9,915
Total $4,500 $95,295
a. Calculate the cost per equivalent unit for each of the three cost items and in total.
b. Calculate the cost of items completed in May and the cost of ending Work in Process.
c. Reconcile the sum of the two costs in part b to the sum of beginning Work in Process and costs added in May.
Boston Textiles has an all-common-equity capital structure. Pertinent financial characteristics for the company are shown below: Shares of common stock outstanding = 1,000,000 Common stock price = $20 per share Expected level of EBIT = $5,000,000 Dividend payout ratio = 100 percent In answering the following questions, assume that corporate income is not taxed.
a) Under the present capital structure, what is the total value of the firm?
b) What is the cost of common equity capital, Kc? What is the composite cost of capital, K0?
c) Now suppose that Boston Textiles sells $1 million of long-term debt with an interest rate of 8 percent. The proceeds are used to retire outstanding common stock. According to NOI theory (the independence hypothesis), what will be the firm’s cost of common equity after the capital structure change?
1. What will be the dividend per share flowing to the firm’s common shareholders? 2. By what percent has the dividend per share changed owing to the capital structure change? 3. By what percent has the cost of common equity changed owing to the capital structure change? 4. What will be the composite cost of capital after the capital structure change?
EXERCISE 3-7. Cost per Equivalent Unit [LO 3]
The balance in beginning Work in Process at Bing Rubber Company for direct labor was $140,000. During the month of March, an additional $700,000 of direct labor was incurred, and 30,000 pounds of rubber were produced.At the end of March, 10,000 pounds of rubber were in process and the units were 50 percent complete. At the start of March, the company had 6,000 pounds of rubber that were 40 percent complete.
Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.
EXERCISE 3-9. Calculation of Equivalent Units [LO 2]
McMillian Tire Company produces tires used on small trailers.The month of June ended with 500 tires in process, 90 percent complete as to direct materials,and 50 percent complete as to conversion costs;2,000 tires were transferred to finished goods during the month,and 2,400 were started during the month.The beginning Work in Process inventory was 60 percent complete as to direct materials and 40 percent complete as to conversion costs.
Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.
Vorteck Inc. manufactures snowsuits. Vorteck is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing machine was purchased five years ago at a price of $1.8 million six months ago; Vorteck spent $55,000 to keep it operational. The existing sewing machine can be sold today for $260,000. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 $390,000 2 400,000 3 411,000 4 426,000 5 434,000 6 435,000 7 436,000 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,000. This new equipment would require maintenance costs of $95,000 at the end of the fifth year. The cost of capital is 9%. Use the net present value method to determine whether Vorteck should purchase the new machine to replace the exiting machine, and state the reason for your conclusion
On October 1, 2009, Ebrahim launched a computer Services Company called Ebrahim Systems, which is organized as a sole proprietorship and provides consulting services, computer system installations, and custom program development. Ebrahim adopts the calendar year for reporting purposes and expects to prepare the company’s first set of financial statements on December 31, 2009. Ebrahim completed the following transactions during the first three months of operations (ending December 31, 2009).
Ebrahim invested $ 55,000 cash, a $ 20,000 computer system and $ 8,000 of office equipment in the business.
Paid $ 3,200 cash for four months’ rent in advance.
Billed Prime Leasing $ 8,200 for services performed on account.
Hired Suzie Smith as a part time assistant for $ 125 per day as needed.
Billed Prime Leasing another $ 1,400 for services performed on account.
Purchased $ 1,000 of office supplies on account
Received $ 7,000 cash from Prime Leasing on its account.
Paid $ 400 on the account for supplies purchased on 25 October
Paid $ 800 cash to purchase new office supplies.
Paid $ 500 cash for an advertisement in a local newspaper.
Ebrahim withdrew $ 400 cash from the business for personal use.
1 December :
Received $ 10,000 cash from a customer for 2-month consulting services in advance.
Paid Suize Smith’s salary in cash for 15 day’s work.
Paid $ 1200 cash to repair the company’s computer.
The following additional information is available on December 31st 2009. (for preparing adjusting entries at 31 December)
a As of December 31st 2002, Suzie Smith has not been paid for four days of work at $ 125 per day.
b Prepaid rent for three of the four months has expired.
c The office equipment and computer system depreciate by $ 333.33 and $ 133.33 each month. Ebrahim will record the depreciation expense for the first three months till 31 December (from 1 October till 31 December)
d One month of the unearned revenue received from Dade Company has been earned.
e It was determined by a physical count that the ending balance of office supplies on 31 December is $ 300.
f Accrued interest revenue $ 200.
You are required to
1 Prepare journal entries to record each of the above transactions for Ebrahim Systems. Post entries to the accounts in the ledger.
2 Prepare the unadjusted trial balance
3 Prepare all necessary adjusting entries. Post these entries to the accounts in the ledger
4 Prepare an adjusted trial balance as of December 31st 2009.
5 Prepare the income statement for the three months ended December 31st 2009.
6 Prepare a statement of changes in owner’s equity for the three months ended December 31st 2009.
7 Prepare a balance sheet as of December 31st 2009.
The following information is available for B Company for the month ended July 31, 20x4:
Direct material inventory $27,000 $24,500
Work-in-process inventory $25,000 $29,000
Finished-goods inventory $22,000 $15,000
Direct materials purchased $21,000 Direct labor(2,500@ $12) $30,000 Indirect labor $3,000 Indirect Materials $2,500 Office supplies expense $100 Equipment deprecation-factory $2,000 Equipment deprecation-office $750 Administrative expenses $20,000 office utilities $75 Factory utilities $200 Marketing expense $2,500 Sales $150,000 Sales commissions $1,500.
Prepare an income statement that shows the cost of goods sold for July.
Nance’s Restaurant, a local independent restaurant, is evaluating new point-of-sale (POS) systems and must determine if a new installation is feasible. A new POS installation would include both software and hardware, with a total cost of $20,000.
Nance’s Restaurant is currently operating without a point-of-sale system and utilizes a chit system with carbon copy papers that allow the waitstaff to provide a copy to the kitchen and the customer while retaining a copy for accounting purposes. Management is aware that this is an archaic system and that a POS system will create efficiencies, but they are not sure it is worth the cost.
The Star Restaurant Company owns and operates Chinese restaurants throughout the northwestern United States. Paris Brown, vice president of development, has been analyzing a new metropolitan market for expansion opportunities. The company’s best option would be to acquire a distressed property at a low price and turn it into a money-making venture. Ms. Brown is contemplating taking over a restaurant that recently failed and is currently closed. The restaurant is located in the parking lot of a large regional shopping mall. The mall owner is anxious to reopen the restaurant, as in its current state it is an eyesore and a deterrent to attracting retail customers.
Clydes marina has estimated that fixed costs per month are $300,000 and variable cost per dollar of sales is $0.40.
A) What is the break –even point per month in sales dollars?
B) What level of sales dollars is needed for a monthly profit of $60,000?
C) For the month of July, the Marina anticipates sales of $1,000,000. What is the expected level of profit?
Apex Company's Copy Department, which does all of the photocopying for the Sales Department and the Administrative Department, budgets the following costs for the year, based on the expected activity of 5,000,000 copies:
Salaries (fixed) $80,000
Employee benefits (fixed) 10,000
Depreciation of copy machines (fixed) 10,000
Utilities (fixed) 5,000
Paper (variable, 1 cent per copy) 50,000
Toner (variable, 1 cent per copy) 50,000
The costs are assigned to two cost pools, one for fixed and one for variable costs. The costs are then assigned to the Sales Department and the Administrative Department. Fixed costs are assigned on a lump-sum basis, 40 percent to sales and 60 percent to administration. The variable costs are assigned at a rate of 2 cents per copy.
Assuming 48,00,000 copies were made during the year, 25,00,000 for Sales and 2,300,000 for Administration, calculate the Copy Department costs allocated to Sales and Administration.
Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5,000 after tax. In addition, it would cost $5,000 after tax to install this machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate, and a required rate of return of 10 percent.
a. What is the initial outlay associated with this project?
b. What are the annual after-tax cash flows associated with this project for years 1 through 9?
c. What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?
d. Should this machine be purchased?
2. What is the monthly debt service payment on Marco’s loan if Enrique lends him $15,000 for four years at 8% interest?
3. Tanya is trying to prepare her loan amortization schedule for the renovation of her bed-and-breakfast facility. Her banker is quoting her an interest rate of 12% for four years. The loan amount is $25,000. Prepare the loan amortization schedule.
4. Juan would like to add a shuttle service for his hotel guests to nearby shopping centers. The van has a price tag of $35,000. His bank will give him a loan for $25,000 at only 6% interest, compounded monthly, if Juan pays $10,000 as a down payment. What is Juan’s loan amortization schedule for the first five months? (The term of the loan for Juan is 5 years)
6. Efren is considering buying some new equipment for his restaurant for $30,000. However, the restaurant supply store says they also lease equipment. The supply store will offer him a five-year lease with no down payment, four annual lease payments of $6,000 per year, and a final payment of $10,000. If Efren’s cost of capital is 8%, should he select the lease or purchase option? If there is a salvage value of $1,000 if he buys the equipment but no salvage value with the lease option, will his decision change?
8. Milton is offering Bernard an opportunity to invest in his deal. He is asking for an equity investment of $125,000 and promises to pay Bernard the following cash flow:
Year Cash Flow
Bernard’s hurdle rate is 14%. Does Milton’s proposal meet Bernard’s investment goal?
The Harmon Company manufactures skates. The company’s income statement for 2008 is as follows:
The year-end balance sheet of Jackson Products Inc., includes the following stockholders' equity section (with certain details omitted)
7% cumulative preferred stock, $100 par value...............................$15,000,000
Common stock, $5 par value, 5,000,000 shares
authorized, $4,000,000 shared issued and outstanding ..................$20,000,000
Additional paid-in capital:
Total stockholders' equity..............................................$143,450,000
From this information, compute answers to the following questions:
a. How many shares of preferred stock have been issued?
b. What is the total amount of the annual dividends to which preferred stockholders are entitled?
c. What was the average issuance price per share of common stock?
d. What is the amount of legal capital and the amount of total paid-in capital?
e. What is the book value per share of common stock?
f. If is possible to determine the fair market value per share of common stock form the stock holders' equity section above? Explain
The fiscal year for Honshu Company ends on May 31. Results for the year ended May 31, 20X1, included (in millions of Japanese yen except for number of shares outstanding):
Tech- Media buys its product for $ 90 and sells it for $ 200 per unit. The sales staff receives a 12% com-mission on the sale of each unit. Its June income statement follows. Problem 20- 4B Preparation and analysis of
TECH- MEDIA COMPANY
Management expects June’s results to be repeated in July, August, and September without any changes in strategy. Management, however, has another plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with July) if the item’s selling price is reduced to $ 180 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $ 90 per unit, the sales staff will continue to earn a 12% commission, and the remaining expenses will stay the same.
