What are the advantages of budgeting?

ACCOUNTING

What are the advantages of budgeting?

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Master Budget and Supporting Schedules for Case 9-30, Chapter 9, page 414

ACCOUNTING
Case 9-30 Master Budget with Supporting Schedules SOLUTION

Earrings Unlimited

Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchase, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.XX

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The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock

FINANCE

The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters’ compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000.

How many shares must the firm sell to net $20 million after underwriting and flotation expenses?

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Mullet Technologies is considering whether or not to refund a $75 million, 12% coupon, 30-year bond issue that was sold 5 years ago

FINANCE

Mullet Technologies is considering whether or not to refund a $75 million, 12% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase.

A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Mullet's marginal federal plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 6% annually during the interim period.

A. Perform a complete bond refunding analysis. What is the bond refunding's NPV?
B. What factors would influence Mullet's decision to refund now rather than later?

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McDowell industries sells on terms of 3/10, net 30

FINANCE

McDowell industries sells on terms of 3/10, net 30. Total sales for the year are $912,500. Forty percent of customers pay on the 10th day and take discounts; 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 would happen to average receivables if McDowell toughened its collection policy with the result that result that all nondiscount customers paid on the 30th day.

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Suppose that 1 swiss franc could be purchased in the foreign exchange market for 60 U.S cents today

ACCOUNTING

Suppose that 1 swiss franc could be purchased in the foreign exchange market for 60 U.S cents today. If the franc appreciated 10% tomorrow against the dollar, how many francs would a dollar buy tomorrow?

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A treasury bond futures contract has a settlement price of 89’08. What is the implied annual yield?

FINANCE

A treasury bond futures contract has a settlement price of 89’08. What is the implied annual yield?

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Calculate the nominal annual cost of non-free trade credit under each of the following terms

FINANCE

Calculate the nominal annual cost of non-free trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date.
a. 1/15, net 20.
b. 2/10, net 60.
c. 3/10, net 45.
d. 2/10, net 45.
e. 2/15, net 40.

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2-60 (Audit Standards for NonPublic Companies)

ACCOUNTING

2-60. (Audit Standards for NonPublic Companies, LO 5, 9, 10) The PCAOB has the authority to set audit standards for all audits of public companies. The AICPA continues to set audit standards for nonpublic companies through its auditing standards board.

Required:
a. What are the pros and cons of having the same audit standards for both public and nonpublic entities?
b. In what ways might you expect auditing standards for audits of nonpublic companies to differ from the standards for public companies? Identify three (there are not necessarily three right or wrong answers-this is an opinion and discussion question only). Identify the rationale for your answers.
c. A CPA is performing an audit of a local municipality. Where should the auditor look to determine audit standards that must be followed?
d. What role should an audit committee play in determining which standards an audit firm will use in auditing their company? Explain.

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2-53 (Sarbanes-Oxley Act of 2002)

ACCOUNTING

2-53. (Sarbanes-Oxley Act of 2002, LO 3) The Sarbanes-Oxley Act of 2002 has been described as the most far-reaching legislation affecting business since the passage of the 1933 Securities Act.

Required:
a. Identify the portions of the legislation that specifically affect the external audit profession and discuss how they affect the profession.
b. How does the legislation affect the internal audit profession? Identify activities that are implied in the legislation as well as activities that will likely emerge as companies implement various provisions of the Act.
c. Do you believe the legislation enhances the power and prestige of the audit profession or, alternatively, that it decreases both the power and prestige of the profession?

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3-44 Application of Ethical Framework

ACCOUNTING

3-44. (Application of Ethical Framework, LO 4) As the auditor for XYZ Company, you discover that a material sale ($500,000 sale, cost of goods of $300,000) was made to a customer this year. Due to poor internal accounting controls, the sale was never recorded. Your client makes a management decision not to bill the customer because such a long time has passed since the shipment was made. You determine, to the best of your ability, that the sale was not fraudulent.

Required
a. Does GAAP require disclosure of this situation? Cite specific applicable standards.
b. Regardless of your answer to part (a), utilize the ethical framework developed in the chapter to determine whether the auditor should require either a recording or disclosure of the transaction. If you conclude that the transaction should be disclosed or recorded, indicate the nature of disclosure and our rationale for it.

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3-41 AICPA Code of Conduct

ACCOUNTING

3-41. (AICPA Code of Conduct, LO 6) The following are a number of scenarios that might constitute a violation of the AICPA Code of Professional Conduct.

Required: For each of the sic situations, identify whether it involves a violation of the ethical standards of the profession and indicate which principle or rule would be violated.
a. Tow Hart, CPA, does the bookkeeping, prepares the tax returns, and performs various management services for Sanders, Inc., but does not do the audit. One management service involved the assessment of the computer needs and the identification of equipment to meet those needs, Hart recommended a product sold by Computer Co., which has agreed to pay Hart a 10% commission if Sanders buys its product.
b. Irma Stone, CPA, was scheduled to be extremely busy for the next few months. When a prospective client asked fi Stone would do its next year’s audit, she declined but referred them to Joe Rock, CPA. Rock paid Stone $2000 for the referral.
c. Nancy Heck, CPA, has agreed to perform an inventory control study and recommended a new inventory control system for Ettes, Inc., a new client. Currently, Ettes engages another CPA firm to audit its financial statements. The financial arrangement is that Ettes, Inc. will pay Heck 50% of the savings in inventory costs over the two-year period following the implementation of the new system.
d. Brad Gage, CPA, has served Hi-Dee Co. as auditor for several years. In addition, Gage has performed other services for the company. This year, the financial vice president has asked Gage to perform a major computer system evaluation.
e. Due to the death of its controller, an audit client had its external auditor, Gail Klate, CPA, perform the controller’s job for a month until a replacement was found.
f. Chris Holt, CPA, conducted an audit and issued a report on the 20X1 financial statements of Tree, Inc. Tree has not yet paid the audit fees for that audit prior to issuing the audit report on 19X2 statements.

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4-56 (Analytical Review and Planning the Audit)

ACCOUNTING

4-56 (Analytical Review and Planning the Audit) The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs. The company is publicly held and is considered a small-to medium-size pharmaceutical company. Approximately 80% of its sales have been in prescription drugs; the remaining 20% are in medical supplies normally found in a drugstore. The primary purpose of the auditor’s calculations is to identify potential risk areas for the upcoming audit. The auditor recognizes that some of the data may signal the need to gather other industry- or company-specific data.

A number of the company’s drugs are patented. Its number-one selling drug, Anecillin, which will come off of patent in two years, has accounted for approximately 20% of the company's sales ‘during the past five years.

