Problem 11-25 Effects of operating leverage on profitability
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors $3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of $340 per student. Akers estimated that 20 students would attend the course.
Base your answer on the preceding information.
Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.
Click here for the solution: Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients
Monday, March 21, 2016
On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
E7-5 (Record sales gross and net) On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for balance due from Chester Company.
Instructions
a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.
Sales and receivables are entered at gross selling price.
Sales and receivables are entered at net of cash discounts.
b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.
Click here for the solution: On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
Instructions
a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.
Sales and receivables are entered at gross selling price.
Sales and receivables are entered at net of cash discounts.
b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.
Click here for the solution: On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
Derrick Adkins Construction Company began operations in 2007
E18-10 (Long-Term Contract Reporting) Derrick Adkins Construction Company began operations in 2007. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2007, is expected to be completed in 2008.
Project Total Contract Price Billings through 12/31/07 Cash Collections through 12/31/07 Contract Costs Incurred through 12/31/07 Estimated Additional Costs to Complete
1 $ 560,000 $ 360,000 $340,000 $450,000 $140,000
2 670,000 220,000 210,000 126,000 504,000
3 500,000 500,000 440,000 330,000 –0–
$1,730,000 $1,080,000 $990,000 $906,000 $644,000
Derrick Adkins Construction Company uses the completed-contract method. Determine the amount of income or loss to be reported for each of the three projects in 2007.
Click here for the solution: Derrick Adkins Construction Company began operations in 2007
Project Total Contract Price Billings through 12/31/07 Cash Collections through 12/31/07 Contract Costs Incurred through 12/31/07 Estimated Additional Costs to Complete
1 $ 560,000 $ 360,000 $340,000 $450,000 $140,000
2 670,000 220,000 210,000 126,000 504,000
3 500,000 500,000 440,000 330,000 –0–
$1,730,000 $1,080,000 $990,000 $906,000 $644,000
Derrick Adkins Construction Company uses the completed-contract method. Determine the amount of income or loss to be reported for each of the three projects in 2007.
Click here for the solution: Derrick Adkins Construction Company began operations in 2007
Fong Sai-Yuk Company sells one product
E8-9 (Periodic versus Perpetual Entries) Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.
Jan 2 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Instructions
a.) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end of month closing entry to record cost of goods sol. A physical count indicates that ending inventory for January is 110 units.
b.) Compute gross profit using the periodic system.
c.) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
d.) Compute gross profit using the perpetual system.
Click here for the solution: Fong Sai-Yuk Company sells one product
Jan 2 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Instructions
a.) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end of month closing entry to record cost of goods sol. A physical count indicates that ending inventory for January is 110 units.
b.) Compute gross profit using the periodic system.
c.) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
d.) Compute gross profit using the perpetual system.
Click here for the solution: Fong Sai-Yuk Company sells one product
Presented below is information related to Blowfish radios for Hootie Company for the month of July
E8-16 (Compute FIFO, LIFO, Average-Cost-Periodic) Presented below is information related to Blowfish radios for Hootie Company for the month of July.
Date Transaction Units In Unit Cost Total Units Sold Sell Price Total
July 1 Balance 100 $4.10 $410
July 6 Purchase 800 $4.20 $3360
July 7 Sale 300 $7.00 $2100
July 10 Sale 300 $7.30 $2190
July 12 Purchase 400 $4.50 $1800
July 15 Sale 200 $7.40 $1480
July 18 Purchase 300 $4.60 $1380
July 22 Sale 400 $7.40 $2960
July 25 Purchase 500 $4.58 $2290
July 30 Sale 200 $7.50 $1500
2100 $9240 1400 $10,230
Instructions
a.) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions:
1.) FIFO
2.) LIFO
3.) Weighted-average round the average unit cost to the nearest one tenth of one cent
b.) Answer the following questions
1.) Which of the following methods used above all will yield the lowest figure for ending figure for gross profit for the income statement? Why?
2.) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Why?
Click here for the solution: Presented below is information related to Blowfish radios for Hootie Company for the month of July
Date Transaction Units In Unit Cost Total Units Sold Sell Price Total
July 1 Balance 100 $4.10 $410
July 6 Purchase 800 $4.20 $3360
July 7 Sale 300 $7.00 $2100
July 10 Sale 300 $7.30 $2190
July 12 Purchase 400 $4.50 $1800
July 15 Sale 200 $7.40 $1480
July 18 Purchase 300 $4.60 $1380
July 22 Sale 400 $7.40 $2960
July 25 Purchase 500 $4.58 $2290
July 30 Sale 200 $7.50 $1500
2100 $9240 1400 $10,230
Instructions
a.) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions:
1.) FIFO
2.) LIFO
3.) Weighted-average round the average unit cost to the nearest one tenth of one cent
b.) Answer the following questions
1.) Which of the following methods used above all will yield the lowest figure for ending figure for gross profit for the income statement? Why?
2.) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Why?
Click here for the solution: Presented below is information related to Blowfish radios for Hootie Company for the month of July
The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
E7-9 (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Reba McIntyre Inc. shows the following balances.
