P6-2 (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.
(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of $90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?
(b) Robert Hitchcock is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Robert make if the fund will earn 12% interest compounded annually?
(c) Diane Ross has $20,000 to invest today at 9% to pay a debt of $47,347. How many years will it take her to accumulate enough to liquidate the debt?
(d) Cindy Houston has a $27,600 debt that she wishes to repay 4 years from today; she has $19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?
Click here for the solution: (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns
Showing posts with label Various. Show all posts
Showing posts with label Various. Show all posts
Tuesday, April 12, 2016
Wednesday, November 25, 2015
The budget director of Regal Furniture Company requests estimates of sales, production, and other operating data from the various administrative units every month
The budget director of Regal Furniture Company requests estimates of sales, production, and other operating data from the various administrative units every month. Selected information concerning sales and production for August 2010 is summarized as follows:
a. Estimated sales of King and Prince chairs for August by sales territory:
Northern Domestic:
King.........................5,500 units at $750 per unit
Prince......................6,900 units at $520 per unit
Southern Domestic:
King.........................3,200 units at $690 per unit
Prince......................4,000 units at $580 per unit
International:
King........................1,450 units at $780 per unit
Prince......................900 units at $600 per unit
b. Estimated inventories at August 1:
Direct materials:
Finished Products
Fabric................4,500 sq. yds
King.....................950units
Wood.................6,000 lineal ft.
Prince..................280units
Filler...................2,800 cu, ft
Springs..............6,700 units
c. Desired inventories at August 31:
Direct Materials:
Finished Products:
Fabric..................4300 sq yds
King.............800units
Wood..................6,200 lineal ft.
Prince...........400units
Filler....................3,100 cu. ft
Springs................7,500 units
d. Direct materials used in production:
In manufacture of King:
Fabric..................5.0 sq. yds per unit of product
Wood ..................35 lineal ft. per unit of product
Filler.................... 3.8 cu ft. per units of product
Springs.................14 units per units of product
In manufacture of Prince:
Fabric...............$12.00 per sq. yd.
Filler..............$3.50 per cu. ft.
Wood................ 8.00 per lineal ft.
Springs........... 4.50 per unit
f. Direct labor requirements:
King:
Framing Department............ 2.5hrs. at $12 per hr.
Cutting Department.............. 1.5 hrs. at $11 per hr.
Upholstery Department.......... 2.4hrs. at $14 per hr.
Prince: Framing Department............ 1.8 hrs. at $12 per hr.
Cutting Department............. 0.5 hrs. at $11 per hr.
Upholstery Department......... 2.0hrs. at $14 per hr.
3.) Prepare a direct materials purchases budget for August.
Click here for the solution: The budget director of Regal Furniture Company requests estimates of sales, production, and other operating data from the various administrative units every month
a. Estimated sales of King and Prince chairs for August by sales territory:
Northern Domestic:
King.........................5,500 units at $750 per unit
Prince......................6,900 units at $520 per unit
Southern Domestic:
King.........................3,200 units at $690 per unit
Prince......................4,000 units at $580 per unit
International:
King........................1,450 units at $780 per unit
Prince......................900 units at $600 per unit
b. Estimated inventories at August 1:
Direct materials:
Finished Products
Fabric................4,500 sq. yds
King.....................950units
Wood.................6,000 lineal ft.
Prince..................280units
Filler...................2,800 cu, ft
Springs..............6,700 units
c. Desired inventories at August 31:
Direct Materials:
Finished Products:
Fabric..................4300 sq yds
King.............800units
Wood..................6,200 lineal ft.
Prince...........400units
Filler....................3,100 cu. ft
Springs................7,500 units
d. Direct materials used in production:
In manufacture of King:
Fabric..................5.0 sq. yds per unit of product
Wood ..................35 lineal ft. per unit of product
Filler.................... 3.8 cu ft. per units of product
Springs.................14 units per units of product
In manufacture of Prince:
Fabric...............$12.00 per sq. yd.
Filler..............$3.50 per cu. ft.
Wood................ 8.00 per lineal ft.
Springs........... 4.50 per unit
f. Direct labor requirements:
King:
Framing Department............ 2.5hrs. at $12 per hr.
Cutting Department.............. 1.5 hrs. at $11 per hr.
Upholstery Department.......... 2.4hrs. at $14 per hr.
Prince: Framing Department............ 1.8 hrs. at $12 per hr.
Cutting Department............. 0.5 hrs. at $11 per hr.
Upholstery Department......... 2.0hrs. at $14 per hr.
3.) Prepare a direct materials purchases budget for August.