INDIANOLA PHARMACEUTICAL RATIO ANALYSIS

Ratio Current One Year Two Years Three Years Current
Year Previous Previous Previous Industry
Current ratio -----1.85 1.89 2.28 2.51 2.13
Quick ratio ------------------------------- 0.85 0.93 1.32 1.76 1.40
Interest coverage:
Times Interest earned------------------- 1.30 1.45 5.89 6.3 4.50
Days’ sales in receivables-------------- 109 96 100 72 69
Inventory turnover---------------------- 2.40 2.21 3.96 5.31 4.33
Days’ sales in inventory---------------- 152 165 92 69 84
Research & development as a
Percent of sales -------------------------- 1.3 1.4 1.94 2.03 4.26
Cost of goods sold as percent
Of sales------------------------------------ 38.5 40.2 41.2 43.8 44.5
Debt/equity ratio------------------------- 4.85 4.88 1.25 1.13 1.25
Earnings per share----------------------- $1.12 $2.50 $4.32 $4.26 n/a
Sales/tangible assets--------------------- 0.68 0.64 0.89 0.87 0.99
Sales/total assets------------------------- 0.33 0.35 0.89 0.87 0.78
Sales growth over past year---- 3% 15% 2% 4% 6%

Required

a. What major conclusions regarding financial reporting risk can be drawn from the information show in the table? Be specific in identifying specific account balances that have a high risk of misstatement. State how that risk analysis will be used in planning the audit. Be very specific in your answer. You should identify a minimum of four financial reporting risks that should be addressed during the audit and how they should be addressed.
b. What other critical background information might you want to obtain as part of the planning of the audit or would you gather during the conduct of the audit? Briefly indicate the probable sources of the information.
c. Based on the information, what major actions did the company take during the immediately preceding year? Explain.

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5-42 (Monitoring Activities)

ACCOUNTING

5-42 (Monitoring Activities) Companies can gain efficiencies by implementing effective monitoring of their internal control processes.

Required:
a. Explain the importance of monitoring and provide examples of monitoring.
b. Identify the important monitoring procedures that a company might use in assessing its controls over revenue recognition and costs that might be utilized in each of the following situations:
• A convenience store such as a 7-Eleven
• A chain restaurant such as Olive Garden
• A manufacturing division making rubberized containers for the consumer market
c. Can the auditor focus the assessment of internal control on testing the effectiveness of the company’s monitoring? Discuss and support your conclusion. Discuss, for example, the level of comfort the auditor can get about the effectiveness of other controls by testing the effectiveness of monitoring controls.

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5-53 (Segregation of Duties)

ACCOUNTING

5-53 (Segregation of Duties) For each of the following situations, evaluate the segregation of duties implemented by the company and indicate the following:

a. Any deficiency in the segregation of duties described. (Indicate none if no deficiency is present.)
b. The potential errors or irregularities that might occur because of the inadequate segregation of duties.
c. Compensation, or other, controls that might be added to mitigate potential misstatements.
d. A specific audit test that ought to be performed to determine whether a misstatement had occurred.

Situations:
1. The company’s payroll is computerized and is handled by one person in charge of payroll who enters all weekly time reports into the system. The payroll system is password so that only the payroll person can change pay rates or add/delete company personnel to the payroll file. Payroll checks are prepared weekly, and the payroll person batches the checks by supervisor or department head for subsequent distribution to employees.
2. XYZ is a relatively small organization but has segregated the duties of cash receipts and cash disbursements. However, the employee responsible for handling cash receipts also reconciles the monthly bank account.
3. Nick’s is a small family-owned restaurant in a northern resort area whose employees are trusted. When the restaurant is very busy, any of the wait staff has the ability to operate the cash register and collect the amounts due from the customer. All orders are tabulated on “tickets.” Although there is a place to indicate the waiter or waitress on each ticket, most d not bothers to do so, nor does management reconcile the ticket numbers and amounts with total cash receipts for the day.
4. A purchasing agent for JC Penney has the responsibility for ordering specific products, e.g., women’s clothes, and setting the prices for those products. The purchasing agent is eligible for a bonus based on the profitability of his or her line of business. The receipt, demonstration, and sale of the goods are handled by individuals who are separate from the purchasing agent.
5. Bass Pro Shops takes customer orders via a toll-free phone number. The order taker sits at a terminal and has complete access to the customer’s previous credit history and a list of inventory available for sale. The order clerk has the ability to input all the customer’s requests and generate a sales invoice and shipment with no additional supervisory review or approval.
6. The purchasing department of Big Dutch is organized around three purchasing agents. the first is responsible for ordering electrical gear and motors, the second orders fabrication material, and the third orders nuts and bolts and other smaller supplies that go into the assembly process. to improve the accountability to vendors, all receiving slips and vendor invoices are sent directly to the purchasing agent placing the order. This allows the purchasing agent to better monitor the performance of vendors. When approved by the purchasing agent for payment, the purchasing agent must forward (a) a copy of the purchase order, (b) a copy of the receiving slip, and (c) a copy of the vendor invoice to accounts payable for payment. Accounts payable will not pay an invoice unless all three items are present and match as to quantities, prices, and so forth. The receiving department reports to the purchasing department.
7. The employees of Americana TV and Appliance-a major electronics retailer-are paid based on their performance in generating profitable sales for the company. Each salesperson has the ability to modify a tagged sales price (within specified but very broad parameters). Once a sales price has been negotiated with the customer, an invoice is prepared. At the close of the day, the salesperson looks up the cost of the merchandise on a master price list. The salesperson then enters the cost of the merchandise on a master price list. The salesperson then enters the cost of the merchandise on the copy of the invoice and submits it to accounting for data entry and processing. The salesperson’s commission is determined by the gross margin realized on sales.

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5-54 (Testing internal Controls)

ACCOUNTING

5-54 (Testing internal Controls) If a company’s control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls.

Required
a. For each of the following control activities, indicate the audit procedure the auditor would use to determine its operating effectiveness.
b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control procedure is not working as planned. In doing so, indicate (a) what could happen because of the control deficiency, and (b) how the auditor’s tests should be expanded to test for the potential misstatement.