Beck Company set the following standard unit costs for its single product.
Major Company’s 2009 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.
Parador Company sells its product for $ 22 per unit. Its actual and projected sales follow.
Water Sports Corp. is a merchandiser of three different products. The company’s March 31 inventories are water skis, 60,000 units; tow ropes, 45,000 units; and life jackets, 75,000 units. Management believes that excessive inventories have accumulated for all three products. As a result, a new policy dictates that ending inventory in any month should equal 10% of the expected unit sales for the following month. Expected sales in units for April, May, June, and July follow.
Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunites. 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 our 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 300,000 and for Project B are 120,000. The annual expected cash inflows are 94641 for project A and 39,507 for project B. both investments are expected to provide cash flow benefits for the next four years. Sweeny Enterprise’s cost of capital is 8 percent.
a) Compute 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 of 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?
The comparative balance sheets for 2011 and 2010 and the statement of income for 2011 are given below for Dux Company. Additional information from Dux's accounting records is provided also.
(due to more data's, just given total alone)
Balance sheet total - $420 and $369
Net income - $25
Additional information from the accounting records:
A building that originally cost $40,000, and which was three-fourths depreciated, was sold for $7,000.
The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
Property was acquired by issuing a 13%, seven-year, $30,000 note payable to the seller.
New equipment was purchased for $15,000 cash.
On January 1, 2011, $25,000 of bonds were sold at face value.
On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
Cash dividends of $13,000 were paid to shareholders.
On November 12, 500 shares of common stock were repurchased as treasury stock at a cost of $8,000.
Prepare the statement of cash flows of Dux Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (You may omit the schedule to reconcile net income to cash flows from operating activities.)
The May 31 bank statement of Wood's Healthcare has just arrived from Federal Bank. To prepare the bank reconciliation, you gather the following data.
Hellar Company was established to manufacture components for the auto industry. The components are shipped the same day they are produced. The following events took place during the first year of operations.
a. Issued common stock for a $50,000 cash investment.
b. Purchased a delivery truck at the beginning of the year at a cost of $10,000 cash. The truck is expected to last five years and will be worthless at the end of that time.
c. Manufactured and sold 500,000 components the first year. The costs incurred to manufacture the components are (1) $1,000 monthly rent on a facility that included utilities and insurance; (2) $400,000 of raw materials purchased on account; $100,000 is still unpaid as of year-end but all materials were used in manufacturing; and (3) $190,000 paid in salaries and wages to employees and supervisors.
d. Paid $100,000 to sales and office staff for salaries and wages.
e. Sold all components on account for $2 each. _ As of year-end, $150,000 is due from customers.
1. How much revenue will Hellar recognize under the cash basis and under the accrual basis?
2. Describe how Hellar should apply the matching principle to recognize expenses.
3. Prepare an income statement under the accrual basis. Ignore income taxes
Battonkill Company, operating at full capacity, sold 112,800 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows:
cost of good sold 6,000,000
gross profit 10,920,000
selling expenses 3,000,000
administrative expenses 1,800,000
total expenses 4,800,000
income from operations 6,120,000
The division of costs between fixed and variable is as follows:
cost of sales 40% 60%
selling expenses 50% 50%
administrative expenses 70% 30%
Management is considering a plant expansion program that will permit an increase of $1,500,000 in yearly sales. the expansion will increase fixed costs by $200,000 but will not affect the relationship between sales and variable costs.
1) Determine for 2010 the total fixed costs and the total variable costs.
2) Determine for 2010 (a) the unit variable cost and (b) the unit contribution margin
3) compute the break-even sales (units) for 2010
4) compute the break-even sales (units) under the proposed program
5) determine the amount of sales (units) that would be necessary under the proposed program to realize the $6,120,000 of income from operations that was earned in 2010
6) determine the maximum income from operations possible with the expanded plant
7) if the proposal is accepted and sales remain at the 2010 level, what will the income or loss from operations be for 2011.
8) based on the data given, would you recommend accepting the proposal.
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40 % of the customers pay on the 10th day and take discounts, while the other 60% pay on average 40 days after their purchases.
A. What is the days' sales outstanding?
B. What is the average amount of receivables?
C. What is the percentage cost of trade credit to customers who take the discount and to those who do not take it?
D. What would happen to its accounts receivable if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya. She must travel to Kenya to check on quality and transportation. The trip will cost $3000. The cost of a handbag is $10 and shipping to the U.S. can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to a $1000. The freight company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try to sell the handbags to retailers for $20. Assume there are no other costs and benefits.
James Hughes Company established a petty cash fund on May 1, cashing a check for $100. The company reimbursed the fund on June 1 and July 1 with the following results.
June 1: Cash in fund $2.75. Receipts: delivery expense $31.25; postage expense $39.00; and miscellaneous expense $25.00.
July 1: Cash in fund $3.25. Receipts: delivery expense $21.00; entertainment expense $51.00; and miscellaneous expense $24.75.
On July 10, James Hughes increased the fund from $100 to $150.
Prepare journal entries for James Hughes Company for May 1, June 1, July 1, and July 10.
Listed below are five procedures followed by The Beat Company.
1. Several individuals operate the cash register using the same register drawer.
2. A monthly bank reconciliation is prepared by someone who has no other cash responsibilities.
3. Ellen May writes checks and also records cash payment journal entries.
4. One individual orders inventory, while a different individual authorizes payments.
5. Unnumbered sales invoices from credit sales are forwarded to the accounting department every four weeks for recording.
If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is
violated. Use the table below.
The cash records of Givens Company show the following four situations.
1. The June 30 bank reconciliation indicated that deposits in transit total $720. During July the general ledger account Cash shows deposits of $15,750, but the bank statement indicates that only $15,600 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $680. During the month of July, Givens Company books show that $17,200 of checks were issued. The bank statement showed that $16,400 of checks cleared the bank in July.
3. In September, deposits per the bank statement totaled $26,700, deposits per books were $25,400, and deposits in transit at September 30 were $2,100.
4. In September, cash disbursements per books were $23,700, checks clearing the bank were $25,000, and outstanding checks at September 30 were $2,100.
There were no bank debit or credit memoranda. No errors were made by either the bank or Givens Company. Instructions
Answer the following questions.
In situation (1), what were the deposits in transit at July 31? $ In situation
(2), what were the outstanding checks at July 31? $ In situation
(3), what were the deposits in transit at August 31? $ In situation
(4), what were the outstanding checks at August 31?
The bank portion of the bank reconciliation for Backhaus Company at November 30, 2010, was as follows.
November 30, 2010
Cash balance per bank $14,367.90
Add: Deposits in transit 2,530.20
Less: Outstanding checks
Check Number Check Amount
3474 1,050.00 6,301.80
Adjusted cash balance per bank $10,596.30
The adjusted cash balance per bank agreed with the cash balance per books at November 30. The December bank statement showed the following checks and deposits.
AND SO ON
Rapache Clothiers is a small company that manufactures tall-men's suits. The company has used a standard cost system. In May 2008, 11,200 suits were produced. The following standard and actual cost data applied to the month of May when normal capacity was 14,000 direct labor hours. All materials purchased were used.
Standard (per unit)
Direct materials 8 yards at $4.30 per yard $371,050 for 90,500 yards
($4.10 per yard)
Direct labor 1.2 hours at $13.50 per hour $201,630 for 14,300 hours
($14.10 per hour)
Overhead 1.2 hours at $6.00 per hour $49,000 fixed overhead
(fixed $3.50; variable $2.50) $37,000 variable overhead
Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $49,000, and budgeted variable overhead was $35,000.
Compute the total, price, and quantity variances for (1) materials and (2) labor, and (3) the total, controllable, and volume variances for manufacturing overhead.
Which of the materials and labor variances should be investigated if management considers a variance of more than 4% from standard to be significant?
Gourmet Specialty Coffee Company (GSCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. GSCC currently has 12 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor.
Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. GSCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price-conscious as well. Data for the 20x5 budget include manufacturing overhead of $12,000,000, which has been allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20x5 totals $1,200,000. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $5,800,000.The expected prime costs for one-pound bags of two of the company’s products are as follows:
Jamaican Colombian Jamaican Columbian
Direct material .......................................................................... $2.90 $3.90
Direct labor ........................................................................... .40 .40
GSCC’s controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x5 budgeted manufacturing-overhead costs shown in the following chart
Activity Cost Driver Budgeted Activity Budgeted Cost
Activity cost driver Budget activity Budgeted cost
Purchasing ........................ Purchase orders ................ 2,316 .................. $ 2,316,000
Material handling ............... Setups .............................. 3,600 ..................... 2,880,000
Quality control ................... Batches ............................. 1,440 ........................ 576,000
Roasting ............................ Roasting hours .................. 192,200 ................. 3,844,000
Blending ............................ Blending hours .................. 67,200 ................... 1,344,000
Packaging ......................... Packaging hours ................ 52,000 ................... 1,040,000
Total manufacturing-overhead cost ........................................................... $12,000,000
Data regarding the 20x5 production of Jamaican and Colombian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year.
Budgeted sales ....................... 2,000 lb. 100,000 lb.
Batch size ................................. 500 lb. 20,000 lb.
Setups ................................. 3 per batch 3 per batch
Purchase order size .................. 500 lb. 50,000 lb.
Roasting time .................... 1 hr. per 200 lb . 1 hr. per 200 lb.
Blending time .................... .5 hr. per 200 lb. .5 hr. per 200 lb.
Packaging time .................. .1 hr. per 200 lb. .1 hr. per 200 lb.
1. Using GSCC’s current product-costing system: a. Determine the company’s predetermined overhead rate using direct-labor cost as the single cost driver. b. Determine the full product costs and selling prices of one pound of Jamaican coffee and one pound of Colombian coffee.