4.)Prepare a direct labor cost budget for August
Click here for the solution: The budget director of Regal Furniture Company requests estimates of sales, production, and other operating data from the various administrative units every month
Sunday, September 13, 2015
Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards
Auditing P 3-31
Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period." Assume that the following list describes changes that have a material effect on a client's financial statement for the current year:
1. Correction of a mathematical error in inventory pricing made in a prior period.
2. A change from prime costing to full absorption costing for inventory valuation.
3. A change from presentation of statements of individual companies to presentation of consolidated statements.
4. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
5. A change from the completed-contract method to the percentage-of completion method of accounting for long-term construction contracts.
6. A change in the estimated useful life of previously recorded fixed assets based on newly acquired information.
7. A change to including the employer share of Social Security (FICA) taxes as "retirement benefits" on the income statement from including it with "other taxes."
8. A change from FIFO method of inventory pricing to the LIFO method of inventory pricing.
Identify the type of change described in each item above, and state whether any modification is required in the auditor's report as it relates to the second standard of reporting. Organized your answer sheet as shown. For example, a change from the LIFO method of inventory pricing to the FIFO method in inventory pricing would appear as shown.
Assume that each item is material.
Item No. Type of Change Should Auditors report be modified?
Example An accounting change from one GAAP "Yes" to another GAAP
Click here for the solution: Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards
Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period." Assume that the following list describes changes that have a material effect on a client's financial statement for the current year:
1. Correction of a mathematical error in inventory pricing made in a prior period.
2. A change from prime costing to full absorption costing for inventory valuation.
3. A change from presentation of statements of individual companies to presentation of consolidated statements.
4. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
5. A change from the completed-contract method to the percentage-of completion method of accounting for long-term construction contracts.
6. A change in the estimated useful life of previously recorded fixed assets based on newly acquired information.
7. A change to including the employer share of Social Security (FICA) taxes as "retirement benefits" on the income statement from including it with "other taxes."
8. A change from FIFO method of inventory pricing to the LIFO method of inventory pricing.
Identify the type of change described in each item above, and state whether any modification is required in the auditor's report as it relates to the second standard of reporting. Organized your answer sheet as shown. For example, a change from the LIFO method of inventory pricing to the FIFO method in inventory pricing would appear as shown.
Assume that each item is material.
Item No. Type of Change Should Auditors report be modified?
Example An accounting change from one GAAP "Yes" to another GAAP
Click here for the solution: Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards
Sunday, September 6, 2015
The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan
4-62 (Lincoln Federal Savings and Loan) The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan, a California savings and loan (S&L) that was a subsidiary of American Continental Company, a real estate development company run by Charles Keating.
Required:
a. After reading the discussion of Lincoln Federal Savings and Loan, identify the risk areas that should be identified in planning for the audit.
b. Briefly discuss the risks identified and the implication of those risks for the conduct of the audit.
c. The auditor did review a few independent appraisals indicating the market value of the real estate in folders for loans. How convincing are such appraisals? In other words, what attributes are necessary in order for the appraisals to constitute persuasive evidence?
Lincoln Federal Savings & Loan
Savings and Loan industry background-the S&L industry was developed in the early part of the century in response to a perceived need to provide low-cost financing to encourage home ownership. As such, legislation by Congress made the S&L industry the primary financial group allowed low-cost home ownership loans (mortgages).
For many years, the industry operated by accepting relatively long-term deposits from customers and making 25- to – 30-year loans at fixed rates on home mortgages. The industry was generally considered to be safe. Most of the S&Ls (also known as thrifts) were small, federally chartered institutions with deposits insured by the FSLIC. “Get your deposits in, make loans, sit back, and earn your returns. Get to work by 9 A.M. and out to the golf course by noon” Seemed to be the motto of many S&L managers.,
Changing economic environment-During the 1970s, two major economic events hit the S&L industry. First, the rate of inflation had reached an all-time high. Prime interest rates had gone as high as 19.5%. Second, deposits were being drawn away from the S&Ls by new competitors that offered short-term variable rates substantially higher than current passbook savings rates. The S&Ls responded by increasing the rates on certificates of deposit to extraordinary levels (15 or 16%) while servicing mortgages with 20-to 30-year maturities made at old rates of 7 to 8%. The S&Ls attempted to mitigate the problem by offering variable-rate mortgages or by selling off some of their mortgages (at substantial losses) to other firms.
However, following regulatory accounting principles, the S&Ls were not required to recognize market values of loans that were not sold. Thus, even if loan values were substantially less than the book value, they would continue to be carried at book value as long as the mortgage holder was not in default.