Controls
1. Credit approval by the credit department is required before salespersons accept orders of more than $15,000 and for all customers who have a past-due balance higher than $22,000.
2. All merchandise receipts are recorded on pre numbered receiving slips. The controller’s department periodically accounts for the numerical sequence of the receiving slips.
3. Payments for goods received are made only by the accounts payable department on receipt of a vendor invoice, which is then matched for prices and quantities with approved purchase orders and receiving slips.
4. The accounts receivable bookkeeper is not allowed to issue credit memos or to approve the write-off of accounts.
5. Cash receipts are opened by a mail clerk, who prepares remittances to send to accounts receivable for recording. The clerk prepares a daily deposit slip, which is sent to the controller. Deposits are made daily by the controller.
6. Employees are added to the payroll master file by the payroll department only after receiving a written authorization from the personnel department.
7. The only individuals who have access to the payroll master file are the payroll department head and the payroll clerk responsible for maintaining the payroll file. Access to the file is controlled by computer passwords.
8. Edit tests built into the computerized payroll program prohibit the processing of weekly payroll hours in excess of 53 and the payment to an employee for more than three different job classifications during a one-week period.
9. Credit memos are issued to customers only on the receipt of merchandise or the approval of the sales department for adjustments.
10. A salesperson cannot approve a sales return or price adjustment that exceeds 6% of the cumulative sales for the year for any one customer. The divisional sales manager must approve any subsequent approvals of adjustments for such a customer.

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7-38 (Classification and Reliability of Audit Evidence)

ACCOUNTING

7-38 (Classification and Reliability of Audit Evidence) The following are examples of documents typically obtained by auditors.

Required
For each example:
a. Classify the document as internal or external evidence.
b. Classify the document as to its relative reliability (high, moderate, or low)
c. Identify an account balance and related assertion(s) for which the auditor might use the document.
Documentary Evidence Utilized in an Audit:
1. Vendor invoices
2. Vendor monthly statements
3. Sales invoices
4. Shipping documents for sales
5. Bank statements
6. Employee payroll timecard
7. Receiving reports for goods received from vendor
8. Sales contracts
9. Purchase commitment contracts
10. Lease agreements
11. Estimated warranty schedules
12. Purchase order stored on client computer and received electronically
13. Credit rating reports
14. Vendor invoice stored on client computer and received electronically

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8-41 (Sample Misstatements) In confirming individual accounts receivable balances your clients customers reported the exceptions listed below

ACCOUNTING

8-41 (Sample Misstatements) In confirming individual accounts receivable balances your clients customers reported the exceptions listed below.

Required
Which of these exceptions should be considered misstatements for evaluation purposes, assuming that misstatements are defined as (a) differences that affect the account balance and (b) differences that affect pretax income? Explain your reasoning in each instance.
1. The wrong trade discount was used.
2. The client charged sales tax to a tax-exempt customer.
3. The client failed to record returned merchandise.
4. The invoice contained a clerical error.
5. The payment was posted to the wrong customer’s account.
6. The client failed to record a sale.
7. The payment was in transit at the confirmation date.
8. Freight was charged to the customer when the terms were FOB destination.
9. The customer subtracted a cash discount for a payment made after the discount period. The client decided to give credit for the discount taken.

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8-36 (Attribute Sample Size Determination and Implementation)

ACCOUNTING

8-36 (Attribute Sample Size Determination and Implementation)

Required
a. Sampling risk is 10%. Determine the sample size for each of the following controls:
Tolerable Expected Sample Number of Achieved
Control Rate % Rate % Size Failures Upper Limit
1 5 0 0
2 5 1 3
3 10 0 1
4 5 0.5 1
5 10 3 2
b. Explain why the sample sizes for controls 2 and 3 are different from those of control 1.
c. What is the general effect on sample size of using a 10% sampling riskversus a sampling risk of 5%? Explain.
d. Under what conditions would it be better to use the largest sample size for all the controls as opposed to using the individual sample size in part (a)?
e. Assume a sample size of 80 is used for all five controls. Determine the achieved upper limit of failures in the population for each control and complete the table in part (a).
f. Based on the answers to part (e), on which of the controls can the auditor placed and planned degree of reliance? Why?

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7-46 (Audit Documentation)

ACCOUNTING

7-46 (Audit Documentation) The audit documentation represents the auditor’s accumulation of evidence and conclusions reached on an audit engagement. Prior-year audit documentation can provide insight into an audit engagement that will be useful in planning the current year audit.

Required
a. What are the purposes of primary functions of audit documentation?
b. Who owns the documentation, the auditor or the client?
c. What important planning information might an auditor learn when reviewing the prior-year audit documentation of a client?
d. The auditor often requests the client to prepare a schedule, such as a schedule listing all repair and maintenance expenses over $5,000 for the past year. Assume that the client ask for a copy of the previous year’s documentation to serve as a guide and the auditor is reluctant to furnish the documentation to the client.
1. Is it possible to provide the client copies of the auditor’s previous documentation? If so, are there any particular conditions the auditor should examine before furnishing the documentation to the client?
2. What procedures should the auditor use to assure that the client has properly prepared the requested documentation?

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7-44 (Alternative Sources of Evidence)

ACCOUNTING

7-44 (Alternative Sources of Evidence) The following situations present the auditor with alternative sources of evidence regarding a particular situation.
Required
a. For each of the following situations, identify the assertion(s) the auditor is most likely testing with the procedure.
b. For each situation, identify which of the two sources presents the most persuasive evidence and briefly indicate the rational for your answer.
Source of Audit Evidence
1. Confirming accounts receivable with business organizations vs. confirming receivables with customers.
2. Visually inspecting an inventory of electronic components vs. performing an inventory turnover and sales analysis by products and product lines.
3. Observing the counting of a client’s year –end physical inventory vs. confirming the inventory held at an independent warehouse b y requesting a confirmation from the owner of the warehouse.
4. Confirming a year-end bank balance with the client’s banking institution vs. reviewing the client’s year-end bank statement vs. having a cut-off bank statement as of January 20 for all activity from December 31 to January 20 sent to the auditor.
5. Observing the client’s inventory composed primarily of sophisticated radar detectors and similar electronic equipment vs. observing the client’s inventory composed primarily of sheet metal.
6. Confirming the client’s year-end bank balance with the bank vs. confirming the potential loss due to a lawsuit with the client’s outside legal counsel.
7. Testing the client’s estimate of warranty liability by obtaining a copy of the client’s spreadsheet used for calculating the liability and determining the accuracy of the spreadsheet’s logic by entering new data into the spreadsheet and independently calculating the result vs. developing an independent spreadsheet and using regressing analysis to develop an independent estimate of the warranty liability using client sales and warranty return data.
8. Reviewing all payments made to vendors and suppliers after year end to determine if they were properly recorded as accounts payable vs. requesting vendor statements at year end for all significant vendors from which the client made purchases during the year.
9. For a financial institution, testing the organization’s controls for recording customer savings deposit, including the existence of an independent department to explore any inquiries by customer vs. confirming year-end savings account balances with customers.
10. For a financial institution, testing the organization’s controls for making and recording loans vs. confirming year-end loan balances directly with customers.