2. Develop a new product cost, using an activity-based costing approach, for one pound of Jamaican coffee and one pound of Colombian coffee.
3. What are the implications of the activity-based costing system with respect to:a. The use of direct labor as a basis for applying overhead to products? b. The use of the existing product-costing system as the basis for pricing?
Phoenix-based CompTronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 42,000 speaker sets:
Sales ........................................................................................ $4,032,000
Variable costs .............................................................................. 1,008,000
Fixed costs .................................................................................. 2,736,000
Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs.
Variable costs are expected to average $21.60 per set; annual fixed costs are anticipated to be $2,380,800.
(In the following requirements, ignore income taxes.)
1. Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.
2. Determine the break-even point in speaker sets if operations are shifted to Mexico.
3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.
a. If variable costs remain constant, what must management do to fixed costs? By how much must fixed costs change?
b. If fixed costs remain constant, what must management do to the variable cost per unit? By how much must unit variable cost change?
4. Determine the impact (increase, decrease, or no effect) of the following operating changes.
a. Effect of an increase in direct material costs on the break-even point.
b. Effect of an increase in fixed administrative costs on the unit contribution margin.
c. Effect of an increase in the unit contribution margin on net income.
d. Effect of a decrease in the number of units sold on the break-even point.
Abby Ellen opened Abby’s toy house. As her newly hired accountant, your tasks are to
The following is the partial chart of accounts for Abby’s toy house:
Assets: 110-cash, 112-accounts receivable, 114-prepaid rent, 121-delivery truck.
Liabilities: 210-accounts payable.
Owner’s Equity Accounts: 310-A.Ellen capital.
Revenue Accounts: 410-Toy sales, 412-sales return and allowances, 414-sales discounts.
Cost of Goods Accounts: 510-toy purchases, 512-purchase return and allowances, 514-purchase discount.
Expenses Accounts: 610-salaries expense, 612-cleaning expense.
Mar. 1 Abby Ellen invested $8,000 in the toy store.
Mar. 1 Paid three months rent in advance check no. 1 $3,000.
Mar. 30 Sold merchandise to Bonnie Flow Company on account $3,000 invoice no.7 terms 2/10, n/30.
Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market.
The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda has just been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next four years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $6 million. Based on a recent appraisal, the company feels it could receive $7 million on an after-tax basis if it sold the land today.
Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would simply remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $85 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract runs for only four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price in four years.
The contract calls for the delivery of 500,000 tons of coal per year at a price of $95 per ton. Bethesda Mining feels that coal production will be 620,000 tons, 680,000 tons, 730,000 tons, and 590,000 tons, respectively, over the next four years.
Packard Company has the following opening account balances in its general and subsidiary ledgers on January 1 and uses the periodic inventory system. All accounts have normal debit and credit balances.
January 1 Opening Balance
I. Packard, Capital
Sell merchandise on account to B. Remy $3,100, invoice no. 510, and J. Fine $1,800, invoice no. 511.
Purchase merchandise on account from S. Yost $3,000 and D. Laux $2,700.
Receive checks for $4,000 from S. Ingles and $2,000 from B. Hachinski.
Pay freight on merchandise purchased $180.
Send checks to S. Kosko for $9,000 and D. Moreno for $11,000.
Issue credit of $300 to J. Fine for merchandise returned.
Summary cash sales total $15,500.
Sell merchandise on account to R. Draves for $1,900, invoice no. 512, and to S. Ingles $900, invoice no. 513.
Post all entries to the subsidiary ledgers.
Pay rent of $1,000 for January.
Receive payment in full from B. Remy and J. Fine.
Withdraw $800 cash by I. Packard for personal use.
Purchase merchandise on account from D. Moreno for $15,000, from S. Kosko for $13,900, and from S. Yost for $1,500.
Pay $400 cash for office supplies.
Return $200 of merchandise to S. Kosko and receive credit.
Summary cash sales total $17,500.
Issue $15,000 note to R. Mikush in payment of balance due.
Receive payment in full from S. Ingles.
Sell merchandise on account to B. Remy for $3,700, invoice no. 514, and to R. Draves for $800, invoice no. 515.
Send checks to D. Moreno and S. Kosko in full payment.
Sell merchandise on account to B. Hachinski for $3,500, invoice no. 516, and to J. Fine for $6,100, invoice no. 517.
Purchase merchandise on account from D. Moreno for $12,500, from D. Laux for $1,200, and from S. Yost for $2,800.
Pay $200 cash for office supplies.
Summary cash sales total $22,920.
Pay sales salaries of $4,300 and office salaries of $3,600.
Hint: AP, S
Record the January transactions in the appropriate journal—sales, purchases, cash receipts, cash payments, and general.
Post the journals to the general and subsidiary ledgers. Add and number new accounts in an orderly fashion as needed.
Prepare a trial balance at January 31, 2010, using a worksheet. Complete the worksheet using the following additional information.
Office supplies at January 31 total $700.
Insurance coverage expires on October 31, 2010.
Annual depreciation on the equipment is $1,500.
Interest of $30 has accrued on the note payable.
Merchandise inventory at January 31 is $15,000.
Trial balance totals $196,820;
Adj. T/B totals $196,975
Prepare a multiple-step income statement and a statement of owner's equity for January and a classified balance sheet at the end of January.
Net income $9,685
Total assets $126,315
Prepare and post the adjusting and closing entries.
Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
Post-closing T/B totals $127,940
Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2008. Nickels reported net income of $320,000 for the year. At December 31, 2008, the market price of Nickels common stock was $24 per share.
a. Prepare the journal entries for Glaser Services for 2008 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
b. Prepare the journal entries for Glaser Services for 2008, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
c. In tabular form, indicate the investment and income statement account balances at December 31, 2008, under each method of accounting.
Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances: Debits Credits Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 48,000 Accounts receivable . . . . . . . . . . . . 224,000 Inventory . . . . . . . . . . . . . . . . . . . . . 60,000 Buildings and equipment (net) . . . . 370,000 Accounts payable . . . . . . . . . . . . . . $ 93,000 Capital stock . . . . . . . . . . . . . . . . . . 500,000 Retained earnings . . . . . . . . . . . . . 109,000 $702,000 $702,000 b. Actual sales for December and budgeted sales for the next four months are as follows: December (actual) . . . . . . $280,000 January . . . . . . . . . . . . . . $400,000 February . . . . . . . . . . . . . $600,000 March. . . . . . . . . . . . . . . . $300,000 April . . . . . . . . . . . . . . . . . $200,000 c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter. f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. g. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month. h. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500. i. During January, the company will declare and pay $45,000 in cash dividends. j. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the data above, complete the following statements and schedules for the first quarter: 1. Schedule of expected cash collections: Jan. Feb March Quarter Cash sales . . . . . . . . . . . . . . . . . . . $ 80,000 Credit sales . . . . . . . . . . . . . . . . . 224,000 Total cash collections . . . . . . . . .. $304,000 2. a. Merchandise purchases budget: Jan. Feb. March Qt. Budgeted cost of goods sold . . . . . $240,000* $360,000 Add desired ending inventory. . . . . 90,000† Total needs . . . . . . . . . . . . . . . . . . . 330,000 Less beginning inventory . . . . . . . . 60,000 Required purchases . . . . . . . . . . . . $270,000 *$400,000 sales _ 60% cost ratio _ $240,000. †$360,000 _ 25% _ $90,000. b. Schedule of expected cash disbursements for merchandise purchases: Jan Feb. March Quarter December purchases . . . . . . . . . . . $ 93,000 $ 93,000 January purchases . . . . . . . . . . . . . 135,000 135,000 270,000 February purchases . . . . . . . . . . . . — March purchases . . . . . . . . . . . . . — Total cash disbursements for purchases . . . . . . . . . . . . . . . $228,000 3. Schedule of expected cash disbursements for selling and administrative expenses: Jan Feb March Quarter Salaries and wages . . . . . . . . . . . . . . . . . $ 27,000 Advertising . . . . . . . . . . . . . . . . . . . . . . . . 70,000 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Other expenses . . . . . . . . . . . . . . . . . . . . 12,000 Total cash disbursements for selling and administrative expenses . . . $ 129,000 4. Cash budget: Jan Feb March Quarter Cash balance, beginning . . . . . . . . $ 48,000 Add cash collections . . . . . . . . . . . 304,000 Total cash available . . . . . . . . . . . . 352,000 Less cash disbursements: Purchases of inventory . . . . . . . 228,000 Selling and administrative expenses . . . . . . . . . . . . . . . . 129,000 Purchases of equipment . . . . . . — Cash dividends . . . . . . . . . . . . . . 45,000 Total cash disbursements . . . . . . . 402,000 Excess (defi ciency) of cash . . . . . . (50,000) Financing: Etc. 5. Prepare an absorption costing income statement for the quarter ending March 31 as shown in Schedule 9 in the chapter. 6. Prepare a balance sheet as of March 31.
Maria Gonzalez opened a veterinary business in Nashville,Tennessee, on August 1. On August 31, the balance sheet showed Cash $9,000, Accounts Receivable $1,700, Supplies $600, Office Equipment $6,000, Accounts Payable $3,600, and M. Gonzalez, Capital $13,700. During September the following transactions occurred.
1. Paid $2,900 cash on accounts payable.
2. Collected $1,300 of accounts receivable.
3. Purchased additional office equipment for $2,100, paying $800 in cash and the balance on account.
4. Earned revenue of $8,000, of which $2,500 is paid in cash and the balance is due in October.
5. Withdrew $1,000 cash for personal use.
6. Paid salaries $1,700, rent for September $900, and advertising expense $300.
7. Incurred utilities expense for month on account $170.
8. Received $10,000 from Capital Bank–money borrowed on a note payable.
(a) Prepare a tabular analysis of the September transactions beginning with August 31 balances.
The column headings should be as follows: Cash _Accounts Receivable _Supplies _Office
Equipment _ Notes Payable _ Accounts Payable _ M. Gonzalez, Capital _ M. Gonzalez,
Drawings _ Revenues _ Expenses.
(b) Prepare an income statement for September, an owner’s equity statement for September,
and a balance sheet at September 30.
The following expenditures relating to plant assets were made by Spaulding Company during the first 2 months of 2011.