Changing regulatory environment-Congress moved to deregulate the S&L industry. During the first half of 1982, the S&L industry lost a record $3.3 billion (even without marking loans down to real value). In August 1982, President Reagan signed the Garn-St Germain Depository Institutions Act of 1982, hailing it as “the most important legislation for financial institutions in 50 years.” The bill had several key elements:
• S&Ls would be allowed to offer money market funds free from withdrawal penalties or interest rate regulation.
• S&Ls could invest up to 40% of their assets in nonresidential real estate lending. Commercial lending was much riskier than home lending, but the potential returns were greater. In addition, the regulators helped the deregulatory fever by removing a regulation that had required a saving and loan institution to have 400 stockholders with no one owning more than 25% to allowing a single shareholder to own a savings and loan institution.
• The bill allowed thrifts to stop requiring traditional down payments and to provide 100% financing, with the borrower not required to invest a dime of personal money in the deal.
• The bill permitted thrifts to make real estate loans anywhere. They had previously been required to make loans on property located only in their own geographic area.
Click here for the solution: The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan
Required:
a. After reading the discussion of Lincoln Federal Savings and Loan, identify the risk areas that should be identified in planning for the audit.
b. Briefly discuss the risks identified and the implication of those risks for the conduct of the audit.
c. The auditor did review a few independent appraisals indicating the market value of the real estate in folders for loans. How convincing are such appraisals? In other words, what attributes are necessary in order for the appraisals to constitute persuasive evidence?
Lincoln Federal Savings & Loan
Savings and Loan industry background-the S&L industry was developed in the early part of the century in response to a perceived need to provide low-cost financing to encourage home ownership. As such, legislation by Congress made the S&L industry the primary financial group allowed low-cost home ownership loans (mortgages).
For many years, the industry operated by accepting relatively long-term deposits from customers and making 25- to – 30-year loans at fixed rates on home mortgages. The industry was generally considered to be safe. Most of the S&Ls (also known as thrifts) were small, federally chartered institutions with deposits insured by the FSLIC. “Get your deposits in, make loans, sit back, and earn your returns. Get to work by 9 A.M. and out to the golf course by noon” Seemed to be the motto of many S&L managers.,
Changing economic environment-During the 1970s, two major economic events hit the S&L industry. First, the rate of inflation had reached an all-time high. Prime interest rates had gone as high as 19.5%. Second, deposits were being drawn away from the S&Ls by new competitors that offered short-term variable rates substantially higher than current passbook savings rates. The S&Ls responded by increasing the rates on certificates of deposit to extraordinary levels (15 or 16%) while servicing mortgages with 20-to 30-year maturities made at old rates of 7 to 8%. The S&Ls attempted to mitigate the problem by offering variable-rate mortgages or by selling off some of their mortgages (at substantial losses) to other firms.
However, following regulatory accounting principles, the S&Ls were not required to recognize market values of loans that were not sold. Thus, even if loan values were substantially less than the book value, they would continue to be carried at book value as long as the mortgage holder was not in default.
Changing regulatory environment-Congress moved to deregulate the S&L industry. During the first half of 1982, the S&L industry lost a record $3.3 billion (even without marking loans down to real value). In August 1982, President Reagan signed the Garn-St Germain Depository Institutions Act of 1982, hailing it as “the most important legislation for financial institutions in 50 years.” The bill had several key elements:
• S&Ls would be allowed to offer money market funds free from withdrawal penalties or interest rate regulation.
• S&Ls could invest up to 40% of their assets in nonresidential real estate lending. Commercial lending was much riskier than home lending, but the potential returns were greater. In addition, the regulators helped the deregulatory fever by removing a regulation that had required a saving and loan institution to have 400 stockholders with no one owning more than 25% to allowing a single shareholder to own a savings and loan institution.
• The bill allowed thrifts to stop requiring traditional down payments and to provide 100% financing, with the borrower not required to invest a dime of personal money in the deal.
• The bill permitted thrifts to make real estate loans anywhere. They had previously been required to make loans on property located only in their own geographic area.
Click here for the solution: The following is a description of various factors that affected the operations of Lincoln Federal Savings and Loan
The following are various activities an auditor does during audit planning
Auditing P 8-28
The following are various activities an auditor does during audit planning:
1. Send an engagement letter to the client.
2. Tour the client's plant and offices.
3. Compare key ratios for the company to industry competitors.
4. Review managements risk management controls and procedures.
5. Identify potential related parties that may require disclosure.
6. Identify whether any specialists are required for the engagement.
7. Review accounting principles unique to the clients industry.
8. Determine the likely users of the financial statements.
Required:
For each procedure, indicate which of the first four parts of audit planning the procedure primarily relates to:
1. accept client and perform initial audit planning;
2. understand the clients business and industry;
3. assess client business risk;
4. perform preliminary analytical procedures.