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Louder Company manufactures part MNO used in several of its truck models

ACCOUNTING

Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:

Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000

Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Question 1: What amount of the MNO production costs is avoidable?

Question 2: Should the company outsource MNO? Why or why not?

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures?

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Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, KS

ACCOUNTING

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, KS. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operation, the following data was collected:

Machine-hours Kilowatt-hours Total Overhead Costs
January 3,800 4,520,000 $138,000
February 3,650 4,340,000 136,800
March 3,900 4,500,000 139,200
April 3,300 4,290,000 136,800
May 3,250 4,200,000 126,000
June 3,100 4,120,000 120,000

Question 1: Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.

Question 2: Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.

Question 3: For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?

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Oregon Lumber processes timber into four products

ACCOUNTING

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

Sales Value at

Product
Board feet
Splitoff Point
Ending Inventory

2 x 4's
6,000,000
$0.30 per board foot
500,000 bdft.

2 x 6's
3,000,000
0.40 per board foot
250,000 bdft.

4 x 4's
2,000,000
0.45 per board foot
100,000 bdft.

Slabs
1,000,000
0.10 per board foot
50,000 bdft.

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

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Zenon Chemical, Inc. processes pine rosin into three products: turpentine, paint thinner, and spot remover

ACCOUNTING

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

Product
Units Produced
Sales Value at Splitoff Point

Turpentine
6,000 liters
$60,000

Paint thinner
6,000 liters
50,000

Spot remover
3,000 liters
25,000

Determine the amount of joint cost allocated to each product if the physical-measure method is used.

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Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes

ACCOUNTING

Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the summer of 20X8, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending inventories for the summer. Production and sales value information for the summer is as follows:

Product
Cases
Sales Value at Splitoff Point
Separable Costs
Selling Price

Catsup
100,000
$6 per case
$3.00 per case
$28 per case

Juice
150,000
8 per case
5.00 per case
25 per case

Canned
200,000
5 per case
2.50 per case
10 per case

Determine the amount allocated to each product if the estimated net realizable value method is used, and compute the cost per case for each product.

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Estimated cost and operating data for three companies for the upcoming year follow

ACCOUNTING

Estimated cost and operating data for three companies for the upcoming year follow:

Company X Company Y Company Z
Direct labor-hours 80,000 45,000 60,000
Machine-hours 30,000 70,000 21,000
Direct materials cost $400,000 $290,000 $300,000
Manufacturing overhead cost $536,000 $315,000 $480,000

Predetermined overhead rates are computed using the following allocation bases in the three companies:

Allocation Base
Company X Direct labor-hours
Company Y Machine-hours
Company Z Direct materials cost

1. Compute each company's predetermined overhead rate.
2. Assume that Company X works on three jobs during the upcoming year. Direct labor-hours recorded by job are: Job 418, 12,000 hours; Job 419, 36,000 hours; and Job 420, 30,000 hours. How much overhead will the company apply to Work in Process for the year? If actual overhead costs total $530,000 for the year, will overhead be underapplied or overapplied? By how much?

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For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the

ACCOUNTING

P4-3 Income statement presentation

For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.

1. During 2011, one of Micron's factories was damaged in an earthquake. As a result, the firm recognized a loss of $800,000. The event is considered unusual and infrequent.
2. In November of 2011, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May of 2011. The operating income of the chain from January 1, 2011, through November was $160,000 and the loss on sale of the chain's assets was $300,000.
3. In 2011, Micron sold one of its six factories for $1,200,000. At the time of the sale, the factory had a carrying value of $1,100,000. The factory was not considered a component of the entity.
4. In 2009, Micron's accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2011.

Required:
1. Prepare Micron's income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2011. Assume an income tax rate of 30%. Ignore EPS disclosures.
2. Briefly explain the motivation for segregating certain income statement events from income from continuing operations.

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Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011 ($ in 000s)

ACCOUNTING

P4-6 Income statement presentation

Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011 ($ in 000s):

In addition, during the year the company completed the disposal of its plastics business and incurred a loss from operations of $1.6 million and a gain on disposal of the component's assets of $2 million. 500,000 shares of common stock were outstanding throughout 2011. Income tax expense has not yet been accrued. The income tax rate is 30% on all items of income (loss).

Required:
Prepare a multiple-step income statement for 2011, including EPS disclosures.

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The following transactions were completed by Hobson Inc., whose fiscal year is the calendar year

ACCOUNTING

The following transactions were completed by Hobson Inc., whose fiscal year is the calendar year:

2010
July 1. Issued $10,000,000 of 10-year, 15% callable bonds dated july1, 2010, at an effective of 11, receiving cash of $12,390,085. Interest is payable semi annually on December 31 and June 30. Oct. 1. Borrowed $225,000 as a six year, 8% installment note from Titan Bank. The note requires annual payments of $48,671, with the first payment occurring on September 30, 2011. Dec. 31. Accrued $4,500of interest on the installment note. The interest is payable on the date of the next installment note payment. Dec. 31. Paid the semiannual interest of the bond. Dec. 31. Recorded bond premium amortization of $119,504, which was determined using the straight line method. Dec. 31. Closed the interest expense account. 2011 June 30. Paid the semiannual interest of the bond. Sept. 30. Paid the annual payment of the note, which consist of interest of $18,000 and principal of $30, 671. Dec. 31. Accrued $3,887 of interest on the installment note. The interest is payable on the date of the next installment note payment. Dec. 31. Paid the semiannual interest of the bond. Dec. 31. Recorded bond premium amortization of $239,008, which was determined using the straight line method. Dec. 31. Closed the interest expense account. 2012 June 30. Recorded the redemption of the bonds, which were called at101,5. the balance in the bond premium account is $1,912,069 after payment of interest and amortization of premium have been recorded.(Record the redemption only) Sept. 30. Paid the second annual payment on the note, which consist of interest of $15,546 and principal of $33,125 Instructions:

1. Journalize the entries to record the foregoing transactions.
2. Indicate the amount of the interest expense in 2010 and 2011
3. Determine the carrying amount of the bonds as of December 31, 2011.

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Case 13-5 (Lease Classifications) Doherty Company leased equipment from Lambert Company

ACCOUNTING

Case 13-5 Lease Classifications
Doherty Company leased equipment from Lambert Company. The classification of the lease makes a difference in the amounts reflected on the balance sheet and income statement of both Doherty and Lambert.