1. Paid $5,000 of accrued taxes at time plant site was acquired.
2. Paid $200 insurance to cover possible accident loss on new factory machinery while the machinery was in transit.
3. Paid $850 sales taxes on new delivery truck.
4. Paid $17,500 for parking lots and driveways on new plant site.
5. Paid $250 to have company name and advertising slogan painted on new delivery truck.
6. Paid $8,000 for installation of new factory machinery.
7. Paid $900 for one-year accident insurance policy on new delivery truck.
8. Paid $75 motor vehicle license fee on the new truck.
(a) Explain the application of the cost principle in determining the acquisition cost of plant assets.
(b) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited.
The following are selected 2011 transactions of Franco Corporation.
Jan. 1 Purchased a small company and recorded goodwill of $150,000. Its useful life is indefinite.
May 1 Purchased for $90,000 a patent with an estimated useful life of 5 years and a legal life of 20 years.
Prepare necessary adjusting entries at December 31 to record amortization required by the events above.
The intangible assets section of Time Company at December 31, 2011, is presented below.
Patent ($100,000 cost less $10,000 amortization) $ 90,000
Copyright ($60,000 cost less $24,000 amortization) 36,000
The patent was acquired in January 2011 and has a useful life of 10 years. The copyright was acquired in January 2008 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2012.
Jan. 2 Paid $45,000 legal costs to successfully defend the patent against infringement by another company.
Jan-June Developed a new product, incurring $230,000 in research and development costs. A patent was granted for the product on July 1. Its useful life is equal to its legal life.
Sept. 1 Paid $125,000 to an Xgames star to appear in commercials advertising the companys products. The commercials will air in September and October.
Oct. 1 Acquired a copyright for $200,000.The copyright has a useful life of 50 years.
(a) Prepare journal entries to record the transactions above.
(b) Prepare journal entries to record the 2012 amortization expense for intangible assets.
(c) Prepare the intangible assets section of the balance sheet at December 31, 2012.
(d) Prepare the note to the financials on Times intangibles as of December 31, 2012.
On May 1, 2010, Newby Corp. issued $600,000, 9%, 5-year bonds at face value. The bonds were dated May 1, 2010 and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31.
5-13 The actual cash received from cash sales was $11,279, and the amount indicated by the cash register total was $11,256.
a. What is the amount deposited in the bank for the day’s sales?
Morgan Inc. is a small company that manufactures baseball caps. For the past several years, the company has used a standard cost accounting system. Cole prepares monthly income statements for management with variances reported within the statement. In April 2008, 67,500 caps were produced. There were no finished caps on hand at either April 1 or April 30. The selling price per cap was $10.00. The following standard and actual cost data applied to the month of April when normal capacity was 14,000 direct labor hours.
Cost Element Standard (per unit) Actual
Direct materials 1.5 yards at $3.00 per yard $318,600 for 108,000 yards ($2.95 yard)
Direct labor .2 hour at $11.00 per hour $158,760 for 14,175 hours ($11.20 per hour)
Overhead.2 hour at $ 5.00 per hour $49,000 fixed overhead $20,000 variable overhead
Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs were $49,000 and budgeted variable costs were $21,000.
(a) Compute the total, price, and quantity variances for (1) materials, (2) labor, and (3) the total, controllable, and volume variances for manufacturing overhead (assuming no beginning or ending material balances).
(b) Journalize the entries to record the variances and the completion and sale of the caps.
Key Company’s budgeted sales and direct materials purchases are as follows.
Key’s sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Key’s purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of purchase, and 60% in the month following purchase.
(a) Prepare a schedule of expected collections from customers for March.
(b) Prepare a schedule of expected payments for direct materials for March.
Key’s sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Key’s purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of purchase, and 60% in the month following purchase.
(a) Prepare a schedule of expected collections from customers for March.
(b) Prepare a schedule of expected payments for direct materials for March.
Peavy Company expects to have a cash balance of $46,000 on January 1, 2010. Relevant monthly budget data for the first 2 months of 2010 are as follows.
Collections from customers: January $100,000, February $160,000.
Payments for direct materials: January $60,000, February $80,000.
Direct labor: January $30,000, February $45,000. Wages are paid in the month they are incurred.
Manufacturing overhead: January $21,000, February $31,000. These costs include depreciation of $1,000 per month. All other overhead costs are paid as incurred.
Selling and administrative expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred.
Sales of marketable securities in January are expected to realize $10,000 in cash. Peavy Company has a line of credit at a local bank that enables it to borrow up to $25,000. The company wants to maintain a minimum monthly cash balance of $25,000.
Prepare a cash budget for January and February.
Peavy Company expects to have a cash balance of $46,000 on January 1, 2010. Relevant monthly budget data for the first 2 months of 2010 are as follows.
Collections from customers: January $100,000, February $160,000.
Payments for direct materials: January $60,000, February $80,000.
Direct labor: January $30,000, February $45,000. Wages are paid in the month they are incurred.
Manufacturing overhead: January $21,000, February $31,000. These costs include depreciation of $1,000 per month. All other overhead costs are paid as incurred.
Selling and administrative expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred.
Sales of marketable securities in January are expected to realize $10,000 in cash. Peavy Company has a line of credit at a local bank that enables it to borrow up to $25,000. The company wants to maintain a minimum monthly cash balance of $25,000.
Prepare a cash budget for January and February.
Durham Inc. is preparing its annual budgets for the year ending December 31, 2010. Accounting assistants furnish the following data.
An accounting assistant has prepared the detailed manufacturing overhead budget and the selling and administrative expense budget. The latter shows selling expenses of $750,000 for product LN 35 and $590,000 for product LN 40, and administrative expenses of $420,000 for product LN 35 and $380,000 for product LN 40. Income taxes are expected to be 30%.
Prepare the following budgets for the year. Show data for each product. Quarterly budgets should not be prepared.
(a) Sales (b) Production (c) Direct materials (d) Direct labor (e) Income statement ( Note: Income taxes are not allocated to the roducts )
P6. Bond basics-straight line method, retirement, and conversion
Golden Corporation has $20,000,000 of 10.5 percent, 20-years bonds dated June 1, 2010, with interest payment dates of may 31 and november 30. After ten years the bonds are callable at 104, and each $1,000 bond is convertible into 25 shares of $20 par value common stock. The company's fiscal year ends on December 31. It uses the straight-line method to amortize bond premiums or discounts.
1. Assume the bonds are issued at 103 on june 1, 2010.
On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Complete the tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and book value per share.
On January 1, 2008, Castle Corporation had retained earnings of $550,000. During the year, Castle had the following selected transactions.
1. Declared cash dividends $120,000.
2. Corrected overstatement of 2007 net income because of depreciation error $30,000.
3. Earned net income $350,000.
4. Declared stock dividends $80,000.
Complete the retained earnings statement for the year.
On October 31, the stockholders’ equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity and outstanding shares. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split.
Entries for selected corporate transactions
Selected transactions completed by Oceano Boating Corporation during the current fiscal year are as follows:
Jan. 3. Split the common stock 2 for 1 and reduced the par from $50 to $25 per share. After the split, there were 400,000 common shares outstanding.
Feb. 20. Purchased 50,000 shares of the corporations own common stock at $32, recording the stock at cost.
May 1. Declared semiannual dividends of $0.80 on 30,000 shares of preferred stock and $0.14 on the common stock to stockholders of record on May 15, payable on June 1.
June 1. Paid the cash dividends.
Aug. 5. Sold 42,000 shares of treasury stock at $39, receiving cash.
Nov. 15. Declared semiannual dividends of $0.80 on the preferred stock and $0.15 on the common stock(before the stock dividend). In addition, a 2% common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at $40.
Dec. 31. Paid the cash dividends and issued the certificates for the common stock dividend.
Journalize the transactions.
Kornet Co produces and sells graphite for golf clubs. The following transactions were completed by Kornet Co whose fiscal year is the calendar year.
July 1 Issued $19,000,000 of seven year 12% callable bonds dated July 1, 2007, at an effective rate of 10% receiving cash of $20,880.780. Interest is payable semiannual on December 21 and June 30.
Dec 31 Paid the semiannual interest on bonds.
Recorded bond premium amortization of $134,341, which was determined by using the straight-line method.
Dec 31 Closed the interest expense account.
June 30 Paid the semiannual interest on the bonds.
Dec 31 Paid the semiannual interest on the bonds.
Dec 31 Recorded bond premium amortization of $268,682 which was determined by using the straight-line method.
July 1 Recorded the redemption of the bonds, which were called at 101.5. The balance in the bond premium is $1,343,416 after payment.
1. Journalize the entries to record the foregoing transaction.
2. Indicate the amount of the interest expense in (a) 2007 and (b) 2008.
3. Determine the carrying amount of the bonds as of December 31, 2008.
You are provided with the following information for Pavey Inc. for the month ended October 31, 2008. Pavey uses a periodic method for inventory.
Unit Cost or
(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods
b. Compare results for the three cost flow assumptions.
Comprehensive Problem 2
Ocean Atlantic Co. is a merchandising business. the account balances for Ocean Atlantic co. as of July 1, 2012 (unless otherwise indicated), are as follows:
110 Cash 63,600
112 Accounts Receivable 153,900
115 Merchandise Inventory 602,400
116 Prepaid Insurance 16,800
117 Store Supplies 11,400
123 Store Equipment 469,500
124 Accumulated Depreciation-Store Equipment 56,700
210 Accounts Payable 96,600
211 Salaries Payable -
310 Capital stock 75,000
311 Retained earnings, Aug 1 2011 480,300
312 Dividends 135,000
313 Income summary
410 Sales 3,221,100
411 Sales Returns and Allowances 92,700
412 Sales Discounts 59,400
510 Cost of Merchandise Sold 1,623,000
520 Sales Salaries Expense 334,800
521 Advertising Expense 81,000
522 Depreciation Expense -
523 Store Supplies Expense -
529 Miscellaneous Selling Expense 12,600
530 Office Salaries Expense 182,100
531 Rent Expense 83,700
532 Insurance Expense -
539 Miscellaneous Administrative Expense 7,800
During July, the last month of the fiscal year, the following transactions were completed:
July 1, Paid rent for July, $4000.
3, Purchased merchandise on account from Lingard Co., Terms 2/10,n/30,FOB shipping point, $25,000.