Click here for the solution: The following are various activities an auditor does during audit planning
The following are various activities an auditor does during audit planning:
1. Send an engagement letter to the client.
2. Tour the client's plant and offices.
3. Compare key ratios for the company to industry competitors.
4. Review managements risk management controls and procedures.
5. Identify potential related parties that may require disclosure.
6. Identify whether any specialists are required for the engagement.
7. Review accounting principles unique to the clients industry.
8. Determine the likely users of the financial statements.
Required:
For each procedure, indicate which of the first four parts of audit planning the procedure primarily relates to:
1. accept client and perform initial audit planning;
2. understand the clients business and industry;
3. assess client business risk;
4. perform preliminary analytical procedures.
Click here for the solution: The following are various activities an auditor does during audit planning
Sunday, August 23, 2015
(Consolidated Financial Statements: Various Issues) Algo Company and Bevo Corporation
Case 16-1 Consolidated Financial Statements: Various Issues
Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of the agreement, but just before closing and actual transfer of the property, a minority stockholder of Algo notified Bevo that a prior stockholder’s agreement with Algo empowered him to prevent the sale. The minority stockholder’s claim was acknowledged by Bevo’s board of directors. Bevo’s board then organized Casco, Inc. to acquire the minority stockholder’s interest in Algo for $75,000, and Bevo advanced the cash to Casco. Bevo exercised control over Casco as a subsidiary corporation with common officers and directors. Casco paid the minority stockholder $75,000 (about twice the market value of the Algo stock) for his interest in Algo. Bevo then purchased the manufacturing division from Algo.
Required:
a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?
b. i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?
ii. Should the financial statements of Bevo and Casco be consolidated? Discuss.
c. Assume that unconsolidated financial statements are prepared. Discuss the propriety of treating the $75,000 expenditure in the financial statements of the Bevo as
i. an account receivable from Casco
ii. an investment in Casco
iii. part of the cost of the property, plant, and equipment
iv. a loss
Click here for the solution: (Consolidated Financial Statements: Various Issues) Algo Company and Bevo Corporation
Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of the agreement, but just before closing and actual transfer of the property, a minority stockholder of Algo notified Bevo that a prior stockholder’s agreement with Algo empowered him to prevent the sale. The minority stockholder’s claim was acknowledged by Bevo’s board of directors. Bevo’s board then organized Casco, Inc. to acquire the minority stockholder’s interest in Algo for $75,000, and Bevo advanced the cash to Casco. Bevo exercised control over Casco as a subsidiary corporation with common officers and directors. Casco paid the minority stockholder $75,000 (about twice the market value of the Algo stock) for his interest in Algo. Bevo then purchased the manufacturing division from Algo.
Required:
a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?
b. i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?
ii. Should the financial statements of Bevo and Casco be consolidated? Discuss.
c. Assume that unconsolidated financial statements are prepared. Discuss the propriety of treating the $75,000 expenditure in the financial statements of the Bevo as
i. an account receivable from Casco
ii. an investment in Casco
iii. part of the cost of the property, plant, and equipment
iv. a loss
Click here for the solution: (Consolidated Financial Statements: Various Issues) Algo Company and Bevo Corporation
Saturday, August 22, 2015
FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives
E 12-2 Securities held-to-maturity
FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives. The following selected transactions relate to FF&T's investment activities during the last two months of 2011. At November 1, FF&T held $48 million of 20-year, 10% bonds of Convenience, Inc., purchased May 1, 2011, at face value. Management has the positive intent and ability to hold the bonds until maturity. FF&T's fiscal year ends on December 31.
Click here for the solution: FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives
FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives. The following selected transactions relate to FF&T's investment activities during the last two months of 2011. At November 1, FF&T held $48 million of 20-year, 10% bonds of Convenience, Inc., purchased May 1, 2011, at face value. Management has the positive intent and ability to hold the bonds until maturity. FF&T's fiscal year ends on December 31.
Click here for the solution: FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives
Tuesday, August 18, 2015
Williams Glassware has estimated, at various debt ratios, the expected earnings per share
P12-21 (EPS and Optimal Debt Ratio) Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.
Debt ratio Earnings per share (EPS) Standard deviation of EPS
0% $2.30 $1.15
20 3.00 1.80
40 3.50 2.80
60 3.95 3.95
80 3.80 5.53
a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.
Click here for the solution: Williams Glassware has estimated, at various debt ratios, the expected earnings per share
Debt ratio Earnings per share (EPS) Standard deviation of EPS
0% $2.30 $1.15
20 3.00 1.80
40 3.50 2.80
60 3.95 3.95
80 3.80 5.53
a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.