Required:
a. What criteria must be met by the lease in order that Doherty Company classify it as a capital lease?
b. What criteria must be met by the lease meet in order that Lambert Company classify it as a sales-type or direct financing lease?
c. Contrast a sales-type lease with a direct financing lease.

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Three different plans for financing a $10,000,000 corporation are under consideration by its organizers

ACCOUNTING

PR14-1A Three different plans for financing a $10,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income

10%bonds= Plan1= blank, Plan2=blank, Plan3=$5,000,000
Preferred 10% stock,$40par Plan1=blank Plan2=$5,000,000 Plane3=2,500,000
Common stock,$10par= Plan1=$10,000,000 Plan2=5,000,000 Plan3=2,500,000
Total=Plan1=10,000,000 Plan2=10,000,000 Plan3=10,000,000

Required:
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,000,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is 950,000.
3. Discuss advantages and disadvantages of each plan.

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Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50

FINANCE

31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell?

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Use the information from the previous problem and calculate the stock price with the clean surplus dividend

FINANCE

30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not?

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Assume the sustainable growth rate and required return you calculated in Problem 27 are valid

FINANCE

29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model.

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Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories

FINANCE

28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios.

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What is the sustainable growth rate and required return for Abbott Laboratories?

FINANCE

27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model.

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After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 just before Problem 27

FINANCE

After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor.

27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. SOLUTION

28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. SOLUTION

29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model. SOLUTION

30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not? SOLUTION

31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell? SOLUTION

James Jerkins walks into a Big Box electronics store in search of a new HDTV

Chapter 1 Problems and Issues 3

3. James Jerkins walks into a Big Box electronics store in search of a new HDTV. He finds exactly what he wants. The price is $2,000 and the HDTV has a $100 maintenance contract that ensures against component failures. He has $1,000 in cash, $3,500 in his checking account that pays 2 percent, a credit card with a 7 percent interest charge on unpaid balances, and a savings account paying 5 percent (all annual rates). Discuss which of the functions that the money and capital markets perform are important to James Jenkins as he considers various options for purchasing the HDTV.

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George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities and discovered that

Chapter 1 Problems and Issues 2

2. George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities and discovered that: (i) he owes $80,000 on his house, which he believes to be worth $150,000; (ii) his car is worth $20,000, against which there is $2,000 on the remaining bank loan; (iii) his stock portfolio has risen to $50,000; (iv) he has a $10,000 balance in his bank account, which is earning a 1.2 percent annual interest rate; and (v) the value of his other belongings is $45,000. He has just received his monthly paycheck for $6,000 and he is trying to decide on taking a vacation and on whether or not to pay off his car loan. His monthly expenses are $3,000 which includes the interest expense on his auto loan. He has two possible vacation choices: the Bahamas for $2,000 or a local beach for $1,000. If he has any money left over at the end of the month, it will go into his bank account. If he doesn’t have enough money to cover all of his expenses for the month, he will sell enough of his stock to cover the excess expenses.

a. Use a spreadsheet to input each of George’s assets, (i) to (v), in the first column; the value of these assets in the second column; and the liabilities (if any) against those assets in the third column. In the fourth column compute the net asset value of each of the assets. Total the fourth column to determine George’s net worth at the beginning of the month.
b. Compute the additional net income that George will have from his paycheck plus the interest on his bank account minus the monthly expenses. Use this information to answer parts (c) through (f) below.
c. Repeat part (a) for the end of the month assuming George does not take a vacation and pays off his auto loan.
d. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and only pays $1,000 on the principal of the auto loan.
e. Repeat part (a) for the end of the month assuming that George takes the local beach vacation and pays off his auto loan.
f. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and pays off the auto loan.

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None of the following statements are correct. In each case, identify the error and correct the statement

Chapter 1 Problems and Issues 1

1. None of the following statements are correct. In each case, identify the error and correct the statement.
a. A household’s current savings includes its current purchases of corporate stock as well as prior holdings of corporate stock and its current investment includes the equity it currently has in its house.
b. The change in a household’s wealth over a quarter is given by its wealth at the beginning of the quarter plus its savings during the quarter.
c. The ability of a household to borrow money from a bank to purchase a new PC is an example of the payments function of the financial markets, while the ability of the bank to make the loan is an example of the liquidity function.
d. The ability of Treasury bills to retain their value over time is an example of the savings function of the economy, while the ability of a household to sell a Treasury bill on short notice with little risk of loss is an example of the liquidity function.
e. The ability of the Federal Reserve to manipulate interest rates is an example of the policy function of the financial markets, while the ability of households to earn interest on those investments affected by the Fed’s decision is an example of the risk-protection function of the financial markets.

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ANSWER KEY ACC 225: Week Two Solution

ACC 225 Week 2 Solution

CheckPoint: Debits and Credits
• Resource: Fundamental Accounting Principles, p. 74
• Due Date: Day 4 [Individual] forum
• Post your answers to Quick Study questions QS 2-3, QS 2-4, and QS 2-5.
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Assignment: Preparing Journal Entries and Trial Balances
• Resource: Fundamental Accounting Principles, pp. 76 and 80
• Due Date: Day 7 [Individual] forum
• Complete Exercises 2-4 and 2-5 on p. 76 and Problem 2-2A on p. 80.
• Post your answers as an attachment.
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ANSWER KEY Period 2 The General's Favorite Fishing Hole - Period 2

The General's Favorite Fishing Hole - Period 2

Comprehensive Problem. Heintz and Parry. College Accounting 19th Edition and 20th Edition.

Bob Night’s fishing camp, “The General’s Favorite Fishing Hole,” is in the second month of operation. The camp is open from April through September, which allows for many college basketball coaches to attend during their off-season. The camp’s attendees arrive on Sunday afternoon and return home the following Saturday afternoon. Each attendee pays a registration fee that includes room and board, the use of fishing boats, and professional instruction in fishing techniques. Based on suggestions from clients, Night plans to expand the facilities and provide additional services. The post-closing trial balance as of April 30, and chart of accounts are provided below.

May
1 In order to provide snacks for guests on a 24 hour basis, Night signed a contract with Snack Attack. Snack Attack will install vending machines with food and drinks and pay a 10% commission on all sales. Estimated payments are made at the beginning of each month. Night received a check for $200, the estimated commission on sales for May.
2 Night purchased a surround sound system and big screen TV with a Digital Satellite System for the guest lounge. The surround sound system cost $3,600 and has an estimated useful life of 5 years, and no salvage value. The TV cost $8,000 and has an estimated useful life of 8 years, and a salvage value of $800. Night paid cash for both items.