4, Paid freight on purchase of July 3, $1000.
6, Sold merchandise on account to Holt Co., terms 2/10,n/30, FOB shipping point, $40,000. The cost of the merchandise sold was $24,000.
7, Received $18000 cash from Flat Co. on account, no discount.
10, sold merchandise for cash $90,000. The cost of the merchandise sold was $50,000.
13, Paid for merchandise purchased on July 3, less discount.
14, Received merchandise returned on sale of July 6, $7000. The cost of the merchandise returned was $4500.
15, Paid advertising expense for last half of July, $9000
16, received cash from sale of July 6, less return of July 14 and discount.
19, purchased merchandise for cash, $22000.
19, Paid $23,100 to Corino Co. on account, no discount
Record the following transactions on page 21 of the journal
20, sold merchandise on account to Reedley Co., terms 1/10,n/30, FOB shipping point, $40000. The cost of the merchandise sold was $25000.
21, for the convenience of the customer, paid freight on sale of July 20, $1100.
21, received $17600 cash from Owen co. on account, no discount.
21, purchased merchandise on account from Munson Co., terms 1/10, n/30, FOB Destination, $32000.
24, Returned $5000 of damaged merchandise purchased on July21, receiving credit from the seller.
26, Refunded cash on sales made for cash, $12000. The cost of the merchandise returned was $7200.
28, paid sales salaries of $22800 and office salaries of $15200.
29, purchased store supplies for cash, $2400.
30, Sold merchandise on account to Dix co., terms 2/10, n/30, FOB shipping point, $18,750. The cost of the merchandise sold was $11,250.
30, received cash from sale of July 20, less discount, plus freight paid on July 21.
31, Paid for purchase of July 21, less return of July 24 and discount.
1. Enter the balances of each of the accounts in the appropriate balance column of a four-column account. Write Balance in the item section, and place a check mark (?) in the posting reference column. Journalize the transactions for July.
2. Post the journal to the general ledger, extending the month-end balances to the appropriate balance columns after all posting is completed. In this problem, you are no required to update or post to the accounts receivable and accounts payable subsidiary ledgers.
3. Prepare and unadjusted trial balance.
4. At the end of July, the following adjustment data were assembled. Analyze and use these data to complete (5) and (6).
a) Merchandise inventory on July 31 $ 565000
b) Insurance expired during the year $ 13400
c) Store supplies on hand on July 31 $3900
d) Depreciation for the current year $11500
e) Accrued salaries on July 31: Sale salaries $3200 Office salaries $1300 ($4500)
5. Enter the unadjusted trial balance on a 10-column end-of-period spreadsheet (work Sheet), and complete the spreadsheet.
6. Journalize and post the adjusting entries. Record the adjusting entries on page 22 of the journal.
7. Prepare an adjusted trial balance
8. Prepare an income statement, a retained earnings statement, and a balance sheet.
9. Prepare and post the closing entries. Record the closing entries on page 23 of the journal. Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. Insert the new balance in the retained earnings account.
10. Prepare a post-closing trial balance.
SY Telc has recently started the manufacture of RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 RecRobo’s is as follows.
Direct materials ($40 per robot)
Direct labor ($30 per robot)
Variable overhead ($6 per robot)
Allocated fixed overhead ($25 per robot)
SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000.
(a) Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions.
(1) Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
(2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $300,000.
(b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.
Twyla Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
Original purchase cost
Estimated annual operating costs
If sold now, the current machine would have a salvage value of $5,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years.
Should the current machine be replaced?
Pro Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2008, the company reported the following operating results while operating at 90% of plant capacity and producing 112,500 units.
Cost of goods sold
Selling and administrative expenses
Fixed costs for the period were: cost of goods sold $1,080,000, and selling and administrative expenses $225,000.
In July, normally a slack manufacturing month, Pro Sports receives a special order for 10,000 basketballs at $28 each from the Italian Basketball Association (IBA). Acceptance of the order would increase variable selling and administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.
(a) Prepare an incremental analysis for the special order.
(b) Should Pro Sports Inc. accept the special order? Explain your answer.
(c) What is the minimum selling price on the special order to produce net income of $4.10 per ball?
(d) What nonfinancial factors should management consider in making its decision?
Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.
Income (loss) from operations
Analysis reveals the following percentages of variable costs in each division.
Discontinuance of any division would save 50% of the fixed costs and expenses for that division.
Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be discontinued.
(a) Compute the contribution margin for Divisions I and II.
(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?
(c) Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.
(d) Reconcile the total income from operations ($176,000) with the total income from operations without Division II.
Solution file in excel
E9-21 Trade in asset—two situations
Community Bank recently traded in office fixtures. Here are the facts:
1. Record Community Bank’s trade-in of old fixtures for new ones.
2. Now let’s change one fact and see a different outcome. Community Bank feels
compelled to do business with Mountain Furniture, a bank customer, even
though the bank can get the fixtures elsewhere at a better price. Community
Bank is aware that the new fixtures’ market value is only $127,000. Now record
E9-24 Acquisition of patent, amortization, and change in useful life
Miracle Printers (MP) manufactures printers. Assume that MP recently paid $600,000
for a patent on a new laser printer. Although it gives legal protection for 20 years, the
patent is expected to provide a competitive advantage for only eight years.
1. Assuming the straight-line method of amortization, make journal entries to
record (a) the purchase of the patent and (b) amortization for year 1.
2. After using the patent for four years, MP learns at an industry trade show that
another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with year 5, to amortize the remaining cost of
the patent over two remaining years, giving the patent a total useful life of six
years. Record amortization for year 5.
P9-28A Capitalized asset cost and first year depreciation, and identifying depreciation results that meet management objectives
On January 3, 2012, Trusty Delivery Service purchased a truck at a cost of $90,000.
Before placing the truck in service, Trusty spent $3,000 painting it, $1,500 replacing
tires, and $4,500 overhauling the engine. The truck should remain in service for
five years and have a residual value of $9,000.
The truck’s annual mileage is expected
to be 22,500 miles in each of the first four years and 10,000 miles in the fifth year—
100,000 miles in total. In deciding which depreciation method to use, Mikail
Johnson, the general manager, requests a depreciation schedule for each of the depreciation
methods (straight-line, units-of-production, and double-declining-balance).
1. Prepare a depreciation schedule for each depreciation method, showing asset
cost, depreciation expense, accumulated depreciation, and asset book value.
2. Trusty prepares financial statements using the depreciation method that reports
the highest net income in the early years of asset use. For income tax purposes,
the company uses the depreciation method that minimizes income taxes in the
early years. Consider the first year that Trusty uses the truck. Identify the depreciation
methods that meet the general manager’s objectives, assuming the income
tax authorities permit the use of any of the methods.
P10-15A Journalizing liability transactions
The following transactions of Denver Pharmacies occurred during 2011 and 2012:
Purchased computer equipment at a cost of $9,000, signing a six-month,
6% note payable for that amount.
Recorded the week’s sales of $64,000, three-fourths on credit, and
one-fourth for cash. Sales amounts are subject to a 6% state sales tax.
Sent the last week’s sales tax to the state.
Borrowed $204,000 on a four-year, 10% note payable that calls for $51,000
annual installment payments plus interest. Record the current and
long-term portions of the note payable in two separate accounts.
Paid the six-month, 6% note, plus interest, at maturity.
Purchased inventory for $12,000, signing a six-month, 9% note payable.
Accrued warranty expense, which is estimated at 2% of sales of $603,000.
Accrued interest on all outstanding notes payable. Make a separate
interest accrual for each note payable.
Paid the first installment and interest for one year on the four-year note
payable. Paid off the 9% note plus interest at maturity.
1. Journalize the transactions in Denver’s general journal. Explanations are not
P10-18A Computing and journalizing payroll amounts
Louis Welch is general manager of United Tanning Salons. During 2012, Welch
worked for the company all year at a $6,200 monthly salary. He also earned a yearend
bonus equal to 10% of his salary.
Welch’s federal income tax withheld during 2012 was $850 per month, plus $924
on his bonus check. State income tax withheld came to $70 per month, plus $40 on the
bonus. The FICA tax withheld was 7.65% of the first $106,800 in annual earnings.
Welch authorized the following payroll deductions: Charity Fund contribution of 1%
of total earnings and life insurance of $5 per month.
United incurred payroll tax expense on Welch for FICA tax of 7.65% of the first
$106,800 in annual earnings. The company also paid state unemployment tax of 5.4%
and federal unemployment tax of 0.8% on the first $7,000 in annual earnings. In addition,
United provides Welch with health insurance at a cost of $150 per month. During
2012, United paid $4,000 into Welch’s retirement plan.
1. Compute Welch’s gross pay, payroll deductions, and net pay for the full year
2012. Round all amounts to the nearest dollar.
2. Compute United’s total 2012 payroll expense for Welch.
3. Make the journal entry to record United’s expense for Welch’s total earnings for
the year, his payroll deductions, and net pay. Debit Salary expense and Bonus
expense as appropriate. Credit liability accounts for the payroll deductions and
Cash for net pay. An explanation is not required.
Exercise 2-1 Effect of accruals on the financial statements
Valmont, Inc., experienced the following events in 2012, in its first year of operations.
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid the utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.
a. Record the events in general ledger accounts under an accounting equation. In the last column of the table, provide appropriate account titles for the Retained Earnings amounts.
b. Prepare the income statement, statement of changes in stockholder's equity, balance sheet, and statement of cash flows for the 2012 accounting period.
c. Why is the amount of net income different from the amount of net cash flow from operating activities?
Exercise 2-3 Effect of prepaid rent on the accounting equation and financial statements.
The following events apply to 2012, the first year of operations of Sentry Services.
1. Acquired $45,000 cash from the issue of common stock.
2. Paid $18,000 cash in advance for one-year rental contract for office space.
3. Provided services for $36,000 cash.
4. Adjusted the records to recognize the use of the office space. The one-year contract started on May 1, 2012. The adjustment was made as of December 32, 2012.
a. Write an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings.
b. Prepare an income statement and statement of cash flows for the 2012 accounting period.
c. Explain the difference between the amount of net income and amount of net cash flow from operating activities.