Click here for the solution: Williams Glassware has estimated, at various debt ratios, the expected earnings per share
Monday, August 3, 2015
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country
Case 9-30 Master Budget with Supporting Schedules
EARRINGS UNLIMITED
Minimum ending cash balance $50,000
Selling price $10
Recent and forecast sales: January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 25,000
Desired ending inventories (percentage 40% of next month's sales)
Cost of earrings 4
Purchases paid as follows: In month of purchase 50% In following month 50% Collection on sales: Sales collected current month 20% Sales collected following month 70% Sales collected 2nd month following 10% Variable monthly expenses: Sales commissions (% of sales) 4% Fixed monthly expenses:
Advertising 200,000
Rent 18,000
Salaries 106,000
Utilities 7,000
Insurance (12 months paid in November) 3,000
Depreciation 14,000
Equipment purchased in May 16,000
Equipment purchased in June 40,000
Dividends declared each quarter 15,000
Balance sheet at March 31:
Assets Cash $74,000
Accounts receivable 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $1,495,000
Liabilities and Stockholders' Equity
Accounts payable $100,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings 580,000
Total liabilities and stockholders' equity $1,495,000
Agreement with Bank:
Borrowing increments $1,000
Interest rate per month 1%
Repayment increments $1,000
Total of interest paid each quarter 100%
Required minimum cash balance $50,000
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
Click here for the solution: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country
EARRINGS UNLIMITED
Minimum ending cash balance $50,000
Selling price $10
Recent and forecast sales: January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 25,000
Desired ending inventories (percentage 40% of next month's sales)
Cost of earrings 4
Purchases paid as follows: In month of purchase 50% In following month 50% Collection on sales: Sales collected current month 20% Sales collected following month 70% Sales collected 2nd month following 10% Variable monthly expenses: Sales commissions (% of sales) 4% Fixed monthly expenses:
Advertising 200,000
Rent 18,000
Salaries 106,000
Utilities 7,000
Insurance (12 months paid in November) 3,000
Depreciation 14,000
Equipment purchased in May 16,000
Equipment purchased in June 40,000
Dividends declared each quarter 15,000
Balance sheet at March 31:
Assets Cash $74,000
Accounts receivable 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $1,495,000
Liabilities and Stockholders' Equity
Accounts payable $100,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings 580,000
Total liabilities and stockholders' equity $1,495,000
Agreement with Bank:
Borrowing increments $1,000
Interest rate per month 1%
Repayment increments $1,000
Total of interest paid each quarter 100%
Required minimum cash balance $50,000
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
Click here for the solution: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country
Tuesday, July 14, 2015
Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure.
debt ratio pretax cost cost of equity weighted average
[B/(B+E)] of debt cost of capital
0.00 12.00
0.15 13.00 11.68
0.30 8.00 14.50
0.45 16.50 11.775
14.00 19.00 12.64
The company’s income tax rate is 40 percent.
a. Fill in the missing entries in the table.
b. Determine the capital structure (i.e., debt ratio) that minimizes the firm’s weighted average cost of capital
Click here for the solution: Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
debt ratio pretax cost cost of equity weighted average
[B/(B+E)] of debt cost of capital
0.00 12.00
0.15 13.00 11.68
0.30 8.00 14.50
0.45 16.50 11.775
14.00 19.00 12.64
The company’s income tax rate is 40 percent.
a. Fill in the missing entries in the table.
b. Determine the capital structure (i.e., debt ratio) that minimizes the firm’s weighted average cost of capital
Click here for the solution: Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure
Sunday, July 12, 2015
Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.
Debt Fractions ki ke with financial ke with financial distress w/o agency costs distress with agency costs
0.00 12.00% 12.00%
0.10 4.80% 12.05% 12.05%
0.30 4.90% 12.10% 12.20%
0.40 5.00% 12.20% 12.60%
0.45 5.20% 12.40% 13.40%
0.50 5.70% 12.80% 14.80%
0.60 7.00% 15.00% 18.00%
a. Based on these data, determine the company’s optimal capital structure (i) with financial distress costs and without agency costs and (ii) with financial distress and agency costs.
b. Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?
Click here for the solution: Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
Debt Fractions ki ke with financial ke with financial distress w/o agency costs distress with agency costs
0.00 12.00% 12.00%
0.10 4.80% 12.05% 12.05%
0.30 4.90% 12.10% 12.20%
0.40 5.00% 12.20% 12.60%
0.45 5.20% 12.40% 13.40%
0.50 5.70% 12.80% 14.80%
0.60 7.00% 15.00% 18.00%
a. Based on these data, determine the company’s optimal capital structure (i) with financial distress costs and without agency costs and (ii) with financial distress and agency costs.
b. Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?