AND SO ON

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7-1A. Types of Cyber Crimes. The following situations are similar, but each represents a variation of a particular crime

BUSINESS LAW

7-1A. Types of Cyber Crimes. The following situations are similar, but each represents a variation of a particular crime. Identify the crime and point out the differences in the variations.

(a) Chen, posing fraudulently as Diamond Credit Card Co., e-mails Emily, stating that the company has observed suspicious activity in her account and observed suspicious activity in her account and has frozen the account. The e-mail asks her to re-register her credit-card number and password to reopen the account.
(b) Claiming falsely to be Big Buy Retail Finance Co,. Conner sends an e-mail to Dino, asking him to confirm or update his personal security information to prevent his Big Buy account from being discontinued.
(c) Felicia posts her resume on GoWork.com, an online job-posting site, seeking a position in business and managerial finance and accounting. Hayden, who misrepresents himself as an employment officer with International Bank & Commerce Corp., sends her an e-mail asking for more personal information.

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7-5A. White Collar Crime. Helm Instruction Co. in Maumee, Ohio, makes custom electrical control systems

BUSINESS LAW

7-5A. White Collar Crime. Helm Instruction Co. in Maumee, Ohio, makes custom electrical control systems. In September 1998, Helm hired Patrick Walsh to work as comptroller. Walsh soon developed a close relationship with Richard Wilhelm, Helm’s president, who granted Walsh’s request to hire Shari Price as an assistant. Wilhelm was not aware that Walsh and Price were engaged in a extramarital affair. Over the next five years, Walsh and Price spent more than $200,000 of Helm’s money on themselves. Among other things, Walsh drew unauthorized checks on Helm’s accounts to pay his personal credit cards and issued to Price and himself unauthorized salary increases, overtime payments, and tuition reimbursement payments, altering Helm’s records to hide the payments. After an investigation, Helm officials confronted Walsh. He denied the affair with Price, claimed that his unauthorized use of Helm’s funds was an “interest-free loan,” and argued that it was less of a burden on the company to pay his credit cards than to give him the salary increases to which he felt he was entitled. Did Walsh commit a crime? If so, what crime did he commit? Discuss. [State v. Walsh, 113 Ohio App. 3d 1515, 866 N.E.2d 513 (6 Dist. 2007)]

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9-1A. Express versus Implied Contracts. Suppose that Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local

BUSINESS LAW

9-1A. Express versus Implied Contracts. Suppose that Everett McCleskey, a local businessperson, is a good friend of Al Miller, the owner of a local candy store. Every day on his lunch hour, McCleskey goes into Miller's candy store and spends about five minutes looking at the candy. After examining Miller's candy and talking with Miller, McCleskey usually buys one or two candy bars. One afternoon McCleskey goes into Miller's candy shop, looks at the candy, and picks up a $1 candy bar. Seeing that Miller is very busy, he waves the candy bar at Miller without saying a word and walks out. Is there a contract? If so, classify it.

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9-4A. Types of Contracts. Burger Baby restaurants engaged Air Advertising to fly an advertisement above the Connecticut beaches

BUSINESS LAW

9-4A. Types of Contracts. Burger Baby restaurants engaged Air Advertising to fly an advertisement above the Connecticut beaches. The advertisement offered $1,000 to any person who could swim from the Connecticut beaches to Long Island in less than a day. At 10:00 a.m. on October 10, Air Advertising’s pilot flew a sign above the Connecticut beaches that read: “Swim across the Sound and Burger Baby pays $1,000.” On seeing the sign, Davison dived in. About four hours later, when he was the about halfway across the Sound, Air Advertising flew another sign over the Sound that read: “Burger Baby revokes”. Davison completed the swim in another six hours. Is there a contract between Davison and Burger Baby? Can Davison recover anything? Why or why not?

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11-4A. Shipment and Destination Contracts. In 2003, Karen Pearson and Steve and Tara Carlson agreed to buy a 2004 Dynasty recreational vehicle (RV)

BUSINESS LAW

11-4A. Shipment and Destination Contracts. In 2003, Karen Pearson and Steve and Tara Carlson agreed to buy a 2004 Dynasty recreational vehicle (RV) from DeMartini’s RV Sales in Grass Valley, California. On September 29, Pearson, the Carlsons, and DeMartini’s signed a contract providing that “seller agrees to deliver the vehicle to you on the date this contract is signed.” The buyers made a payment of $145,000 on the total price of $356,416 the next day, when they also signed a form acknowledging that the RV had been inspected and accepted. They agreed to return later to have the RV transported out of state for delivery (to avoid paying state sales tax on the purchase). On October 7, Steve Carlson returned to DeMartini’s to ride with the seller’s driver to Nevada to consummate the out-of –state delivery. When the RV developed problems, Pearson and the Carlsons filed a suit in a federal district court against the RV’s manufacturer, Monaco Coach Corp., alleging in part, breach of warranty under the state law. The applicable statute is expressly limited to goods sold in California. Monaco argued that this RV had been sold in Nevada. How does the Uniform Commercial Code (UCC) define a sale? What does the UCC provide with respect to the passage of title? How do these provisions apply here? Discuss. [ Carlson v. Monaco Coach Corp., 486 F. Supp. 2d 1127 (E.D. Cal. 2007)]

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11-8A. A question of Ethics: Revocation. Scotwood Industries, Inc., sells calcium chloride flake for use in ice melt products

BUSINESS LAW

11-8A. A question of Ethics: Revocation. Scotwood Industries, Inc., sells calcium chloride flake for use in ice melt products. Between July and September 2004, Scotwood delivered thirty-seven shipments of flake to Frank Miller & Sons, Inc. After each delivery, Scotwood billed Miller, which paid thirty-five of the invoices and processed 30 to 50 percent of the flake. In August, Miller began complaining about the product’s quality. Scotwood assured Miller that it would remedy the situation. Finally, in October, Miller told Scotwood, “This is totally unacceptable. We are willing to discuss Scotwood picking up the material. “ Miller claimed that the flake was substantially defective because it was chunked. Calcium chloride maintains its purity for up to five years, but if it is exposed to and absorbs moisture, it chunks and becomes unusable. In response to Scotwood’s suit to collect payment in the unpaid invoices, Miller filed a counterclaim in a federal district court for breach of contract, seeking to recover based on revocation of acceptance, among other things. [Scotwood Industries, Inc . v. Frank Miller & Sons, Inc., 435 F. Supp.2d 1160 (D.Kan.2006)]

(a) What is revocation of acceptance? How does a buyer effectively exercise this option? Do the facts in this case support this theory as a ground for Miller to recover damages? Why or why not?

(b) Is there an ethical basis for allowing a buyer to revoke acceptance of goods and recover damages? If so, is there an ethical limit to this right? Discuss.