Exercise 2-19 Closing the accounts
The following information was drawn from the accounting records of Kwon Company as of December 31, 2012, before the temporary accounts had been closed. The Cash balance was $4,000, and Notes Payable amounted to $2,000. The company had revenues of $6,000 and expenses of $3,500. The company's Land account had a $9,000 balance. Dividends amounted to $500. There was $6,000 of common stock issued.
a. Identify which accounts would be classified as permanent and which accounts would be classified as temporary.
b. Assuming that Kwon's beginning balance ( as of January 1, 2012) in the Retained Earnings account was $2,600, determine its balance after the nominal accounts were closed at the end of 2012.
c. What amount of net income would Kwon Company report on its 2012 income statement?
d. Explain why the amount of net income differs from the amount of the ending Retained Earnings balance.
e. What are the balances in the revenue, expense, and dividend accounts on January 1, 2013?
Exercise 2-22 Matching concept
Companies make sacrifices known as expenses to obtain benefits called revenues. The accurate measurement of net income requires that expenses be matched with revenues. In some circumstances matching a particular expense directly with revenue is difficult or impossible. In these circumstances, the expense is matched with the period in which it is incurred.
Distinguish the following items that could be matched directly with revenues from the items that would be classified as period expenses.
a. Sales commissions paid to employees.
b. Utilities expense.
c. Rent expense.
d. The cost of land that has been sold.
Exercise 2-25 Relation of elements to financial statements
Identify whether each of the following items would appear on the income statement (IS), statement of changes in stockholders' equity (SE), balance sheet (BS), or statement of cash flows (CF). Some items may appear on more than one statement; if so, identify all applicable statements. If an item would not appear on any financial statement, label it NA.
a. Prepaid rent.
b. Net income.
c. Utilities expense.
e. Cash flow from operating activities.
f. Service revenue.
g. Auditor's opinion.
h. Account's receivable.
i. Account's payable.
j. Unearned revenue.
l. Beginning cash balance.
m. Ending retained earnings.
n. Rent expense.
o. Ending cash balance.
P5-2 (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2010.
Goodwill $125,000 Accumulated Depreciation - Equipment $292,000
Payroll Taxes Payable 177,591 Inventories 239,800
Bonds Payable 300,000 Rent Payable - Short-term 45,000
Discount on Bonds Payable 15,000 Taxes Payable 98,362
Cash 360,000 Long-term Rental Obligations 480,000
Land 480,000 Common Stock, $1 Par Value 200,000
Notes Receivable 445,700 Preferred Stock, $10 Par Value 150,000
Notes Payable to Banks 265,000 Prepaid Expenses 87,920
Accounts Payable 490,000 Equipment 1,470,000
Retained Earnings ? Trading Securities 121,000
Income Taxes Receivable 97,630 Accumulated Depreciation - Building 270,200
Unsecured Notes Payable (Long-term) 1,600,000 Building 1,640,000
Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term, unless stated otherwise. Cost and fair value of marketable securities are the same.
E10-3 (Acquisition Costs of Trucks) Shabbona Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2010. The terms of acquisition for each truck are described below.
1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.
2. Truck #2 has a list price of $20,000 and is acquired for a down payment of $2,000 cash and a zero-interest-bearing note with a face amount of $18,000. The note is due April 1, 2011. Shabbona would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Shabbona carries in inventory. The computer system cost $12,000 and is normally sold by Shabbona for $15,200. Shabbona uses a perpetual inventory system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in Shabbona Corporation. The stock has a par value per share of $10 and a market value of $13 per share.
Prepare the appropriate journal entries for the foregoing transactions for Shabbona Corporation. (Round computations to the nearest dollar)
E11-1 (Depreciation Computations—SL, SYD, DDB) Lansbury Company purchases equipment on January 1, Year 1, at a cost of $518,000. The asset is expected to have a service life of 12 years and a salvage value of $50,000.
(a) Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
(b) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’-digits method.
(c) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining balance method. (In performing your calculations, round constant percentage to the nearest one hundredth of a point and round answers to the nearest dollar)
ACC291 Week 2 E8-3 BE9-13 Do it!9-4 E9-9 E9-10 P9-5A
The ledger of Hixson Company at the end of the current year shows Accounts Receivable $120,000, Sales $840,000, and Sales Returns and Allowances $30,000.
Information related to plant assets, natural resources, and intangibles at the end of 2011 for Spain Company is as follows: buildings $1,100,000; accumulated depreciation-buildings $650,000; goodwill $410,000; coal mine $500,000; accumulated depletion-coal mine $108,000. Prepare a partial balance sheet of Spain Company for these items.
Do it! 9-4 Match the statement with the term most directly associated with it.
(a) Goodwill (d) Amortization
(b) Intangible assets (e) Franchise
(c) Research and development costs
Presented below are selected transactions at Ingles Company for 2011.
Jan 1 Retired a piece of machinery that was purchased on January 1, 2001. The machine cost $62,000 on that date. It had a useful life of 10 years with no salvage value.
June 30 Sold a computer that was purchased on January 1, 2008. The computer cost $40,000. It had a useful life of 5 years with no salvage value. The computer was sold for $14,000.
Dec 31 Discarded a delivery truck that was purchased on January 1, 2007. The truck cost $39,000. It was depreciated based on a 6-year useful life with a $3,000 salvage value.
Beka Company owns equipment that cost $50,000 when purchased on January 1, 2008. It has been depreciated using the straight-line method based on estimated salvage value of $5,000 and an estimated useful life of 5 years.
At December 31, 2011, Jimenez Company reported the following as plant assets.
(a) Journalize the above transactions.The company uses straight-line depreciation for buildings and equipment.The buildings are estimated to have a 50-year life and no salvage value.The equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement.
(b) Record adjusting entries for depreciation for 2012.
(c) Prepare the plant assets section of Jimenez’s balance sheet at December 31, 2012.
P3-32A Journalizing adjusting entries
Laughter Landscaping has the following independent cases at the end of the year on December 31, 2014.
a. Each Friday, Laughter pays employees for the current week’s work. The amount of the weekly payroll is $7,000 for a five-day workweek. This year December 31 falls on a Wednesday.
b. Details of Prepaid insurance are shown in the account:
Jan 1 $4,500 Prepaid insurance Laughter prepays a full year’s insurance each year on January 1. Record insurance expense for the year ended December 31.
c. The beginning balance of Supplies was $4,000. During the year, Laughter purchased supplies for $5,200, and at December 31 the supplies on hand total $2,400.
d. Laughter designed a landscape plan, and the client paid Laughter $7,000 at the start of the project. Laughter recorded this amount as Unearned service revenue. The job will take several months to complete, and Laughter estimates that the company has earned 60% of the total revenue during the current year.
e. Depreciation for the current year includes Equipment, $3,700; and Trucks, $1,300. Make a compound entry.
1. Journalize the adjusting entry needed on December 31, 2014, for each of the previous items affecting Laughter Landscaping.
P3-33A Analyzing and journalizing adjustments
Galant Theater Production Company unadjusted and adjusted trial balances at December 31, 2012, follow.
GALANT THEATER PRODUCTION COMPANY
Adjusted Trial Balance
Account Debit Credit Debit Credit
Cash $3,900 $3,900
Accounts receivable 6,100 6,900
Supplies 1,700 300
Prepaid insurance 2,700 2,100
Equipment 25,000 25,000
Accumulated depreciation $8,800 $13,200
Accounts payable 4,000 4,000
Salary payable 300
Common stock 16,000 16,000
Retained earnings 4,300 4,300
Dividends 30,500 30,500
Service revenue 71,000 71,800
Depreciation expense 4,400
Supplies expense 1,400
Utilities expense 4,700 4,700
Salary expense 29,500 29,800
Insurance expense 600
Total $104,100 $104,100 $109,600 $109,600
1. Journalize the adjusting entries that account for the differences between the two trial balances.
E4-21 Identifying and journalizing closing entries
The accountant for Klein Photography has posted adjusting entries (a)–(e) to the following selected accounts at December 31, 2012.
1. Journalize Klein Photography’s closing entries at December 31, 2012.
2. Determine Klein Photography’s ending Retained earnings balance at
December 31, 2012.
P4-25A Preparing a worksheet, financial statements, and closing entries
The trial balance of Fugazy Investment Advisers, Inc., at December 31, 2012, follows:
FUGAZY INVESTMENT ADVISERS, INC.
Account Debit Credit
Accounts receivable 46,000
Accumulated depreciation $11,000
Accounts payable 15,000
Unearned service revenue 2,000
Note payable, long-term 39,000
Common stock 17,600
Retained earnings 20,400
Service revenue 97,000
Salary expense 32,000
Interest expense 3,000
Rent expense 9,000
Insurance expense 2,000
Total $202,000 $202,000
1. Enter the account data in the Trial Balance columns of a worksheet, and complete the worksheet through the Adjusted Trial Balance. Key each adjusting entry by the letter corresponding to the data given. Leave a blank line under Service revenue.
2. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in account format.
3. Prepare closing journal entries from the worksheet.
4. Did the company have a good or a bad year during 2012? Give the reason for your answer.
1. Sleep Corporation was organized on January 1, 2011. During its first year, the corporation issued 40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock. At December 31, the company declared the following cash dividends:
2011 - $8,000
2012 - $30,000
2013 - $70,000
(a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 5% and not cumulative.
(b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and cumulative.
(c) Journalize the declaration of the cash dividend at December 31, 2013 using the assumption of part (b).
2. On January 1, 2012, Magnus Corporation had 60,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 25,000 shares of common stock for $550,000.
June 1 Declared a cash dividend of $2.00 per share to stockholders of record on
June 30 Paid the $2.00 cash dividend.
Dec 1 Purchased 5,000 shares of common stock for the treasury for $22 per shares
Dec 15 Declared a cash dividend on outstanding shares of $2.25 per share to stockholders of record on December 31
Prepare journal entries to record the above transactions.
3. Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a long-term investment for $900,000. During the year, Paxton Corporation reported net income of $300,000 and paid dividends of $100,000.
(a) Assuming that the 35,000 shares represent a 10% interest in Paxton Corporation:
1. Prepare the journal entry to record the investment in Paxton stock.
2. Prepare any entries that Rosco Company should make in accounting for its investment in Paxton stock during the year.
3. What is the balance of the Stock Investments account on Rosco Company's books at the end of the year?
(b) Repeat requirement (a) above except assume that the 35,000 shares represent a 20% interest in Paxton Corporation?