Click here for the solution: Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure
Tuesday, July 7, 2015
Modern Building Supply sells various building materials to retail outlets
Common-Size Statements and Financial Ratios for Creditors
Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow
MODERN BUILDING SUPPLY
Comparative Balance Sheet
Assets This Year Last Year
Current assets:
Cash . . . . . . . . . . . . . . . . .. $ 90,000 $ 200,000
Marketable securities . . . . . . . . . . –0– 50,000
Accounts receivable, net . . . .. . . . . 650,000 400,000
Inventory . . . . . . . . . . . . . . . 1,300,000 800,000
Prepaid expenses . . . . . . . . . . . 20,000 20,000
Total current assets . . . . . . . . . 2,060,000 1,470,000
Plant and equipment, net . . . . . . . 1,940,000 1,830,000
Total assets . . . . . . . . .. . . . . $4,000,000 $3,300,000
AND SO ON
Assume that the following ratios are typical of firms in the building supply industry:
Current ratio . . . . . . . . . . . . . . 2.5 to 1
Acid-test ratio . . . . . . . . . . . . . 1.2 to 1
Average age of receivables . . . . . 18 days
Inventory turnover in days . . . . . .. . 50 days
Debt-to-equity ratio . . . . . . . .. . . . 0.75 to 1
Times interest earned . . . . . .. . . . 6.0 times
Return on total assets . . . . . . . . . . 10%
Price-earnings ratio . . . . . . . . . . 9
Net income as a percentage of sales . . . . . 4%
Required:
1. Linden Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following ratios for both this year and last year:
a. The amount of working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average age of receivables. (The accounts receivable at the beginning of last year totalled $350,000.)
e. The inventory turnover in days. (The inventory at the beginning of last year totalled $720,000.)
f. The debt-to-equity ratio.
g. The number of times interest was earned.
2. For both this year and last year (carry computations to one decimal place):
a. Present the balance sheet in common-size form.
b. Present the income statement in common-size form down through net income.
3. From your analysis in (1) and (2) above, what problems or strengths do you see existing in Modern Building Supply? Make a recommendation as to whether the loan should be approved.
Click here for the solution: Modern Building Supply sells various building materials to retail outlets
Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow
MODERN BUILDING SUPPLY
Comparative Balance Sheet
Assets This Year Last Year
Current assets:
Cash . . . . . . . . . . . . . . . . .. $ 90,000 $ 200,000
Marketable securities . . . . . . . . . . –0– 50,000
Accounts receivable, net . . . .. . . . . 650,000 400,000
Inventory . . . . . . . . . . . . . . . 1,300,000 800,000
Prepaid expenses . . . . . . . . . . . 20,000 20,000
Total current assets . . . . . . . . . 2,060,000 1,470,000
Plant and equipment, net . . . . . . . 1,940,000 1,830,000
Total assets . . . . . . . . .. . . . . $4,000,000 $3,300,000
AND SO ON
Assume that the following ratios are typical of firms in the building supply industry:
Current ratio . . . . . . . . . . . . . . 2.5 to 1
Acid-test ratio . . . . . . . . . . . . . 1.2 to 1
Average age of receivables . . . . . 18 days
Inventory turnover in days . . . . . .. . 50 days
Debt-to-equity ratio . . . . . . . .. . . . 0.75 to 1
Times interest earned . . . . . .. . . . 6.0 times
Return on total assets . . . . . . . . . . 10%
Price-earnings ratio . . . . . . . . . . 9
Net income as a percentage of sales . . . . . 4%
Required:
1. Linden Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following ratios for both this year and last year:
a. The amount of working capital.
b. The current ratio.
c. The acid-test ratio.
d. The average age of receivables. (The accounts receivable at the beginning of last year totalled $350,000.)
e. The inventory turnover in days. (The inventory at the beginning of last year totalled $720,000.)
f. The debt-to-equity ratio.
g. The number of times interest was earned.
2. For both this year and last year (carry computations to one decimal place):
a. Present the balance sheet in common-size form.
b. Present the income statement in common-size form down through net income.
3. From your analysis in (1) and (2) above, what problems or strengths do you see existing in Modern Building Supply? Make a recommendation as to whether the loan should be approved.