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The following situations may be covered by insider trading laws in the United States

FINANCE

FIN 350 Module 1: Assignments

Chapter 3 Problems and Issues 5

5. The following situations may be covered by insider trading laws in the United States. Examine each situation described and indicate whether, in your opinion a violation of insider trading laws might have occurred. If you think a violation occurred, what kind of violation was it?

a. The chief financial officer of Start Corporation reads an internal memorandum criticizing the firm’s recent oil field development investments and picks up his phone to call his broker, placing an order to sell his holdings of the firm’s shares when the market opens in the morning.

b. Corren Professional Corporation, a CPA firm, assists Selkirk Industrial Corporation with its quarterly and annual financial reports. Jim Roberts, a CPA with Corren, after reviewing the latest information provided by Selkirk’s CEO, calls a friend and suggests making certain stock and bond trades involving Selkirk’s securities. Roberts will not benefit financially from these suggested trades and refuses to get involved.

c. James Smith works for Cohen and Cooper, a local law firm, and while browsing in his firm’s law library, he discovers a new report from a legal client of his colleague, Roscoe Adams, that predicts serious financial problems if the client proceeds with its recently drafted strategic plan. Smith subsequently discovers discreetly that the strategic plan is to be launched next week. He also learns that Roscoe is selling the client’s stock short through his broker. Smith quietly advises Roscoe not to make the short sale and lets the matter drop.

d. Samuel Joule learns from conversations with Sarah Conklin, a bartender at a local bar, that neighboring Locket Corporation has recently developed a warning device that may help prevent air collisions and may be worth tens of millions of dollars once announced to the public. Neither Joule nor Conklin works for Locket, though he has been dating Miss Conklin. Both of these individuals decide to purchase 1,000 shares of Locket’s stock before Locket holds a press conference to announce the new air collision device. Joule and Conklin will use a bank loan to finance the purchase of Locket’s shares. A wedding is planned if the transaction pays off.

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P10–4 (Basic sensitivity analysis) Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity

FINANCE

P10–4 Basic sensitivity analysis Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table.

Project A Project B
Initial Investment (CF0) $8,000 $8,000
Outcome Annual Cash Inflows (CF)
Pessimistic $200 $900
Most Likely $1,000 $1,000
Optimistic $1,800 $1,100

a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm’ s cost of capital is 10% and that both projects have 20-year lives. Construct a table similar to this for the NPVs for each project. Include the range of NPVs for each project.
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why?

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Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments

FINANCE 419 (FIN 419)

P5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:

Investment Expected Return Expected Risk Index

X 14% 7%
Y 12% 8%
Z 10% 9%

a. If Sharon were risk-indifferent, which investments would she select?
Explain why.
b. If she were risk-averse, which investments would she select? Why?
c. If she were risk-seeking, which investments would she select? Why?
d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?

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The comparative balance sheet of TorMax Technology, Inc. at December 31, 2010 and 2009, is as follows

ACCOUNTING

PR 16-2B The comparative balance sheet of TorMax Technology, Inc. at December 31, 2010 and 2009, is as follows

AND SO ON

Check: Net Cash Flow from Operating Activities $200,500

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E6-10 Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions

ACCOUNTING

Exercise 6-10 (E6-10) Make incremental analysis concerning elimination of division.
Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Maggie made the following presentation to Poway's Board of Directors and suggested the Erie Division be eliminated. “If the Erie Division is eliminated,” she said, “our total profits would increase by $24,500.”
The Other Five Divisions Erie Division Total
Sales $1,664,200 $100,000 $1,764,200
Cost of goods sold 978,520 76,500 1,055,020
Gross profit 685,680 23,500 709,180
Operating expenses 527,940 48,000 575,940
Net income $ 157,740 $(24,500) $ 133,240

In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are $25,000 variable and $23,000 fixed. None of the Erie Division' fixed costs will be eliminated if the division is discontinued.

Instructions
Is Maggie right about eliminating the Erie Division? Prepare a schedule to support your answer.

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The Sterling Tire Company’s income statement for 2008 is as follows

FINANCE

11. The Sterling Tire Company’s income statement for 2008 is as follows:
STERLING TIRE COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales (20,000 tires at $60 each) . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000
Less: Variable costs (20,000 tires at $30) . . . . . . . . . . . . . . . 600,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Earnings before interest and taxes (EBIT) . . . . . . . . . . . . . . . . 200,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Income tax expense (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,000

Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage.
c. Degree of combined leverage.
d. Break-even point in units.

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The following data are from Sharon Stone and Gravel, Inc., financial statements

FINANCE

33. The following data are from Sharon Stone and Gravel, Inc., financial statements. The firm manufactures home decorative material. Sales (all credit) were $60 million for 2008.
Sales to total assets . . . . . . . . . . . . . . . 3.0 times
Total debt to total assets . . . . . . . . . . . . 40%
Current ratio . . . . . . . . . . . . . . . . . . . . . 2.0 times
Inventory turnover . . . . . . . . . . . . . . . . . 10.0 times
Average collection period . . . . . . . . . . . 18.0 days
Fixed asset turnover . . . . . . . . . . . . . . . 7.5 times

Fill in the balance sheet

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ANSWER KEY The General's Favorite Fishing Hole - Period 1: Bob night opened "The General's Favorite Fishing Hole"

The General's Favorite Fishing Hole - Period 1

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Comprehensive Problem. Heintz and Parry. College Accounting 19th Edition and 20th Edition.

PERIOD 1

The Account Cycle
Bob night opened "The general's favorite Fishing Hole" The fishing camp is open from April through September and attracts many famous college basketball coaches during the off-season. Guests typically register for one week, arriving on Sunday afternoon and returning home the following Saturday afternoon. The registration fee includes room and board, the use of fishing boats, and professional instruction in fishing techniques. The chart of accounts for the camping operations is provided below.


The General's Favorite Fishing Hole

Chart of Account.