4. Doctor Company prepared the tabulation below at December 31, 2012.
Net income $307,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $32,000
Decrease in accounts receivable, $50,000
Increase in inventory, $12,000
Decrease in accounts payable, $8,600
Increase in income taxes payable, $1,500
Loss on sale of land, $5,000
Net cash provided (used) by operating activities
Show how each item should be reported in the statement of cash flows. Use parentheses for deductions.
5. A comparative balance sheet for Halpern Corporation is presented below:
1. Net loss for 2012 is $20,000.
2. Cash dividends of $14,000 were declared and paid in 2012.
3. Land was sold for cash at a loss of $4,000. This was the only land transaction during the year.
4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.
5. $22,000 of bonds were retired during the year at carrying (book) value.
6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000.
Prepare a statement of cash flows for the year ended 2012, using the indirect method.
6. Selected financial statement data for Moor Company are presented below.
December 31, 2013
December 31, 2012
Total current liabilities
During 2013, net sales were $950,000, and cost of goods sold was $775,000.
Compute the following ratios at December 31, 2013
(c) Receivables turnover.
(d) Inventory turnover.
ACC205 WEEK 1 E1-21 P1-48 P2-30A P2-53B IN EXCEL
E1-21 Using the accounting equation to analyze transactions
Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events:
july 6 Smith invested $55,000 in the business by opening a bank account in the name of C. Smith, M.D., P.C. The corporation issued common stock to Smith.
9 Paid $46,000 cash for land.
12 Purchased medical supplies for $1,800 on account.
15 Officially opened for business.
15-31 During the rest of the month, Smith treated patients and earned service revenue of $8,000, receiving cash.
29 Paid cash expenses: employees’ salaries, $1,600; office rent, $900; utilities, $100.
30 Returned supplies purchased on the 12th for the cost of those supplies, $700.
31 Paid $1,100 on account.
1. Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C. Use a format similar to that of Exhibit 1-6, with headings for Cash, Medical supplies, Land, Accounts payable, Common stock, and Retained earnings.
P1-48 Analyzing transactions and preparing financial statements
Draper Consulting, Inc., began operations and completed the following transactions during the first half of December:
Dec 2 Received $18,000 cash and issued 100 shares of no-par common stock.
2 Paid monthly office rent, $550.
3 Paid cash for a Dell computer, $1,800. This equipment is expected to remain in service for five years.
4 Purchased office furniture on account, $4,200. The furniture should last for five years.
5 Purchased supplies on account, $900.
9 Performed consulting service for a client on account, $1,500.
12 Paid utility expenses, $250.
18 Performed service for a client and received cash of $1,100.
P2-30A Journalizing transactions, posting to T-accounts, and preparing a trial balance
Doris Stewart started her practice as a design consultant on September 1, 2012. During the first month of operations, the business completed the following transactions:
Sep. 1 Received $42,000 cash and issued common stock.
4. Purchased supplies, $700, and furniture, $1,900, on account.
6. Performed services for a law firm and received $1,400 cash.
7. Paid $24,000 cash to acquire land for a future office site.
10. Performed service for a hotel and received its promise to pay the $1,000 within one week.
14. Paid for the furniture purchased September 4 on account.
15. Paid secretary’s bi-monthly salary, $490.
17. Received cash on account, $400.
20. Prepared a design for a school on account, $700.
28. Received $2,100 cash for consulting with Plummer & Gorden.
30. Paid secretary’s bi-monthly salary, $490.
30. Paid rent expense, $650.
30. Paid cash dividends of $3,000.
1. Open the following T-accounts: Cash, Accounts receivable, Supplies, Furniture, Land, Accounts payable, Common stock, Dividends, Service revenue, Salary expense, and Rent expense.
2. Record each transaction in the journal, using the account titles given. Key each transaction by date. Explanations are not required.
3. Post the transactions to the T-accounts, using transaction dates as posting references in the ledger accounts. Label the balance of each account Bal, as shown in the chapter.
4. Prepare the trial balance of Doris Stewart, Designer, P.C., at September 30, 2012.
P2-53B Correcting errors in a trial balance
The trial balance for Treasure Hunt Exploration Company does not balance.
Treasure Hunt Exploration Company
Accounts receivable 9,000
Exploration equipment 22,600
Accounts payable $2,900
Note payable 18,900
Common stock 50,100
Dividends 1,000 4,900
Salary expense 1,800
Rent expense 100
Advertising expense 100
Utilities expense 700
Total $88,100 $76,800
The following errors were detected:
The cash balance is overstated by $1,000.
Rent expense of $300 was erroneously posted as a credit rather than a debit.
A $6,000 credit to Service revenue was not posted.
A $500 debit to Accounts receivable was posted as $50.
The balance of Utilities expense is understated by $90.
A $600 purchase of supplies on account was neither journalized nor posted. Exploration equipment should be $17,160.
1. Prepare the corrected trial balance at July 31, 2012. Journal entries are not required.
E5-16 Computing inventory and cost of goods sold amounts
Consider the following incomplete table of merchandiser’s profit data:
Sales Sales Net Cost of Gross profit
discounts sales goods sold
$89,500 $1,560 $87,940 $60,200 (a)
103,600 (b) 99,220 (c) $34,020
66,200 2,000 (d) 40,500 (e)
(f) 2,980 (g) 75,800 36,720
1. Calculate the missing table values to complete the table.
P5-29A Journalizing purchase and sale transactions—perpetual inventory
Thelma’s Amusements completed the following transactions during November 2012:
1-Nov Purchased supplies for cash, $700.
4 Purchased inventory on credit terms of 3/10, n/eom, $9,600.
8 Returned half the inventory purchased on November 4. It was not the inventory ordered.
10 Sold goods for cash, $1,200 (cost, $700).
13 Sold inventory on credit terms of 2/15, n/45, $9,900 (cost, $5,300).
14 Paid the amount owed on account from November 4, less the return (November 8) and the discount.
17 Received defective inventory as a sales return from the November 13 sale, $600. Thelma’s cost of the inventory received was $450.
18 Purchased inventory of $4,100 on account. Payment terms were 2/10, net 30.
26 Paid the net amount owed for the November 18 purchase.
28 Received cash in full settlement of the account from the customer who purchased inventory on November 13, less the return and the discount.
29 Purchased inventory for cash, $12,000, plus freight charges of $20
1. Journalize the transactions on the books of Thelma’s Amusements
E6-23 Comparing cost of goods sold in a perpetual system—FIFO, LIFO, and average-cost methods
Assume that a JR Tire Store completed the following perpetual inventory transactions for a line of tires:
Beginning inventory . . . . . . 16 tires @ $65
Purchase . . . . . . . . . . . . . . . 10 tires @ $78
Sale . . . . . . . . . . . . . . . . . . 12 tires @ $90
1. Compute cost of goods sold and gross profit using FIFO.
2. Compute cost of goods sold and gross profit using LIFO.
3. Compute cost of goods sold and gross profit using average-cost. (Round average cost per unit to the nearest cent and all other amounts to the nearest dollar.)
4. Which method results in the largest gross profit and why?
E6-28 Estimating ending inventory by the gross profit method
Deluxe Auto Parts holds inventory all over the world. Assume that the records for one auto part show the following:
Beginning inventory . . . . . . $220,000
Net purchases . . . . . . . . . . . 800,000
Net sales . . . . . . . . . . . . . . . 1,100,000
Gross profit rate . . . . . . . . . 45%
Suppose this inventory, stored in the United States, was lost in a fire.
1. Estimate the amount of the loss to Deluxe Auto Parts. Use the gross profit method.
P7-27A Preparing a bank reconciliation and journal entries
The December cash records of Dunlap Insurance follow
Date Cash Debit Chech No. Cash Credit
4-Dec $4,170 1416 $860
9 510 1417 130
14 530 1418 650
17 2,180 1419 1,490
31 1,850 1420 1,440
Additional data for the bank reconciliation follows:
The EFT credit was a receipt of rent. The EFT debit was an insurance payment.
The NSF check was received from a customer.
The $1,400 bank collection was for a note receivable.
The correct amount of check 1419 for rent expense is $1,940. Dunlap’s controller
mistakenly recorded the check for $1,490.
1. Prepare the bank reconciliation of Dunlap Insurance at December 31, 2012.
2. Journalize any required entries from the bank reconciliation.
P7-31A Accounting for petty cash transactions
Suppose that on June 1, Rockin’ Gyrations, a disc jockey service, creates a petty cash fund with an imprest balance of $500. During June, Michael Martell, fund custodian, signs the following petty cash tickets
On June 30, prior to replenishment, the fund contains these tickets plus cash of $325. The accounts affected by petty cash payments are Office supplies expense, Entertainment expense, and Postage expense.
1. On June 30, how much cash should this petty cash fund hold before it is replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Include explanations.
3. Make the entry on July 1 to increase the fund balance to $550. Include an explanation.
P8-26A Accounting for uncollectible accounts using the allowance and direct write-off methods, and reporting receivables on the balance sheet
On August 31, 2012, Daisy Floral Supply had a $155,000 debit balance in Accounts receivable and a $6,200 credit balance in Allowance for uncollectible accounts.
During September, Daisy made
2 3 6
sales on account, $590,000.
collections on account, $627,000.
write-offs of uncollectible receivables, $7,000
1. Journalize all September entries using the allowance method. Uncollectible account expense was estimated at 3% of credit sales. Show all September activity in Accounts receivable, Allowance for uncollectible accounts, and Uncollectible account expense (post to these T-accounts).
2. Using the same facts, assume instead that Daisy used the direct write-off method to account for uncollectible receivables. Journalize all September entries using the direct write-off method. Post to Accounts receivable and Uncollectible account expense and show their balances at September 30, 2012.
3. What amount of uncollectible account expense would Daisy report on its September income statement under each of the two methods? Which amount better matches expense with revenue? Give your reason.
4. What amount of net accounts receivable would Daisy report on its September 30, 2012 balance sheet under each of the two methods? Which amount is more realistic? Give your reason.
P8-27A Accounting for uncollectible accounts using the allowance method, and reporting receivables on the balance sheet
At September 30, 2012, the accounts of Mountain Terrace Medical Center (MTMC) include the following:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .145,000
Allowance for uncollectible accounts (credit balance) . . .3,500
1. Journalize the transactions.
2. Open the Allowance for uncollectible accounts T-account, and post entries affecting that account. Keep a running balance.