Click here for the solution: Modern Building Supply sells various building materials to retail outlets
Monday, July 6, 2015
The budget director of Outdoor Chef Grill Company requests estimates of sales, production, and other operating data from the various administrative units every month
The budget director of Outdoor Chef Grill Company requests estimates of sales, production, and other operating data from the various administrative units every month. Selected information concerning sales and production for May 2012 is summarized as follows:
a. Estimated sales for May by sales territory:
b. Estimated inventories at May 1:
c. Desired inventories at May 31:
d. Direct materials used in production:
e. Anticipated purchase price for direct materials:
f. Direct labor requirements:
Required;
1. Prepare a sales budget for May.
2. Prepare a production budget for May.
3. Prepare a direct materials purchases budget for May.
4. Prepare a direct labor cost budget for May
Check: 3. Total Direct Materials Purchases, $939,065
Click here for the solution: The budget director of Outdoor Chef Grill Company requests estimates of sales, production, and other operating data from the various administrative units every month
a. Estimated sales for May by sales territory:
b. Estimated inventories at May 1:
c. Desired inventories at May 31:
d. Direct materials used in production:
e. Anticipated purchase price for direct materials:
f. Direct labor requirements:
Required;
1. Prepare a sales budget for May.
2. Prepare a production budget for May.
3. Prepare a direct materials purchases budget for May.
4. Prepare a direct labor cost budget for May
Check: 3. Total Direct Materials Purchases, $939,065
Click here for the solution: The budget director of Outdoor Chef Grill Company requests estimates of sales, production, and other operating data from the various administrative units every month
Monday, June 29, 2015
Various Questions: Viva Inc. had bought machine X for $15,500 two years ago
1) Viva Inc. had bought machine X for $15,500 two years ago. The
machine had no residual value and had an estimated useful life of 10
years. If the company uses the straight line depreciation method,
calculate the current book value of the machine.
2) Henry Tax Planning Service bought production equipment for $9,600 on
January 1, 2015. It has an estimated useful life of 5 years and zero
residual value. Henry uses the straight-line method to calculate
depreciation and records depreciation expense in the books at the end of
every month. As of June 30, 2015, the book value of this equipment
shown on Henry's balance sheet will be:
3) Real Weight Losers, a diet magazine, collected $480,000 in
subscription revenue in May. Each subscriber will receive an issue of
the magazine for each of the next 12 months, beginning with the June
issue. The company uses the accrual method of accounting. Provide the
adjusting entry needed on June Assume the magazine initially records a
liability for the subscription revenue.
4) On July 1, Alpha Company prepaid rent for a small equipment storage
area. They paid $20,000 to rent the area for the period of July 1
through the end of the year. Provide the journal entry needed on July 1
when the payment is made. Assume the prepaid expense is initially
recorded as an asset.
5) Luminous Electrical Repair performed services costing $8,000 on
January 24 and invoiced the customer. Luminous received the $8,000 on
January 31. Provide the journal entry on January 31 when the cash was
received.
6) On January 1, 2015, the Accounts Receivable of Linda Company had a
debit balance of $20,000. During January, the company provided services
for $600,000 on account. The company collected $250,000 from its
customers on account in January. What was the ending balance in the
Accounts Receivable account at the end of January?
7) A company received $5,000 for 100 one-year subscriptions on July 1. The journal entry to record this is
8) On July 1, Alpha Company paid rent of $15,000 for a small equipment
storage area for the period of July 1 till December 31. Provide the
adjusting journal entry on July 31. Assume the prepaid expense is
initially recorded as an asset.
9) ABC Company signed a one-year $48,000 note payable at 8% interest on
May 1, 2014. If ABC only adjusts their accounts once a year at
year-end, how much interest expense was accrued on December 31, 2014?
10) The balances of select accounts of Sandra Company as at December 31, 2015 are given below:
Debit Credit
Building $120,000
Cash 5,000
Office Supplies 700
Furniture 3,000
Prepaid Insurance 450
Accumulated Depreciation—Furniture $1,000
Land 35,000
Accumulated Depreciation—Building 4,800
Accounts Receivable 2,500
The insurance has been prepaid for the next half year. What are the
total current assets that would be shown on the balance sheet?
11) Education for All sells tickets in advance for their weekly
productions and records the proceeds as Unearned Revenue. At the end of
each month, Education for All makes an adjusting entry to account for
the tickets used during the month (ticket revenue.) On March 1, the
Unearned Revenue account had a credit balance of $4,000. During March,
they sold 300 tickets at $20 each and 250 tickets were used during the
month. What is the balance in Unearned Revenue at the end of March?
12) Golden Oak Antique Shop had the following account balances at the end of the current accounting period:
Beginning inventory $73,000
Net purchases 58,250
Net sales revenue 87,500
The normal gross profit for the company is $45%. What was the company's estimated cost of goods sold for the accounting period?
13) Samson Company had the following balances and transactions during 2014:
Beginning Merchandise Inventory 10 units at $95
March 10 Sold 8 units
June 10 Purchased 20 units at $100
October 30 Sold 15 units
What is the amount of the company's Merchandise Inventory, as disclosed
in the December 31, 2014 balance sheet as per the periodic first-in,
first-out (FIFO) costing method?