Assets Revenues
101 cash 401 Registration fees
142 Office Supplies
144 Food Supplies Expenses
145 Prepaid Insurance 511 Wages Expense
181 Fishing Boat 521 Rent Expense
181.1 Accum. Depr-Fishing Boats 523 Office Supplies Expense
524 Food Supplies Expense
Liabilities 525 Telephone Expense
202 Account Payable 533 utilities Expense
219 Wages Payable 535 Insurance Expense
536 Postage Expense
Owner's Equity 542 Depr. Exp-Fishing Boats
311 Bob Night Payable
312 Bob Night Drawing
313 Income Summary

The following transactions took place during April 20--
April
1 Night invested cash in the business $90,000.
1 Paid insurance premium for camping season, 9,000.
2 Paid rent for lodge and campgrounds for the month of April, $40,000.
2 Deposited registration fee, $35,000
2 Purchase ten fishing boats on account for $60,000. The boats have estimated useful
lives of five years, at which time they will be donated to a local day camp. Arrangement
were made to pay for the boats in July.
3 Purchase food supplies from Acme Super Market on account, $7,000.
5 Purchase office supplies from Gordon Office Supplies on account, $500.
7 Deposited registration fee, $38,600.
10 Purchased food supplies from Acme Super Market on account, $8,200
10 Paid wages to fishing guides, $10,000
14 Deposited registration fees, $30,500
16 Purchased food supplies from Acme Super Market on account, $9,000
17 Paid wages to fishing guides, $10,000
18 Paid postage , $150.
21 Deposited registration fees, $35,600
24 Purchased food supplies from Acme Super Market on account, $8,500
24 Paid wages to fishing guides, $10,000
28 Deposited registration fees, $32,000.
29 Paid wages to fishing guides, $10,000
30 Purchased food supplies from Acme Super Market on account, $6,000.
30 Paid Acme Super market on account ,$32,700.
30 Paid utilities bill, $2,000.
30 Paid telephone bill, $1,200.
30 Bob Night withdrew cash for personal use, $6,000

Adjustment information for the end of April is provided below.
a Office supplies remaining on hand, $100.
b Food supplies remaining on hand, $8,000.
c Insurance expired during the month of April, $1,500.
d Depreciation on the fishing boatsfor the month of April, $1,000.
e Wages earned , but not yet paid, at the end of April, $500.

Required:
1 Enter the above transactions in a general journal. Enter transactions from April 1-5 on pages 1, April 7-8 on page 2, April 21-29 and the first two entries for April 30 on page 3, and the remain entries for April 30 on page 4.

2 Post the entries to the general ledger.(if you are not using the working papers that accompany this text, you will need to enter the account titles and account numbers in the general ledger accounts).

3 Prepare a trial balance on a work sheet.

4 Complete the work sheet.

5 Prepare the income statement.

6 Prepare the statement of owner's equity

7 Prepare the balance sheet.

8 Journalise the adjusting entries (page 5)

9 Post the adjusting entries to the general ledger.

10 Journalise the closing entries (page 5 and 6)

11 Post the closing entries to the general ledger.

12 Prepare a post-closing trial balance.

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ANSWER KEY The questions in this exercise are based on the Benetton Group, a company headquartered in Italy and known in the United States primarily

Benetton Group Problem-SOLUTION

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The questions in this exercise are based on the Benetton Group, a company headquartered in Italy and known in the United States primarily for one of its brands of fashion apparel?United Colors of Benetton. To answer the questions, you will need to download the Benetton Group's 2004 Annual Report at www.benetton.com/investors. You do not need to print this document to answer the questions.

Required:
1. How do the formats of the income statements shown on pages 33 and 50 of Benetton's annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?
2. Why do you think cost of sales is included in the computation of contribution margin on page 33?
3. Perform two separate computations
of Benetton's break-even point in euros. For the first computation, use data from 2003. For the second computation, use data from 2004. Why do the numbers that you computed differ from one another?
4. What sales volume would have been necessary in 2004 for Benetton to attain a target income from operations of €300 million?
5. Compute Benetton's margin of safety using data from 2003 and 2004. Why do your answers for the two years differ from one another?
6. What is Benetton's degree of operating leverage in 2004? If Benetton's sales in 2004 had been 6% higher than what is shown in the annual report, what income from operations would the company have earned? What percentage increase in income from operations does this represent?
7. What income from operations would Benetton have earned in 2004 if it had invested €10 million additional euros in advertising and promotions and realized a 3% increase in sales? As an alternative, what income from operations would Benetton have earned if it not only invested €10 million additional euros in advertising and promotions but also raised its sales commission rate to 6% of sales, thereby generating a 5% increase in sales? Which of these two scenarios would have been preferable for Benetton?
8. Assume that total sales in 2004 remained unchanged at €1,686 million (as shown on pages 33 and 50); however, the Casual sector sales were €1,554 million, the Sportswear and Equipment sector sales were €45million, and the Manufacturing and Other sector sales were €87 million. What income from operations would Benetton have earned with this sales mix? (Hint: look at pages 36 and 37 of the annual report.) Why is the income from operations under this scenario different from what is shown in the annual report?

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ANSWER KEY ACC 225 Week 1 Solution

ACC 225
Axia College of University of Phoenix (UoP)

ACC 225 Week 1 Solution

Exercises: Accounting and Business Organizations

• Resource: Fundamental Accounting Principles, p. 30
• Due Date: Day 5
• Post your answers to Exercises 1-1 and 1-4

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ANSWER KEY FIN 200: Quiz and Final Exam

FIN 200: Quiz and Final Exam:

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ANSWER KEY Fin 200 Week 8 Solution

FIN 200

Fin 200 Week 8 Solution

CheckPoint: Time Value of Money

• Resource: Ch. 7 of Foundations of Financial Management
• Due Date: Day 5 [Individual forum]
• Write a 200- to 300-word description of the four time value of money concepts: present value, present value of an annuity, future value, and future value of annuity. Describe the characteristics of each concept and give an example of when each would be used.

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ANSWER KEY Fin 200 Week 9 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Fin 200 Week 9 Solution

Assignment: Present Value, Future Value, and Annuity Due

• Resource: Ch. 9 of Foundations of Financial Management
• Due Date: Day 5 [Individual forum]
• Complete Problems 3, 4, and 5 on pp. 278-279.
• Post as an attachment.

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3. You will receive $5,000 three years from now. The discount rate is 8 percent.
a. What is the value of your investment two years from now? Multiply
$5,000 .926 (one year’s discount rate at 8 percent).
b. What is the value of your investment one year from now? Multiply your
answer to part a by .926 (one year’s discount rate at 8 percent).
c. What is the value of your investment today? Multiply your answer to part b
by .926 (one year’s discount rate at 8 percent).
d. Confirm that your answer to part c is correct by going to Appendix B (present
value of $1) for n 3 and i 8 percent. Multiply this tabular value by
$5,000 and compare your answer to part c. There may be a slight difference
due to rounding.
4. If you invest $9,000 today, how much will you have:
a. In 2 years at 9 percent?
b. In 7 years at 12 percent?
c. In 25 years at 14 percent?
d. In 25 years at 14 percent (compounded semiannually)?
5. Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is
discounted at 12 percent, which should you choose?

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