3. Show how Mountain Terrace Medical Center should report net accounts receivable on its December 31, 2012 balance sheet. Use the three line reporting format.
P8-32AUsing ratio data to evaluate a company's financial position.
The comparative financial statements of Lakeland Cosmetic Supply for 2012, 2011, and 2010 include the data shown here:
2012 2011 2010
Cash ................................................. $ 90,000 $ 70,000 $ 30,000
Short-term investments ....................... 145,000 175,000 125,000
Receivables, net ……………………………………. 290,000 260,000 250,000
Inventories……………………………………………. 370,000 335,000 325,000
Prepaid expenses…………………………………… 60,000 15,000 50,000
________ ________ ________
Total current assets ........................... $ 955,000 $ 855,000 $ 780,000
Total current liabilities…………………………. $ 560,000 $ 600,000 $ 690,000
Sales revenue (all on account) ............ $5,860,000 $5,140,000 $4,200,000
1. Compute these ratios for 2012 and 2011:
a. Acid-test ratio
b. Days' sales in receivables
c. Accounts receivable turnover
2. Considering each ratio individually, which ratios improved from 2011 to 2012 and which ratios deteriorated? Is the trend favorable or unfavorable for the company?
Issuing stock and preparing the stockholders' equity section of the balance sheet
Lincoln-Priest, Inc., was organized in 2011. At December 31, 2011, the Lincoln-Priest balance sheet reported the following stockholders' equity:
Preferred stock, 7%, $40 par, 110,000 shares authorized, none issued $0 Common stock, $1 par, 520,000 shares authorized, 61,000 shares issued and outstanding
Paid-in capital in excess of par—common $41,000
Total paid-in capital $102,000
Retained earnings $29,000
Total stockholders' equity………………………………. $131,000
1. During 2012, the company completed the following transactions. Journalize each transaction. Explanations are not required.
a. Issued for cash 1,300 shares of preferred stock at par value.
b. Issued for cash 2,400 shares of common stock a a price of $5 per share.
c. Net income for the year was $74,000, and the company declared no dividends. Make the closing entry for net income.
2. Prepare the stockholders' equity section of the Lincoln-Priest December 31, 2012.
Computing dividends on preferred and common stock.
Fashionista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares $2 par common stock outstanding. During a three-year period, Fashionista declared and paid cash dividends as follows: 2010, $3,000; 2011, $13,000; and 2012, $17,000.
Compute the total dividends to preferred and to common for each of the three years if
a. preferred is noncumulative.
b. referred is cumulative,
For requirement 1.b., journalize the declaration of the 2012 dividends on December 22, 2012, and payment on January 14,2013. Use separate Dividends payable accounts for preferred and common.
Journalizing stockholders' equity transactions
Summerborn Manufacturing, Co., completed the following transactions during 2012.
Jan 16 - Declared a cash dividend on the 5%, $100 par preferred stock (900 shares outstanding). Declared a $0.30 per share dividend on the 80,000 shares of common stock outstanding. The date of record is January 31, ,
and the payment due date is February 15.
Feb 15 - Paid the cash dividends.
Jun 10 - Split common stock 2 for 1. Before the split, Summerborn had 80,000 shares of $6 par common stock outstanding.
Jul 30 - Distributed a 50% stock dividend on the common stock. The market value of the common stock was $9 per share.
Oct 26 - Purchased 1,000 shares of treasury stock at $13 per share.
Nov 8 - Sold 500 shares of treasury stock for $15 per share.
Nov30 - Sold 300 shares of treasury stock for $8 per share,
1. Record the transactions in Surnmerborn's general journal.
Journalizing dividend and treasury stock transactions, and preparing stockholders' equity
The balance sheet of Lennox Health Foods, at December 31, 2011 reported 120,000 shares of no-par common stock authorized, with 25,000 shares issued and a Common stock balance of $190,000. Retained earnings had a balance of $115,000. During 2012, the company completed the following selected transactions:
Mar 15 - Purchased 9,000 shares of treasury stock at $8 per share.
Apr 30 - Distributed a 10% stock dividend on the outstanding shares of common stock. The market value of common stock was $9 per share.
Dec 31 - Earned net income of $110,000 during the year. Closed net income to Retained
Record the transactions in the general journal. Explanations are not required.
Prepare the stockholders' equity section of Lennox Health Foods' balance sheet at December 31, 2012.
On 30 June 2013, the Ledger of Goran cilic, Veterinary Surgeon, contain the accounts and account balances shown below:
The following information has not yet been recorded.
1. Rates Owing at 30 June, $2120
2. Depreciation on the equipment is $3240. Depreciation on the building is $ 9280.
3. An advance fee payment of $400 for minor surgery to be performed in July 2013 was credited to fee earned.
4. The mortgage contract provides for a monthly payment of $1000 Plus accrued interest. The June payment was not made. Interest of $280 is accrued on the mortgage.
5. Prepaid Insurance of $1240 has expired.
6. Salaries earned but not paid amount to $2360.
A. Prepare a 10-Column worksheet for the year ended 30 June 2013.
B. Prepare an Income statement, a statement of changes in equity and a balance sheet.
C. Journalise the closing entries.
Wyco Company manufactures toasters. For the first 8 months of 2013, the company reported the following operating results while operating at 75% of plant capacity.
Sales (400,000 units) $4,000,000
Cost of goods sold 2,400,000
Gross profit 1,600,000
Operating expenses 900,000
Net income $ 700,000
Cost of goods sold was 70% variable and 30% fixed. Operating expenses were also 60% variable and 40% fixed.
In September, Wyco Company receives a special order for 40,000 toasters at $6.00 each from Salono Company of Mexico City. Acceptance of the order would result in $8,000 of shipping costs but no increase in fixed operating expenses.
(a) Prepare an incremental analysis for the special order.
(b) Should Wyco Company accept the special order? Why or why not
Innova Company produces golf discs which it normally sells to retailers for $7 each. The cost of manufacturing 20,000 golf discs is:
Variable overhead 20,000
Fixed overhead 40,000
Innova also incurs 5% sales commission ($0.35) on each disc sold.
Mudd Corporation offers Innova $4.75 per disc for 5,000 discs. Mudd would sell the discs under its own brand name in foreign markets not yet served by Innova. If Innova accepts the offer, its fixed overhead will increase from $40,000 to $45,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.
Prepare an incremental analysis for the special order.
Should Innova accept the special order?
Shannon Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity. Variable manufacturing overhead is charged to production at the rate of 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4.00 and $6.00, respectively. Normal production is 40,000 table lamps per year.
A supplier offers to make the lamp shades at a price of $13.50 per unit. If Shannon Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $40,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
Complete the incremental analysis for the decision to make or buy the lamp shades.
Should Shannon Inc. buy the lamp shades?
Would your answer be different if the productive capacity released by not making the lamp shades could be used to produce income of $35,000?
Impact on breakeven point if sale price, variable costs, and fixed costs Change
Dependable Drivers Driving School charges $250 per student to prepare and administer written and driving tests. Variable costs of $100 per student include trainers' wages, study materials, and gasoline. Annual fixed costs of $75,000 include the training facility and fleet of cars.
I. For each of the following independent situations, calculate the contribution margin per unit and the breakeven point in units by first referring to the original data provided:
a. Breakeven point with no change in information.
b. Decrease sales price to $220 per student.
c. Decrease variable costs to $50 per student.
d. Decrease fixed costs to $60,000.
II. Compare the impact of changes in the sales price, variable costs, and fixed costs on the contribution margin per unit and the breakeven point in units.
Analyzing CVP relationships
Kincaid Company sells flags with team logos. Kincaid has fixed cost of $583,200
per year plus variable costs of $4.80 per flag. Each flag sells for $12.00
1. Use the income statement equation approach to compute the number of flags Kincaid must sell each year to break even.
2. Use the contribution margin ratio CVP formula to compute the dollar sales Kincaid needs to earn $33,000 in operating income for 2012. (Round the contribution margin to two decimal places.)
3. Prepare Kincaid's contribution margin income statement for the year December 31, 2012, for sales of 72,000 flags. Cost of goods sold is 70% of variable cost. Operating costs make up the rest of variable costs and all of fixed cost. (Round your final answers to the nearest whole number.)
4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Kincaid undertake the expansion? Give your reasoning. Round your final answers to the nearest whole number.
22-22A Thumback Office Supply
P22-28A - jAVA MANUFACTURES
Preparing a finical budget
Consider the following June actual ending balances and July 31, 2012, budgeted amounts for Orleans.com:
June 30 inventory balance, $17,750
b. June payments for inventory, $4,300
c. June payments of accounts payable and accured liabilities, $8,200
d. June 30 accounts payable balance, $10,600
e. June 30 furniture and fixtures balance, $34, 500; accumulated depreciation balance, 29,830
f. June 30 equity, $28,360
g. June depreciation expense, $900
h. Costs of goods sold, 50%of sales
i. Order July expenses, including income tax, total $6,000, paid in cash
j. June 30 cash balance, $11,400
k. June budgeted credit sales, $12, 700
l. June 30 accounts receivable balance, $5,140
m. July cash receipts, $14,200
Prepare a budgeted balance sheet
Preparing an operating budget
Thumbtack's March 31, 2012, budgeted balance sheet follows:
Computing and journalizing standard cost variances
Java manufactures coffee mugs that it sells to other companies for customizing with their own logos. Java prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 60,200 coffee mugs per month:
Emil Skoda Company had the following adjusted trial balance.
EMIL SKODA COMPANY
Adjusted Trial Balance
For the Month Ended June 30, 2008
Adjusted Trial Balance
Account Titles Debits Credits
Accounts Receivable 3,904
Accounts Payable $1,792
Unearned Revenue 160
Common Stock 5,000
Retained Earnings 760
Service Revenue 4,064
Salaries Expense 1,344
Miscellaneous Expense 256
Supplies Expense 2,228
Salaries Payable 448
(a) Prepare closing entries at June 30, 2008.
(b) Prepare a post-closing trial balance.
DISNEY AMUSEMENT PARK, INC. has a fiscal year ending on September 30. Selected data from the September 30 worksheet are presented below.