14) Collins Computers stored its inventory in a warehouse which
suffered a fire in late November, 2014. Their sales office was at a
different location. In order to file a claim with the insurance company,
the owners ask you to estimate the inventory in the warehouse. The
following information is available:
Beginning inventory for November $375,500
Purchases through November 30 470,250
Net sales revenue through November 31 793,000
The company's gross profit has historically been 40% of Net sales
revenue. Estimate the value of the inventory destroyed in the fire using
the gross profit method.
15) The Allowance for Bad Debts account has a credit balance of $2,000.
The company's management estimates that 2% of net credit sales will be
uncollectible for the year 2015. Net credit sales for the year amounted
to $250,000. What will be the amount of Bad Debts Expense reported on
the income statement for 2015?
16) Art Parrish, the sole employee of Parrish Sales, has gross salary
for March of $4,000. The entire amount is under the OASDI limit of
$110,100, and thus subject to FICA. He is also subject to federal income
tax at a rate of 18%. Art has a deduction of $320 for health insurance
and $80 for United Way. Provide the Provide the journal entry to record
salaries expense and payroll withholdings. (Assume a FICA—OASDI Tax of
4.2% and FICA—Medicare Tax of 1.45%.)
17) A $35,000, two-month, 7% note payable was issued on December 1,
2015. What is the amount of interest expense recorded in the year 2016?
18) The following information is needed to reconcile the cash balance for Fire Steel Inc.
• A deposit of $5,800 is in transit.
• Outstanding checks total $1,500.
• The book balance is $6,800 at February 28, 2013.
• The bookkeeper recorded a $1,740 check as $17,400 in payment of the current month's rent.
• The bank balance at February 28, 2013 was $18,000.
• A deposit of $400 was credited by the bank for $4,000.
• A customer's check for $3,700 was returned for nonsufficient funds.
• The bank service charge is $60.
Based on this information, prepare a bank reconciliation for Fire Steel Inc. as of February 28, 2013.
Answer:
Bank Book
Balance, February 28, 2013 Balance, February 28,2013
Adjusted balance Feb. 28, 2013 Adjusted balance Feb. 28, 2013
Click here for the solution: Various Questions: Viva Inc. had bought machine X for $15,500 two years ago
Tuesday, June 23, 2015
(Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc. for the year 2007
Exercise 4-16 (E4-16) (Various Reporting Formats) The following
information was taken from the records of Roland Carlson Inc. for the
year 2007. Income tax applicable to income from continuing operations
$187,000; income tax applicable to loss on discontinued operations
$25,500; income tax applicable to extraordinary gain $32,300; income tax
applicable to extraordinary loss $20,400; and unrealized holding gain
on available-for-sale securities 15,000.
Extraordinary gain $ 95,000 Cash dividends declared $ 150,000
Loss on discontinued operations 75,000 Retained earnings January 1, 2007 600,000
Administrative expenses 240,000 Cost of goods sold 850,000
Rent revenue 40,000 Selling expenses 300,000
Extraordinary loss 60,000 Sales 1,900,000
Shares outstanding during 2007 were 100,000.
Instructions
(a) Prepare a single-step income statement for 2007.
(b) Prepare a retained earnings statement for 2007.
(c) Show how comprehensive income is reported using the second income statement format.
Click here for the solution: (Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc. for the year 2007
Extraordinary gain $ 95,000 Cash dividends declared $ 150,000
Loss on discontinued operations 75,000 Retained earnings January 1, 2007 600,000
Administrative expenses 240,000 Cost of goods sold 850,000
Rent revenue 40,000 Selling expenses 300,000
Extraordinary loss 60,000 Sales 1,900,000
Shares outstanding during 2007 were 100,000.
Instructions
(a) Prepare a single-step income statement for 2007.
(b) Prepare a retained earnings statement for 2007.
(c) Show how comprehensive income is reported using the second income statement format.
Click here for the solution: (Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc. for the year 2007
Saturday, June 20, 2015
(Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
Case 24-2 (CA24-2) (Disclosures Required in Various Situations) Rem Inc.
produces electronic components for sale to manufacturers of radios,
television sets, and digital sound systems. In connection with her
examination of Rem’s financial statements for the year ended December
31, 2007, Maggie Zeen, CPA, completed field work 2 weeks ago. Ms. Zeen
now is evaluating the significance of the following items prior to
preparing her auditor’s report. Except as noted, none of these items
have been disclosed in the financial statements or notes.
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007.
Item 2
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem’s income statement the rental payment is reported on a separate line.
Instructions
For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)
Click here for the solution: (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007.
Item 2
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem’s income statement the rental payment is reported on a separate line.
Instructions
For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)
Click here for the solution: (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems
Subscribe to:
Posts (Atom)