Accounts Rec. $90,000 (DR.)
Allowance for Doubtful Accounts 1,750 (DR.)
Sales (all on credit) $680,000 (CR.)
Instructions: Given the entry for estimated bad debts assuming that the allowances is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
Click here for the solution: The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
Accounts Rec. $90,000 (DR.)
Allowance for Doubtful Accounts 1,750 (DR.)
Sales (all on credit) $680,000 (CR.)
Instructions: Given the entry for estimated bad debts assuming that the allowances is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
Click here for the solution: The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
P17-2 (Available-for-Sale Debt Securities) On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2015. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2012, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.
a. Prepare journal entry to record purchase of bonds on Jan. 1. (Assume bonds are classified as available-for-sale.)
b. Prepare the amortization schedule for the bonds.
c. Prepare the journal entries to record the semiannual interest on July 1, 2010, and Dec. 31, 2010.
d. If fair value of Aguirre bonds is $372,726 on Dec. 31, 2011, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on Jan 1, 2011 is a debit of $3,375.)
e. Prepare journal entry to record the sale of the bonds on Jan 1, 2012.
Click here for the solution: On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
a. Prepare journal entry to record purchase of bonds on Jan. 1. (Assume bonds are classified as available-for-sale.)
b. Prepare the amortization schedule for the bonds.
c. Prepare the journal entries to record the semiannual interest on July 1, 2010, and Dec. 31, 2010.
d. If fair value of Aguirre bonds is $372,726 on Dec. 31, 2011, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on Jan 1, 2011 is a debit of $3,375.)
e. Prepare journal entry to record the sale of the bonds on Jan 1, 2012.
Click here for the solution: On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
CA24-4 (Post-Balance Sheet Events) At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000 (representing 2,000,000 shares of $1 par common stock), and retained earnings of $2,000,000. Net sales for the year 2007 were $18,000,000, and net income was $800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2008, and you find the following.
1. On February 3, 2008, one of Brandt’s customers declared bankruptcy. At December 31, 2007, this company owed Brandt $300,000, of which $40,000 was paid in January, 2008.
2. On January 18, 2008, one of the three major plants of the client burned.
3. On January 23, 2008, a strike was called at one of Brandt’s largest plants, which halted 30% of its production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with Brandt’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2007. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2, which was the level experienced over several years. On January 18, 2008, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2007, was on a lower of cost or market basis.
6. On February 1, 2008, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock.
Instructions
State in each case how the 2007 financial statements would be affected, if at all.
Click here for the solution: At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
1. On February 3, 2008, one of Brandt’s customers declared bankruptcy. At December 31, 2007, this company owed Brandt $300,000, of which $40,000 was paid in January, 2008.
2. On January 18, 2008, one of the three major plants of the client burned.
3. On January 23, 2008, a strike was called at one of Brandt’s largest plants, which halted 30% of its production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with Brandt’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2007. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2, which was the level experienced over several years. On January 18, 2008, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2007, was on a lower of cost or market basis.
6. On February 1, 2008, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock.
Instructions
State in each case how the 2007 financial statements would be affected, if at all.
Click here for the solution: At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
E16-24 (Balance Sheet Classification)
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.
Click here for the solution: At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.
Click here for the solution: At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011
P17-16 Comprehensive-reporting a pension plan; pension spreadsheet; determine changes in balances; two years
Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:
Prior service cost at Jan. 1, 2011, from plan amendment at the beginning of 2009 (amortization: $4 million per year) $32 million
Net loss-pensions at Jan. 1, 2011 (previous losses exceeded previous gains) $40million
Average remaining service life of the active employee group 10 years
Actuary's discount rate 8%
($in millions)
PBO Plan Assets
Beginning of 2011 $300 Beginning of 2011 $200
Service cost 48 Return on plan assets
Interest cost, 8% 24 7.5% (10% expected) 15
Loss (gain) on PBO (2) Cash contributions 45
Less: Retiree benefits (20) Less: Retiree benefits (20)
End of 2011 $350 End of 2011 $240
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost-ACOI, the net loss-ACOI, and the pension liability.
Click here for the solution: Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011
Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:
Prior service cost at Jan. 1, 2011, from plan amendment at the beginning of 2009 (amortization: $4 million per year) $32 million
Net loss-pensions at Jan. 1, 2011 (previous losses exceeded previous gains) $40million
Average remaining service life of the active employee group 10 years
Actuary's discount rate 8%
($in millions)
PBO Plan Assets
Beginning of 2011 $300 Beginning of 2011 $200
Service cost 48 Return on plan assets
Interest cost, 8% 24 7.5% (10% expected) 15
Loss (gain) on PBO (2) Cash contributions 45
Less: Retiree benefits (20) Less: Retiree benefits (20)
End of 2011 $350 End of 2011 $240
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost-ACOI, the net loss-ACOI, and the pension liability.
Click here for the solution: Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011
Subscribe to:
Posts (Atom)